FINANCIAL STATEMENT ANALYSIS

1. How are financial ratios used in decision making?

A. They remove the uncertainty of the business environment.
B. They aren’t useful because decision making is too complex.
C. They give clear signals about the appropriate action to take.
D. They can help identify the reasons for success and failure in business, but decision
making requires information beyond the ratios.

2. Which of the following is not revealed on a common size balance sheet?

A. The debt structure of a firm.
B. The capital structure of a firm.
C. The peso amount of assets and liabilities.
D. The distribution of assets in which funds are invested.

3. Last year, a business had no long-term investments; this year long term investments
amount to P100,000. In a horizontal analysis the change in long-term investments
should be expressed as
A. An absolute value of P100,000, and an increase of 100%
B. An absolute value of P100,000 and an increase of 1,000%
C. An absolute value of P100,000 and no value for a percentage change
D. No change in any terms because there was no investment in the previous year

4. Which ratio is most helpful in appraising the liquidity of current assets?

A. Accounts receivable turnover. C. Current ratio.
B. Acid-test ratio. D. Debt ratio.

5. Which of these ratios are measures of a company’s profitability?

1. Earnings per share 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Return on sales 7. Receivables turnover
4. Debt-equity ratio 8. Price-earnings ratio
A. 1, 3, and 5 only C. 1, 3, 5, 6, 7, and 8 only.
B. 1, 3, 5, and 8 only. D. All eight ratios.

6. How are the following used in the calculation of the dividend-pay-out ratio for a company
with only common stock outstanding?
A. B. C. D.
Dividends per share Denominator Denominator Numerator Numerator
Earnings per share Numerator Not used Denominator Not used
Book value per share Not used Numerator Not used Denominator
7. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of
credit. Belle’s quick ratio is significantly better than the industry average. Which of the
following factors should North consider as possible limitation of using this ratio when
evaluating Belle’s creditworthiness?
A. Belle may need to liquidate its inventory to meet its long-term obligations.
B. Increasing market prices for Belle’s inventory may adversely affect the ratio.
C. Fluctuating market prices of short-term investments may adversely affect the ratio.
 D. Belle may need to sell its available-for-sale investments to meet its current
obligations.

8. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the
year. At the end of the year, the company has a current ratio of 2.5 to 1 and a quick
ratio of 0.8 to 0.1 Which of the following could help explain the divergence in the ratios
from the beginning to the end of the year?
A. An increase in inventory levels during the year.
B. An increase in credit sales in relationship to sales
C. An increase in the use of payables during the current year.
D. An increase in the use of payables during the current year.

9. The market value of a firm's outstanding common shares will be higher, everything else
equal, if
A. Investors expect lower dividend growth.
B. Investors have longer expected holding periods.
C. Investors have a lower required return on equity.

D. Investors have shorter expected holding periods.

10. Minix Co. has a high sales-to-working-capital ratio. This could indicate
A. The firm is not profitable.
B. The firm is undercapitalized.
C. Working capital is not profitably utilized.
D. The firm is likely to have liquidity problems.

11. You observe that a firm’s profit margin and debt ratio are below the industry average,
while its return on equity exceeds the industry average. What can you conclude?
A. Return on assets is above the industry average.
B. Total assets turnover is below the industry average.
C. Total assets turnover is above the industry average.
D. Statements A and C are correct.

12. The company issued new common shares in a three-for-one stock split. Identify the
statements that indicate the correct effect(s) of this transaction.
A. It reduced equity per share of common stock.
B. The peso amount of capita stock is increased.
C. Share of each common stockholder is reduced.
D. Working capital and current ratio are increased.

13. Which of the following actions will increase a company’s quick ratio?
A. Issue equity and use the proceeds to purchase inventory.
B. Issue short-term debt and use the proceeds to purchase inventory.
C. Reduce inventories and use the proceeds to reduce long-term debt.
D. Issue long-term debt and use the proceeds to purchase fixed assets.
E. Reduce inventories and use the proceeds to reduce current liabilities.

14. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less
 than 2 to 1 if the company
A. Paid an account payable.
B. Collected an account receivable.
C. Purchased inventory on open account.
D. Sold merchandise on open account that earned a normal gross margin.

15. A company has a current ratio of 2 to 1. The ratio will decrease if the company
A. Borrow cash on a six-month note.
B. Pays a large account payable which had been a current liability.
C. Receives a 5% stock dividend on one of its marketable securities.
D. Sells merchandise for more than cost and records the sale using the perpetual
inventory method.

16. ABC Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A
transaction that would change Bond's quick ratio but not its current ratio is the
A. payment of accounts payable.
B. collection of accounts receivable.
C. sale of inventory on account at cost.
D. sale of short-term marketable securities for cash that results in a profit.

17. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets
either by using borrowed funds for the purchase or by entering into an operating lease.
The company's debt ratio as measured by the balance sheet will
A. Increase whether the assets are purchased or leased.
B. Remain unchanged whether the assets are purchased or leased.
C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Increase if the assets are purchased, and remain unchanged if the assets are
leased.

