2nd Flr.Unit 2D, Classica 1 Bldg. 112 H.V. Dela Costa St. Makati City Tel.No.

892-9793/95

MANAGEMENT ADVISORY SERVICES jaurojrtcbic

11 Financial Statement Analysis May 2017
___________________________________________________________________
Notes
1. When analyzing financial statements, these are the major characteristics of a company that are
evaluated:

Liquidity ratios — measures of the short-term debt-paying ability.

Ratio Formula Purpose Or Use
1 Current ratio Current Assets ÷ Measures the short-term debt-paying
Current Liabilities ability
2 Acid Test or Cash + Marketable Securities + Measures the immediate short-term
Quick ratio Accounts Receivable ÷ liquidity.
Current Liabilities

Activity ratios — measures the efficiency of the conduct of business activity.

Ratio Formula Purpose Or Use
1 Accounts Net Credit Sales ÷ Measures the number of times in a year
Receivable Average Net Accounts Receivable that receivables were collected
Turnover
2 Average 365 days ÷ Accounts receivable Measures the average number of days that
collection turnover receivables were collected
period
OR
Accounts receivable Net ÷
Net Credit Sales ÷ 365 days
3 Inventory Cost of Goods Sold ÷ Measures the number of times in a year
Turnover Average Inventory that inventories were sold
4 Average sales 365 days ÷ Inventory turnover Measures the average number of days that
period inventories were sold
OR
Accounts Payable ÷
Cost of Goods Sold ÷ 365 days

Profitability ratios—measures of the income or operating success of an enterprise for a given period of
time.
Ratio Formula Purpose Or Use
1 Profit margin Net Income ÷ Sales Measures the net income generated by
each peso sales
2 Asset Turnover Net Sales ÷ Average Total Assets Measures how assets are efficiently used
to generate sales
3 Return On Assets Net Income ÷ Total Assets Measures overall profitability of assets
4 Return On Net Income ÷ Average Common Measures profitability of owner’s
Equity Stockholder’s Equity investment
5 Earnings
(Accounting
Per Net Income Or Earningsafter tax − Measures net income per common share
Share Preferred Dividends) ÷ Average outstanding
number of common shares
outstanding
Or
Earnings available to common
stockholder ÷ Average number of
common shares outstanding
6 Price Earnings Market Value of common Stock ÷ Measures the value investors are willing to
Ratio Earnings Per Share give up for every peso earnings they earn
7 Payout Ratio Common Cash Dividends ÷ Earnings Measures the percentage of earnings
Available To Common Stockholders distributed as cash dividends
8 Dividend Yield Common Cash Dividends ÷ Market Measures the percentage of cash dividends
Value of common Stock received over the cash investment per
share of common stockholders
9 Book value per Common stockholders' equity ÷ Book value per common share
1
 share Number of common shares
outstanding
10 Book value to Book value per share ÷ Measures the book value per share against
Market Market Value of common Stock perceived market value of common stock

Solvency ratios— measures of the ability of the enterprise to survive over a long period of time.
Ratio Formula Purpose Or Use
1 Times interest Operating income ÷ Interest Measures the ability to meets interest
earned ratio expense payments as they become due
2 Debt-to-equity Liabilities ÷ Stockholders' equity Measures size of total debt to total capital
ratio
3 Debt ratio Liabilities ÷ Total Assets Measures the percentage of total assets
provided by creditors
4 Equity ratio Total Equity ÷ Total Assets Measures the percentage of total assets
provided by owners

2. Comparative analysis may be made on a number of different bases.

a. Intracompany basis—Compares an item or financial relationship within a company in the
current year with the same item or relationship in one or more prior years.
b. Industry averages—Compares an item or financial relationship of a company with industry
averages.
c. Intercompany basis—Compares an item or financial relationship of one company with the
same item or relationship in one or more competing companies.

3. There are three basic tools of analysis:

a. Horizontal analysis, also called trend analysis, is a technique for evaluating a series of financial
statement data over a period of time to determine the increase or decrease that has taken place,
expressed as either an amount or a percentage. In horizontal analysis, a base year is selected and
changes are expressed as percentages of the base year amount.

b. Vertical analysis, also called common size analysis, expresses each item within a
financial statement as a percent of a base amount. Generally, the base amount is total assets for
the balance sheet, and net sales for the income statement.

c. Ratio analysis, also called common size analysis, expresses each item within a
financial statement as a percent of a base amount. Generally, the base amount is total assets for
the balance sheet, and net sales for the income statement.

