UM TAGUM COLLEGE 2.1 – 2.2.

1 ROE (Profit/Net Sales) x (Net Sales/Investments) x (Investments/Shareholders’

Department of Accounting Education 1st Sem, 2018-2019 Equity)
Bachelor of Science in Accountancy ROE PM x AT x Equity Multiplier
Competency Appraisal Course ROA ROE x Equity ratio
ROE ROA/Equity ratio
Subject: Management Advisory Services (MAS) EPS (Profit/Net Sales) x (Net Sales/Investments) x (Investments/Shareholders’
Topic: Objectives and Scopes of Financial Management & Financial Equity) x (Shareholders’ equity/Ordinary shares outstanding)
Statement Analysis EPS PM x AT x EM x BVPS
Reviewer: Kheen V. Batingal, MICB, CPA BEPS (Net Income – Preference Dividend)/WAOSO
In computation of EPS, the preference dividend requirements shall be treated as
REVIEW NOTES follows:
1. Traditional models of financial statements analysis Cumulative preference Non-cumulative preference
a. Horizontal or comparative analysis share share
b. Trend analysis Dividends in Excluded Excluded
c. Vertical or ordinary-size analysis arrears
d. Financial mix ratio analysis Current dividend Included Included only when declared
i. Profitability ratios
3. The growth ratios
ii. Growth ratios
a. Basic growth ratios
iii. Liquidity ratios
Price-earnings (P/E) ratio MPPS/EPS
iv. Leverage ratios
Dividend yield ratio DPS/MPPS
2. The profitability ratios
Dividend payout ratio DPS/EPS
a. Basic profitability ratios
Gross profit rate Gross profit/Net sales Book value per preference share PSE/APSO
Operating income Operating profit/Net sales Book value per ordinary share OSE/AOSO
rate Market to book value per share MPPS/BVPS
Profit margin (PM) Profit/Net sales Where:
Return on (Profit + Interest expense, net of tax)/Average Investment AOSO = Average ordinary shares outstanding
Investment (ROI) APSO = Average preference shares outstanding
Operating profit after tax/Average investment
BVPS = Book value per share
Return on Equity Profit/Average shareholders’ equity
DPS = Dividend per share
(ROE)
EPS = Earnings per share
Earnings per Share (Profit – Preference dividends requirements)/Average
MPPS = Market price per share
(EPS) ordinary shares outstanding
OSE = Ordinary shareholders’ equity
b. Du Pont Model PSE = Preference shareholders’ equity
ROI Profit/Net Sales x Net Sales/Average Investment
b. The preference and ordinary equity balances shall be determined
ROI Profit Margin x Assets Turnover as follows:
ROI PM x AT

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Total shareholders’ equity P xxx (Equity multiplier – 1)/Equity multiplier
- PSE D/E ratio/(1 + D/E Ratio)
Liquidation (or callable) value P xxx Equity ratio Shareholders’ equity/Total assets
Applicable dividends Xxx 1 – Debt ratio
OSE P xxx Return on assets/Return on equity
c. The applicable dividend is determined by considering the 1/Equity multiplier
dividend in arrears when the preference shares are cumulative. Debt-equity ratio Total debt/Shareholders’ equity
4. The liquidity ratios Debt ratio/(1 – Debt ratio)
a. Basic operating ratios Equity multiplier Total equity/Shareholders’ equity
Inventory days xx 1 + Debt-equity ratio
+ Collection period xx 1/Equity ratio
Operating cycle xx 1/(1 – Debt ratio)
- Payment period xx Times interest EBIT/Interest expense
Net cash cycle xx earned
Financial leverage EBIT/(EBIT – Interest expense – Preference dividend
b. Turnovers and number of days:
ratio requirement)
Inventory turnover = CGS/Inventory
Inventory days = 365/IT b. The importance of cash flow motivates other financial analysts to
Receivable turnover = Net credit sales/Trade receivables develop cash flow ratios such as
Collection period = 365/RT Cash flow adequacy Cash from operations/Long-term debt paid +
Payable turnover = Net credit purchases/Trade payables Purchases of assets
Payment period = 365/PT Long-term debt payment Long-term debt payments/Cash from
operations
c. Other liquidity ratios
Dividend payout on cash from Dividends/Cash from operations
Current ratio Current assets/Current liabilities
operations
Quick assets ratio Quick assets/Current liabilities
Reinvestment ratio Purchase of assets/Cash from operations
Quick assets Cash + Marketable securities + Trade receivables
Total debt coverage Total liabilities/Cash from operations
Defensive interval ratio Defensive assets/Average cash operating expenses
Depreciation-amortization Depreciation + Amortization / Cash from
Defensive assets Cash + Marketable securities + Trade receivables impact operations
Net working capital CA – CL Cash flow to sales Cash from operations / Sales
WC turnover Net Sales/Ave. WC Cash flow to net income Cash from operations / Income from ordinary
Assets turnover Net Sales/Ave. Total Assets operations
5. The financial leverage ratios Cash flow return on sales Cash from operations / Total assets
a. Basic financial leverage ratios
Debit ratio Total debt/Total assets
1 – (1/Equity multiplier)
(1 – Equity ratio)