18. Which of the following statements is correct?

A. A high quick ratio is always a good indication of a well-managed liquidity position.
B. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings
stream.
C. A relatively low return on assets (ROA) is always an indicator of managerial
incompetence.
D. An increase in a firm’s inventories will call for additional financing unless the increase
is offset by an equal or larger decrease in some other asset account.

19. All of the following statements are valid except

A. The inventory turnover is computed by dividing sales by average inventory.
B. The results of financial statements analysis are of value only when viewed in
comparison with the results of other periods or other firms.
C. If the return on total assets is higher than the after-tax cost of long-term debt, then
leverage is positive, and the common stockholders will benefit.
 D. The short term creditor is more interested in cash flows and in working capital
management that he is in how much accounting net income is reported.

20. The net sales of Grand Manufacturing Co. in 2019 is total, P580,600. The cost of goods
manufactured is P480,000. The beginning inventories of goods in process and finished
goods are P82,000 and P65,000, respectively. The ending inventories are, goods in
process, P75,000, finished goods, P55,000. The selling expenses is 5%, general and
administrative expenses 2.5% of cost of sales, respectively. The net profit in the year
2019 is
A. P45,725 C. P83,000
B. P53,850 D. P90,000

21. Blasso Co.’s net accounts receivable were P500,000 at December 31, 2018 and
P600,000 at December 31, 2019. Net cash sales for 2019 were P200,000. The
accounts receivable turnover for 2019 was 5.0. What were Blasso’s total net sales for
2019?
A. P2,950,000 C. P3,200,000
B. P3,000,000 D. P5,500,000

22. Alumbat Corporation has P800,000 of debt outstanding, and it pays an interest rate of
10 percent annually on its bank loan. Alumbat’s annual sales are P3,200,000, its
average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the
company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew
its loan, and bankruptcy will result. What is Alumbat’s current TIE ratio?
A. 2.4 C. 3.6
B. 3.4 D. 5.0

23. Manufacturer’s Inc. estimates that its interest charges for this year will be P700 and its
net income will be P3,000. Assuming its average tax rate is 30 percent, what is the
company’s estimated times interest earned ratio?
A. 2.40 C. 5.33
B. 4.25 D. 7.12

24. Ehrenburg Co. had net income of P5.3 million and earnings per share of common stock
of P2.50. Included in the net income was P500,000 of bond interest expense related to
its long-term debt. The income tax rate was 50%. Dividends on preferred stock were
P300,000. The dividend payout ratio on common stock was 40%. What were the
dividends on common stock?
A. P1,800,000 C. P2,000,000
B. P1,900,000 D. P2,120,000

25. India Oats pays dividends of P0.62 per quarter, and has annual earnings per share of
P2.80. What is India Oats's dividend yield and dividend payout ratio for 2000,
respectively, if its recent market price is P30.00 and its average market price was
P28.00?
 A. 8.27% and 22.1%. C. 8.86% and 22.1%.
B. 8.27% and 88.6%. D. 8.86% and 88.6%.

26. Last year, Quayle Energy had sales of P200 million and its inventory turnover ratio was
5.0. The company’s current assets totaled P100 million and its current ratio was 1.2.
What was the company’s quick ratio?
A. 0.55 C. 1.20
B. 0.72 D. 1.39

27. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
company has P2 million in sales and its current liabilities are P1 million. What is the
company’s inventory turnover ratio?
A. 5.0 C. 5.5
B. 5.2 D. 6.0

28. Taft Technologies has the following relationships:

Annual sales P1,200,000 Inventory turnover ratio 4.8
Current liabilities P 375,000 Current ratio 1.2
Days sales outstanding 40 (360-day year)
(DSO)
The company’s current assets consist of cash, inventories, and accounts receivable.
How much cash does Taft have on its balance sheet?
A. -P 8,333 C. P125,000
B. P 66,667 D. P200,000

29. The Intelinet Corporation and Comp Inc. have assets of P100,000 each and a return on
common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half
the sales of Intelinet. If Intelinet has net income of $10,000 and a total assets turnover
ratio of 3.5, what is Comp Inc.'s profit margin?
A. 3.31% C. 10.00%
B. 7.71% D. 13.50%

30. Selected information from the accounting records of the Blackwood Co. is as follows:
Net A/R at December 31, 2018 P 900,000
Net A/R at December 31, 2019 P1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2018 P1,100,000
Inventories at December 31, 2019 P1,200,000
Inventory turnover 4 to 1
What was the gross margin for 2019?
A. P150,000 C. P300,000
B. P200,000 D. P400,000

31. Assume Meyer Corporation is 100 percent equity financed. Calculate the return on
equity, given the following information:
 (1) Earnings before taxes = $1,500
(2) Sales = $5,000
(3) Dividend payout ratio = 60%
(4) Total assets turnover = 2.0
(5) Tax rate = 30%
A. 25% C. 35%
B. 30% D. 42%

32. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to
put together a financial report. You have found the return on equity to be 12% and the
debt ratio was 0.40. What was the return on assets?
A. 5.35% C. 7.20%
B. 6.60% D. 8.40%

33. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of
P500,000 on P5,000,000 of total debt outstanding. Its tax rate is 40 percent. If the firm’s
ROA is 6 percent, by how many percentage points is the firm’s ROE greater than its
ROA?
A. 0.0% C. 5.2%
B. 3.0% D. 7.4%

34. Earnings per share amount to P10 and the price earnings ratio is 5. If the dividend yield
is 8%,
A. The dividend is P4 per share.
B. Market price of the stock must be P40.
C. The amount of dividend cannot be determined.
D. Market value of the stock cannot be determined.