PROBLEMS
1
The comparative balance sheet of Greer Company appears below:
GREER COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Current assets .................................................................................. P 330 P280
Plant assets ...................................................................................... 670 520
Total assets ...................................................................................... P1,000 P800

Liabilities and stockholders' equity

Current liabilities ............................................................................... P 160 P120
Long-term debt ................................................................................. 240 160
Common stock .................................................................................. 340 320
Retained earnings ............................................................................. 260 200
Total liabilities and stockholders' equity ........................................... P1,000 P800
Instructions
(a) Using horizontal analysis, show the percentage change for each balance sheet item using 2008 as
a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.

2
The financial statements of Dobson Company appear below:

DOBSON COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash........................................................................................... P 35,000 P 40,000
2
Short-term investments................................................................. 15,000 60,000
Accounts receivable (net)............................................................... 50,000 30,000
Inventory.................................................................................... 50,000 70,000
Property, plant and equipment (net)................................................ 250,000 300,000
Total assets ........................................................................... P400,000 P500,000

Liabilities and stockholders' equity

Accounts payable.......................................................................... P 10,000 P 30,000
Short-term notes payable.............................................................. 40,000 90,000
Bonds payable.............................................................................. 88,000 160,000
Common stock............................................................................. 160,000 145,000
Retained earnings......................................................................... 102,000 75,000
Total liabilities and stockholders' equity...................................... P400,000 P500,000

DOBSON COMPANY
Income Statement
For the Year Ended December 31, 2009

Net sales..................................................................................... P360,000

Cost of goods sold........................................................................ 198,000
Gross profit.................................................................................. 162,000
Expenses
Administrative expenses........................................................... P59,000
Selling expenses..................................................................... 40,000
Interest expense..................................................................... 12,000
Total expenses.................................................................. 111,000
Income before income taxes........................................................... 51,000
Income tax expense...................................................................... 15,000
Net income.................................................................................. P 36,000

Additional information:
a. Cash dividends of P9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during 2009 was 30,000 shares.
c. Market value of common stock on December 31, 2009, was P21 per share.

Instructions
Using the financial statements and additional information, compute the following ratios for Coulter
Company for 2009. Show all computations.

1. Current ratio________ . 6. Times interest earned _________

2. Return on common stockholders' equity 7. Profit margin _________.

3. Price-earnings ratio _________. 8. Days in inventory _________.

4. Acid-test ratio _________. 9. Payout ratio _________.

5. Receivables turnover _________. 10. Return on assets _________.

3
The following ratios have been computed for Pratt Company for 2009.

Profit margin 20%

Times interest earned 15 times
Receivables turnover 5 times
Acid-test ratio 1.60 : 1
Current ratio 3:1
Debt to total assets ratio 26%

Pratt Company’s 2009 financial statements with missing information follow:

PRATT COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash...................................................................................... P 25,000 P 35,000
Short-term Investments........................................................... 15,000 15,000
Accounts receivable (net)......................................................... ? (6) 60,000
Inventory............................................................................... ? (8) 50,000
Property, plant, and equipment (net)......................................... 200,000 150,000
Total assets..................................................................... P ? (9) P310,000

3
Liabilities and stockholders' equity
Accounts payable.................................................................... P ? (7) P 25,000
Short-term notes payable......................................................... 35,000 30,000
Bonds payable........................................................................ ? (10) 20,000
Common stock........................................................................ 200,000 200,000
Retained earnings................................................................... 59,000 35,000
Total liabilities and stockholders' equity............................... P ? (11) P310,000

PRATT COMPANY
Income Statement
For the Year Ended December 31, 2009
———————————————————————————————————————————
Net sales................................................................................ P250,000
Cost of goods sold................................................................... 125,000
Gross profit............................................................................ 125,000
Expenses:
Depreciation expense......................................................... P ? (5)
Administrative expenses..................................................... 15,000
Selling expenses................................................................ 10,000
Interest expense................................................................ 5,000
Total expenses............................................................. ? (4)
Income before income taxes..................................................... ? (2)
Income tax expense........................................................... ? (3)
Net income............................................................................. P ? (1)

Instructions
Use the above ratios and information from the Pratt Company financial statements to fill in the missing
information on the financial statements. Follow the sequence indicated. Show computations that support
your answers.

