I. THEORIES industries. leased. earnings stream.

c. Increase if the assets are purchased, and 13. The ratio that measures a firm's ability to
1. When a balance sheet amount is related to an 4. Which of the following is not revealed on a decrease if the assets are leased. generate earnings from its resources is
income statement amount in computing a common size balance sheet? d. Remain unchanged whether the assets are a. Days' sales in inventory.
ratio, a. The debt structure of a firm. purchased or leased. b. Days' sales in receivables.
a. The income statement amount should be b. The capital structure of a firm. c. Sales to working capital.
converted to an average for the year. c. The peso amount of assets and liabilities. 9. You observe that a firm’s profit margin and d. Asset turnover.
b. Comparisons with industry ratios are not d. The distribution of assets in which funds debt ratio are below the industry average,
meaningful. are invested. while its return on 10. equity exceeds the 14. Planners have determined that sales will
c. The balance sheet amount should be industry average. What can you conclude? increase by 25% next year, and that the profit
converted to an average for the year. 5. If a transaction causes total liabilities to a. Return on assets is above the industry margin will remain at 15% of sales. Which of
d. The ratio loses its historical perspective decrease but does not affect the owners’ average. the following statements is correct?
because a beginning-of-the-year amount equity, what change if any, will occur in total b. Total assets turnover is above the a. Profit will grow by 25%.
is combined with an end-of-the-year assets? industry average. b. The profit margin will grow by 15%.
amount. a. Assets will be increased. c. Total assets turnover is below the industry c. Profit will grow proportionately faster
b. Assets will be decreased. average. than sales.
2. How are financial ratios used in decision c. No change in total assets. d. Statements a and b are correct. d. Ten percent of the increase in sales will
making? d. None of the above. become net income.
a. They can help identify the reasons for 10. What is a limitation common to both the
success and failure in business, but 6. Minix Co. has a high sales-to-working-capital current and quick ratio? 15. Which one of the following ratios would
decision making requires information ratio. This could indicate a. Accounts receivable may not be truly provide a best measure of liquidity?
beyond the ratios. a. The firm is undercapitalized. liquid. a. Sales minus returns to total debt.
b. They remove the uncertainty of the b. The firm is likely to have liquidity b. Inventories may not be truly liquid. b. Total assets minus goodwill to total
business environment. problems. c. Marketable securities are not liquid. equity.
c. They aren’t useful because decision c. Working capital is not profitably utilized. d. Prepaid expenses are potential sources of c. Current assets minus inventories to
making is too complex. d. The firm is not profitable. cash. current liabilities.
d. They give clear signals about the d. Net profit minus dividends to interest
appropriate action to take. 7. When compared to a debt-to-assets ratio, a 11. In a single-period common-size income expense.
debt-to-equity ratio would statement, the base amount (100%) is
3. A useful tool in financial statement analysis is a. Be about the same as the debt-to-assets normally the
the common-size financial statement. What ratio. a. Gross sales c. Net cash sales
does this tool enable the financial analyst to b. Be higher than the debt-to-assets ratio. b. Net sales d. Net credit sales
do? c. Be lower than the debt-to-assets ratio.
a. Evaluate financial statements of d. Have no relationship at all to the debt-to- 12. Which of the following statements is correct?
companies within a given industry of assets ratio. a. An increase in a firm’s inventories will
approximately the same value. call for additional financing unless the
b. Determine which companies in the same 8. Assume that a company's debt ratio is increase is offset by an equal or larger
industry are at approximately the same currently 50%. It plans to purchase fixed assets decrease in some other asset account.
stage of development. either by using borrowed funds for the b. A high quick ratio is always a good
c. Compare the mix of assets, liabilities, purchase or by entering into an operating indication of a well-managed liquidity
capital, revenue, and expenses within a lease. The company's debt ratio as measured position.
company over time or between by the balance sheet will c. A relatively low return on assets (ROA) is
companies within a given industry a. Increase whether the assets are always an indicator of managerial
without respect to relative size. purchased or leased. incompetence.