35. The following ratios and data were computed from the 2019 financial statements of Star
Co.:
Current ratio 1.5
Working capital P20,000
Debt/equity ratio .8
Return on equity .2
If net income for 2019 is P40,000, the balance sheet at the end of 2019 total assets of
A. P300,000 C. P360,000
B. P340,000 D. P400,000

36. Kansas Office Supply had P24,000,000 in sales last year. The company’s net income
was P400,000, its total assets turnover was 6.0, and the company’s ROE was 15
percent. The company is financed entirely with debt and common equity. What is the
company’s debt ratio?
A. 0.20 C. 0.33
B. 0.30 D. 0.60

37. Deb & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of
10%. The president is unhappy with the current return on equity, and he thinks it could
be doubled. This could be accomplished (1) by increasing the profit margin to 14% and
(2) increasing debt utilization. Total assets turnover will not change. What new debt
 ratio, along with the 14% profit margin, is required to double the return on equity?
A. 0.55 C. 0.70
B. 0.65 D. 0.75

38. Lombardi Trucking Company has the following data:

Assets: P10,000 Interest rate: 10.0%
Debt ratio: 60.0% Total assets turnover: 2.0
Profit margin: 3.0% Tax rate: 40%
What is Lombardi’s TIE ratio?
A. 0.95 C. 2.10
B. 1.75 D. 2.67

39. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets of
12%. If the debt ratio is 36% and the market price of the stock is P38 per share, what is
the return on equity?
A. 7.68% C. 12.0%
B. 9.0% D. 18.75%

40. OTW Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1.
What is OTW’s current ratio immediately after it has paid P2million of its accounts
payable?
A. 2.75 to 1 C. 3.75 to 1
B. 3.25 to 1 D. 4.75 to 1

41. Last year's asset turnover ratio for Wuerffel Airlines was 2.5. This year, sales increased
by 20% and average total assets increased by 10%. What is the new asset turnover
ratio?
A. 2.50 C. 2.73
B. 2.59 D. 3.00

42. Vance Motors has current assets of P1.2 million. The company’s current ratio is 1.2, its
quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to
increase its inventory turnover ratio to the industry average, which is 5, without reducing
its sales. Any reductions in inventory will be used to reduce the company’s current
liabilities. What will be the company’s current ratio, assuming that it is successful in
improving its inventory turnover ratio to 5?
A. 0.75 C. 1.33
B. 1.22 D. 1.67

43. Standard Company's bonds have a provision which stipulates that the ratio of senior
debt to total assets will never rise above 45%. The company is at the limit of that ratio
and it wishes to issue still another P25 million in senior debt. How much additional
equity capital must it raise to comply with this restrictive provision?
A. P11.25 million. C. P30.56 million.
B. P20.45 million. D. P55.56 million.

44. Barr Co. has total debt of P420,000 and shareholders’ equity of P700,000. Barr is
seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in
common stock, and is negotiating with a bank to borrow additional funds. The bank is
 requiring a debt-to-equity rate of 0.75. What is the maximum additional amount Barr will
be able to borrow?
A. P225,000 C. P525,000
B. P330,000 D. P750,000

45. Associated Co. paid out one-half of its 2018 earnings by dividends. Its earnings
increased by 20% and the amounts of its dividends increased by 15% in 2019.
Associated’s dividend payout ratio for 2019 was
A. 47.9% C. 52.3%
B. 51.5% D. 75.0%

46. Landry Retailers has annual sales of P365 million. The company’s days sales
outstanding (calculated on a 365-day basis) is 50, which is well above the industry
average of 35. The company has P200 million in current assets, P150 million in current
liabilities, and P75 million in inventories. The company’s goal is to reduce its DSO to the
industry average without reducing sales. Cash freed up would be used to repurchase
common stock. What will be the current ratio if the company accomplishes its goal?
A. 0.73 C. 1.33
B. 1.23 D. 1.43

47. Roland & Company has a new management team that has developed an operating plan
to improve upon last year’s ROE. The new plan would place the debt ratio at 55
percent, which will result in interest charges of P7,000 per year. EBIT is projected to be
P25,000 on sales of P270,000, it expects to have a total assets turnover ratio of 3.0, and
the average tax rate will be 40 percent. What does Roland & Company expect its return
on equity to be following the changes?
A. 17.65% C. 26.67%
B. 21.82% D. 44.44%