4
The following data are taken from the financial statements of Doyle Company:

2009 2008
Monthly average accounts receivable P 520,000 P 500,000
Net sales on account 5,460,000 4,500,000
Terms for all sales are 2/10, n/30

Instructions
(a) Compute the receivables turnover and the average collection period for both years.
(b) What conclusion can an analyst draw about the management of the accounts receivable?

5
The income statement for Stoval Company for the year ended December 31, 2008 appears below.
Sales P610,000
Cost of goods sold 380,000
Gross profit 230,000
Expenses 170,000*
Net income P 60,000

*Includes P30,000 of interest expense and P18,000 of income tax expense.

Additional information:
1. Common stock outstanding on January 1, 2008 was 40,000 shares. On July 1, 2008, 10,000 more
shares were issued.
2. The market price of Stoval's stock was P15 at the end of 2008.
3. Cash dividends of P30,000 were paid, P6,000 of which were paid to preferred stockholders.
Instructions
Compute the following ratios for 2008:
(a) earnings per share.
(b) price-earnings.
(c) times interest earned.
(d) dividend yield

MULTIPLE CHOICE

1. Which of the following is not a measure of asset utilization?

a. Inventory turnover.
b. Average accounts receivable collection period.
c. Fixed asset turnover.
d. Debt to total assets.

2. What financial analysis technique would imply benchmarking with other firms?
a. Horizontal analysis.
b. Vertical analysis.

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c. Cross-sectional analysis.
d. Ratio analysis.

Items 3 and 4 are based on the following information:

The Dawson Corporation projects the following for the
year 2012:
Earnings before interest and taxes P35 million
Interest expense 5 million
Preferred stock dividends 4 million
Common stock dividend payout ratio 30%
Common shares outstanding 2 million
Effective corporate income tax rate 40%

3.The expected common stock dividend per share for Dawson Corporation for 2012 is
a. P2.34
b. P2.70
c. P3.90
d. P2.10

4.If Dawson Corporation’s common stock is expected to trade at a price/earnings ratio of eight, the
market price per share (to the nearest peso) would be
a. P125
b. P56
c. P72
d. P68

Items 5 through 9 are based on the following information:

The data presented below show actual figures for selected accounts of McKeon Company for the fiscal
year ended December 31, 2012. McKeon’s controller is in the process of reviewing the 2012 results.
McKeon Company monitors yield or
return ratios using the average financial position of the company. (Round all calculations to three
decimal places if necessary.)
12/31/12 12/31/11
Current assets P210,000 P180,000
Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock (P30 par value)
300,000 300,000
Retained earnings 32,000 20,000
2012 Operations
Sales* P350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in
2012 60,000
Administrative expense 67,000
* All sales are credit sales.
Current Assets
12/31/12 12/31/11
Cash P 20,000 P10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
**
5.McKeon Company’s debt-to-total-asset ratio at 12/31/12 is
a. 0.352
b. 0.315
c. 0.264
d. 0.237
**
6.The 2012 accounts receivable turnover for McKeon company is
a. 1.882
b. 3.500
c. 5.000
d. 4.118
**
7.Using a 365-day year, McKeon’s inventory turnover is
a. 2.133
b. 2.281
c. 1.995
d. 4.615

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8.McKeon Company’s total asset turnover for 2012 is
a. 0.805
b. 0.761
c. 0.722
d. 0.348

9.The 2012 return on assets for McKeon Company is

a. 0.261
b. 0.148
c. 0.157
d. 0.166

Items 10 through 16 are based on the following information:

Depoole Company is a manufacturer of industrial products and employs a calendar year for financial
reporting purposes. These questions present several of Depoole’s transactions during the year. Assume
that total quick assets exceeded total current liabilities both before and after each transaction
described. Further assume that Depoole has positive profits during the year and a credit balance
throughout the year in its retained earnings account.