d. Ascertain the relative potential of b. Increase if the assets are purchased, and d. A high degree of operating leverage
companies of similar size in different remain unchanged if the assets are lowers the risk by stabilizing the firm’s
 II. PROBLEMS Current assets = 480,000 – 252,000 = 228,000 P485,250 COGS 60% 2,400,000
Current liabilities = 228,000/1.9 = 120,000 4. Total current assets would amount to GM 40% 1,600,000
A. The condensed balance sheet as of Accounts payable = 120,000 – 40,000 = 80,000 P930,825
December 31, 2014 of San Matias Solution
1.4 = Total liabilities/ total equity D. For the year 2014, Drey Company’s income
Company is given below. Figures Total liabilities = 140% Sales 100% 1,350,000 statement shows operating expenses of
shown by a question mark (?) may be COGS 65% 877,500 P20,480. The following information is also
Total equity = 100%
computed from the additional GM 35% 472,500 available:
Total liabilities & shareholders’ equity = 140% +
information given: Operating expenses 18% 243,000
100% = 240% Operating income / EBIT 17% 229,500 Prepaid expenses, January 1, 2014 P1,100
ASSETS Total equity = 480,000 / 240% = 200,000 Interest expense 1.7% 22,950 Accrued expenses payable, January 3,680
Cash P 60,000 Retained earnings = 200,000 – 140,000 = 60,000 Earnings before tax 25.3% 206,550 1, 2014
Sales = 15/10 = 150% Prepaid expenses, December 31, 1,200
Trade receivable-net ?
COGS = 10/10 = 100% Times interest earned = EBIT/interest expense 2014
Inventory ?
Sales 150% 1,500,000 Interest expense = 229,500 / 10 = 22,950 Accrued expenses payable, 2,500
Fixed assets-net 252,000
COGS 100% 1,000,000 Bonds payable = 22,950 / 20% =114,750 December 31, 2014
How much was the cash paid for operating
Total Assets P 480,000 Gross margin 50% 500,000 Debt or total liabilities = 750,000 * .8 = 600,000
expenses? 21,760
LIAB. & STOCKHOLDERS’ EQUITY Ending inventory = 1.5M/15 = 100,000 Total liabilities = current liabilities + long term
Accounts payable P ? Ending inventory = 1M/10 = 100,000 liabilities E. Operating expenses 20,480
Current notes payable 40,000 Current liabilities = 600,000 – 114,750 = 485,250 Prepaid expenses, 1/1 (1,100)
Long-term payable ? B. You are requested to reconstruct the Total assets = 750,000 + 600,000 = 1,350,000 Accrued expenses, 1/1 3,680
Common stock 140,000 accounts of Angela Trading for analysis. Quick assets = 485,250 * 1.3 = 630,825 Prepaid expenses, 12/31 1,200
Retained earnings ? The following data were made available to Total current assets = 630,825 + 300,000 = 930,825 Accrued expenses, 12/31 (2,500)
Total L & SHE P 480,000
you: Cash payment for operating 21,760
Additional information:
Gross margin for 2014 P472,500 C. Selected data from the year-end financial expenses
Current ratio (as of Dec. 31, 1.9 to 1
Ending balance of merchandise P300,000 statements of World Cup Corp. are presented In 2014, Audrey Company’s land account
2014)
inventory below. The difference between average and decreased by P90,000 because of a cash sale
Ratio of total liabilities to total 1.4
Total stockholders’ equity as of P750,000 for the same amount. Its equipment account
stockholders’ equity ending inventories is immaterial.
December 31, 2014
Inventory turnover based on 15 times Current ratio 2.0 increased by P40,000 as a result of a cash
sales and ending inventory Gross margin ratio 35%
Quick ratio 1.5 purchase, and its bonds payable increased by
Inventory turnover based on 10 times Debt to equity ratio 0.8:1
Current liabilities P600,000 P35,000 due to an issuance for cash at face
cost of goods sold and Times interest earned 10
Quick ratio 1.3:1 Inventory turnover (based on 8 times value. How much is the net cash
ending inventory
Ratio of operating expenses to 18% cost of sales) provided/used by investing activities? 50,000
Gross margin for 2014 P500,00
sales Gross profit margin 40% Sale of equipment 90,000
0
Long-term liabilities consisted of 20% Acquisition of equipment (40,000)
1. The balance of accounts payable of San Matias bonds payable with interest rate World’s net sales for the year were? Net cash provided in investing 50,000
as of December 31, 2014 is P80,000 of P4.0 million
2. The balance of retained earnings of San Matias Solution
as of December 31, 2014 is P60,000 Based on the above information, Current assets = 600,000 * 2.0 = 1,200,000
3. The balance of inventory of San Matias as of Quick assets = 600,000 * 1.5 = 900,000
December 31, 2014 is P100,000 1. What was the operating income for 2014?
P229,500 Inventory = 1,200,000 – 900,000 = 300,000
Solution 2. How much was the bonds payable? P114,750 COGS = 300,000 * 8 = 2,400,000
3. Total current liabilities would amount to Sales 100% 4,000,000