10.Payment of a trade account payable of P64,500 would

a. Increase the current ratio but the quick ratio would not be affected.
b. Increase the quick ratio but the current ratio would not be affected.
c. Increase both the current and quick ratios.
d. Decrease both the current and quick ratios.

11.The purchase of raw materials for P85,000 on open account would

a. Increase the current ratio.
b. Decrease the current ratio.
c. Increase net working capital.
d. Decrease net working capital.

12.The collection of a current accounts receivable of P29,000 would

a. Increase the current ratio.
b. Decrease the current ratio and the quick ratio.
c. Increase the quick ratio.
d. Not affect the current or quick ratios.

13.Obsolete inventory of P125,000 was written off during the year. This transaction
a. Decreased the quick ratio.
b. Increased the quick ratio.
c. Increased net working capital.
d. Decreased the current ratio.

14.The issuance of new shares in a five-for-one split of common stock

a. Decreases the book value per share of common stock.
b. Increases the book value per share of common stock.
c. Increases total shareholders’ equity.
d. Decreases total shareholders’ equity.

15.The issuance of serial bonds in exchange for an office building, with the first installment of the bonds
due late this year,
a. Decreases net working capital.
b. Decreases the current ratio.
c. Decreases the quick ratio.
d. Affects all of the answers as indicated.

16.The early liquidation of a long-term note with cash affects the

a. Current ratio to a greater degree than the quick ratio.
b. Quick ratio to a greater degree than the current ratio.
c. Current and quick ratio to the same degree.
d. Current ratio but not the quick ratiohy?

6
 SOLUTION 1 FINANCIAL STATEMENT ANALYSIS
Solution 1
GREER COMPANY
Comparative Balance Sheet
December 31,
(b) (b) (a)
Assets 2009 Percent 2008 Percent Percent
Current assets P 330 33% P280 35% 18%
Plant assets 670 67 520 65 29%
Total assets P1,000 100% P800 100% 25%

Liabilities and stockholders' equity

Current liabilities P 160 16% P120 15% 33%
Long-term debt 240 24 160 20 50%
Common stock 340 34 320 40 6%
Retained earnings 260 26 200 25 30%
Total liabilities and stockholders' equity P1,000 100% P800 100% 25%

Solution 2
P150,000
1. Current ratio 3:1. ———— = 3
P50,000
P36,000
2. Return on common stockholders' equity 14.9%. ———————————— = .149
(P262,000 + P220,000) ÷ 2
P36,000
3. Price-earnings ratio 17.5 times. EPS = ———— = P1.20;
30,000
P21
——— = 17.5 times
P1.20

P100,000
4. Acid-test ratio 2:1. ———— = 2:1
P50,000
P360,000
5. Receivables turnover 9 times. ——————————— = 9
(P50,000 + P30,000) ÷ 2

P36,000 + P15,000 + P12,000

6. Times interest earned 5.25 times. ————————————— = 5.25
P12,000

P36,000
7. Profit margin 10%. ———— = .10
P360,000
8. Days in inventory 110.6 days.
P198,000
Inventory turnover = ——————————— = 3.3;
(P50,000 + P70,000) ÷ 2

365 days
———— = 110.6
3.3

P9,000
9. Payout ratio 25%. ———— = .25
P36,000

P36,000
10. Return on assets 8%. ———————————— = .08
(P400,000 + P500,000) ÷ 2
Solution 3
PRATT COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash................................................................................ P 25,000 P 35,000
Marketable securities.......................................................... 15,000 15,000
Accounts receivable (net).................................................... 40,000 (6) 60,000
Inventory......................................................................... 70,000 (8) 50,000
Property, plant, and equipment (net).................................... 200,000 150,000
Total assets................................................................ P350,000 (9) P310,000

Liabilities and stockholders' equity

Accounts payable............................................................... P 15,000 (7) P 25,000
Short-term notes payable................................................... 35,000 30,000
Bonds payable................................................................... 41,000 (10) 20,000
Common stock.................................................................. 200,000 200,000
7
Retained earnings.............................................................. 59,000 35,000
Total liabilities and stockholders' equity.......................... P350,000 (11) P310,000

PRATT COMPANY
Income Statement
For the Year Ended December 31, 2009
———————————————————————————————————————————
Net sales.......................................................................... P250,000
Cost of goods sold.............................................................. 125,000
Gross profit....................................................................... 125,000
Expenses
Depreciation expense.................................................... P25,000 (5)
Administrative expenses................................................ 15,000
Selling expenses.......................................................... 10,000
Interest expense.......................................................... 5,000
Total expenses....................................................... 55,000 (4)
Income before income taxes................................................ 70,000 (2)
Income tax expense........................................................... 20,000 (3)
Net income....................................................................... P 50,000 (1)
(1) Net income = P50,000 (P250,000 × 20%).
(2) Income before income taxes = P70,000.
Let X = Income before income taxes and interest expense.
X
——— = 15 times
P5,000
X = P75,000
P75,000 – P5,000 = P70,000
(3) Income tax expense = P20,000 (P70,000 – P50,000).
(4) Total operating expenses = P55,000 (P125,000 – P70,000).
(5) Depreciation expense = P25,000 [P55,000 – (P5,000 + P10,000 + P15,000)].

(6) Accounts receivable (net) = P40,000.

Let X = Average receivables.
P250,000
———— = 5 times
X
5X = P250,000.
X = P50,000.

Let Y = Accounts receivable at 12/31/09.

P60,000 + Y
—————— = P50,000
2
P60,000 + Y = P100,000
Y = P40,000
(7) Accounts payable = P15,000.
Let X = Current liabilities.
P25,000 + P15,000 + P40,000
————————————— = 1.60
X
1.60X = P80,000
X = P50,000
P50,000 – P35,000 = P15,000

(8) Inventory = P70,000

Let X = Total current assets
X
———— = 3
P50,000
X = P150,000
P150,000 – (P25,000 + P15,000 + P40,000) = P70,000

(9) Total assets = P350,000 (P25,000 + P15,000 + P40,000 + P70,000 + P200,000)

(10) Bonds payable = P41,000

Let X = Total debt
X
———— = 26%
P350,000
X = P91,000

8
 P91,000 – (P15,000 + P35,000) = P41,000

(11) Total liabilities and stockholders' equity = P350,000; same as total assets—see (9) above.

Soltion 4
(a) 2009 2008

P5,460,000 P4,500,000
Receivables turnover ————— —————
520,000 500,000
10.5 times 9.0 times

365 days 365 days

Average collection period ————– ————
10.5 times 9.0 times
34.8 days 40.6 days
(b) The receivables are turning faster in 2009 than they did in 2008. There is still a problem since the
normal credit period is 30 days, and the average collection period for both years exceeds this
target. Therefore, improvement in the management of the receivables would appear to be
desirable.
Solution 5
(a) Earnings per share
P60,000 – P6,000 P54,000
—————————— = ———— = P1.20
[40,000 + (10,000 ÷ 2)] 45,000
(b) Price-earnings
P15.00
——— = 12.5 times
1.20
(c) Times interest earned
P60,000 + P30,000 + P18,000
————————————— = 3.6 times
P30,000

1.(d) The requirement is to identify the ratio that does not measure asset utilization. Answer (d) is
correct because the debt to total assets ratio is a debt utilization (financial leverage) ratio. Answers (a),
(b), and (c) are incorrect because they are asset utilization ratios.
2.(c) The requirement is to identify the nature of benchmarking with other firms. Answer (c) is correct
because cross-sectional analysis involves comparing results and ratios to those of other firms in the
same industry. Answer (a) is incorrect because horizontal analysis involves comparisons
of results and ratios for the same firm over time. Answer (b) is incorrect because vertical analysis
involves comparisons of
relationships in a firm’s financial statements for a single year. Answer (d) is incorrect because ratio
analysis does not imply any particular comparison.
3.(d) The requirement is to calculate the expected dividend per share. Earnings after interest is equal to
P30 million (P35 million – P5 million). Net earnings after taxes is equal to P18 million [P30 million × 1 –
Tax rate (40%)]. The net earnings after dividends to preferred shareholders is equal to P14 million (P18
million – P4 million), and the dividend for common stockholders is equal to P4,200,000 (P14 million ×
30%). The dividend per share is equal to P4,200,000/P2 million shares = P2.10. Therefore, the correct
answer is (d).
4.(b) The requirement is to calculate the market price from the earnings per share and price/earnings
ratio. Net earnings is
equal to P18 million (P35 million – P5 million) × (1 – 40%). Net earnings available to common
stockholders is equal to P14 million (P18 million – P4 million). Earnings per share is equal to P14
million/2 million shares, or P7.00. Therefore, the estimated market price would be P7.00 × 8 = P56, or
answer (b).
5.(b) The requirement is to calculate the debt-to-total-asset ratio. Answer (b) is correct. The debt-to-
total-asset ratio is
calculated by dividing total debt by total assets. Therefore, the debt-to-total-asset ratio is equal to
0.315 (P78,000 current
liabilities + P75,000 long-term debt) ÷ (P210,000 current assets + P275,000 noncurrent assets).
Answers (a), (c), and (d) are incorrect because the computations are not correct.6.(d) The requirement
is to calculate accounts receivable turnover. Answer (d) is correct. Accounts receivable turnover is
calculated by dividing total credit sales by the average balance of accounts receivable. The average
balance of accounts receivable is P85,000 [(P100,000 + P70,000) ÷ 2]. Therefore,
accounts receivable turnover is equal to 4.118 (P350,000 credit sales ÷ P85,000 average accounts
receivable).
7.(a) The requirement is to calculate inventory turnover. Answer (d) is correct. Inventory turnover is
calculated by dividing cost of goods sold by average inventory. Average inventory is equal to P75,000
[(P70,000 + P80,0000) ÷ 2]. Therefore, inventory turnover is equal to 2.133 (P160,000 ÷ P75,000).
8.(b) The requirement is to calculate total asset turnover. Answer (b) is correct. Total asset turnover is
calculated by dividing sales by average total assets. Average total assets is equal to P460,000 =
[(P210,000 + P275,000) + (P180,000 +
P255,000)] ÷ 2. Therefore, total asset turnover is equal to 0.761 (P350,000 ÷ P460,000).9.(c) The
requirement is to calculate return on total assets. Answer (c) is correct. Return on assets is calculated
by

9
dividing net income by average total assets. As determined in the previous question, average total
assets is equal to
P460,000. Net income is equal to P72,000 (P350,000 sales – P160,000 cost of goods sold – P3,000
interest expense –
P48,000 income taxes – P67,000 administrative expense). Therefore, return on assets is equal to 0.157
(P72,000 ÷
P460,000), or 15.7%.
10.(c) The requirement is to determine the effect of payment of an account payable. Answer (c) is
correct. The quick ratio is equal to quick assets divided by current liabilities and the current ratio is
equal to current assets divided by current liabilities. Since we are told that quick assets exceed current
liabilities, both ratios are greater than one. With a ratio greater than one if you reduce the numerator
and denominator by an equal amount, the ratio will increase.
11.(b) The requirement is to determine the effect of a purchase of raw materials on account. The
correct answer is (b). Since we know that the current ratio is greater than one, an increase in the
numerator and the denominator by an equal amount will decrease the ratio. Answers (c) and (d) are
incorrect because working capital will not change.
12.(d) The requirement is to determine the effect of the collection of accounts receivable. Answer (d) is
correct. Collection of accounts receivable has no effect on the quick or current ratio because both cash
and accounts receivable are part of the numerator of both ratios.
13.(d) The requirement is to determine the effect of writing off inventory. Answer (d) is correct because
a write-off of inventory will decrease the current ratio. Answers (a) and (b) are incorrect because
inventory is not used in computing the quick ratio. Answer (c) is incorrect because working capital will
be decreased.
14.(a) The requirement is to determine the effect of a fivefor-one stock split. Answer (a) is correct
because a stock split increases the number of shares outstanding and, therefore, reduces the book
value per share. Answers (c) and (d)
are incorrect because the transaction does not affect total stockholders’ equity.
15.(d) The requirement is to determine the effect of issuing serial bonds in exchange for an office
building. Answer (d) is correct because the first installment is a current liability which affects the quick
ratio, the current ratio, and working capital.
16.(b) The requirement is to determine the effect of liquidating a long-term note with cash. Answer (b)
is correct. Cash is included in the numerator of both the quick and current ratios. However, a reduction
in cash affects the quick ratio more than the current ratio because it is smaller.

10