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STRAIGHT PROBLEMS Trade and other receivables 40,000 25,000
1. FINANCING RATIOS. X Corporation and Y Company disclose the following Inventory 27,000 30,000
data on their balance sheet (in thousands): Investment property 15,000 0
X Corp. Y Co. Property, plant and equipment (net) 100,000 75,000
Debt, 10% P 250,000 P 500,000 Intangible assets 10,000 10,000
Shareholder’s equity 500,000 250,000 Other noncurrent assets 5,000 20,000
Total Equity P 750,000 P 750,000 Total assets P200,000 P165,000
Earnings before interest Liabilities
And taxes P 375,000 P 375,000 Current liabilities P 30,000 P 47,000
Interest Expense 25,000 50,000 Long-term liabilities 88,000 74,000
Total liabilities 118,000 121,000
Required: Shareholders’ equity
A. For each company, compute the following 8% Preference equity 10,000 9,000
a. Debt rate Ordinary equity 54,000 42,000
b. Debt-equity ratio Share premium 5,000 5,000
c. Equity multiplier Retained earnings 13,000 (12,000)
d. Times interest earned Total shareholders’ equity 82,000 44,000
Total liabilities & shareholders’ equity P200,00 P165,000
2. INVESTING RATIOS. Char Corp. and Maine Co. revealed the following
Sales and cost of goods sold insignificantly change in 2015 in relation with 2014.
information on their published financial statements for the 2015 business Required:
operations (in thousands): 1. Prepare a comparative balance sheet showing peso and percentage
Char Maine changes for 2015 as compared with 2014.
Current assets P 640,000 P225,000 2. Prepare a common-size balance sheet as of December 31, 2015 and 2014.
Investments 56,000 500,000 4. COMPARATIVE AND COMMON-SIZE ANALYSIS. The operating activities
Property, plant, and equipment 56,000 50,000 of FM Company for the year ended December 31, 2015 and 2014 are
Intangibles 32,000 15,000 summarized below:
Other assets 16,000 10,000
(in thousands)
Total assets P800,000 P800,000 2014 2015
Sales P440,000 P480,000
Required: For each company, determine the ratio component of Cost of goods sold (242,000) (360,000)
each asset over the total assets. Comment on the data you computed Selling and general expenses (118,800) (96,000)
Interest expense (30,800) (33,600)
3. HORIZONTAL AND VERTICAL ANALYSIS. The financial position of Frances
Profit (loss) before income tax 48,400 (9,600)
Meliena Company at the end of 2014 and 2015 is as follows (pesos in
Income tax (refund) 19,360 (3,840)
thousands):
Profit (Loss) P29,040 P(3,760)
Assets 2015 2014
Cash and cash equivalents P 3,000 P 5,000 Required:
a. Prepare a Comparative Statement of Profit or Loss for 2015 and 2014.
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 b. Prepare a Common-Size Statement of Profit or Loss for 2015 and 2014. Net sales P1,000 4,000 P9,000
c. Based on the above percentages, comment on the FM Company’s result Total assets P400 P3,000
of operations for 2015. Shareholders’ equity P150 P3,600
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000
5. TREND RATIOS. G Corporation’s sales, current assets, and current Profit margin 20% 4%
liabilities have been reported as follows over the last five years (amount Asset turnover 0.2
in thousands): ROA 12%
2015 2014 2013 2012 2011 ROE 10% 10%
Sales P10,800 P 9,600 P 9,200 P 8,640 P 8,000 EPS
Current assets 2,626 2,181 2,220 2,267 2,225
Current liabilities 475 450 350 325 250 8. BASIC PROFITABILITY RATIOS 3. Find the missing data:
Required: Express all the sales, current assets, and current liabilities on trend
A B C
index. Round your decimals up to 2 places.
Profit margin 10% 12% 10%
A. Use 2011 as the base year.
Assets turnover 4 5
B. Use 2015 as the base year.
Equity multiplier 1.25
6. PROFITABILITY RATIOS 1. The following data were taken from the records
ROE 20%
of F Company and T Company (amounts in thousands and balance sheet
data are on average): Debt ratio 40% 25%
F Co. T Co.
Sales P 80,000 P 10,000 9. BASIC GROWTH RATIOS 1. Consider the following data for the year ended
Profit (loss) 3,050 640 December 31, 2012:
Interest expense 50 40 R Co. J Co. T Co.
Total assets 12,000 2,000 Earnings per share P 50 P 200 P 100
Ordinary shareholders’ equity 6,000 500 Market price per ordinary share 150 500 300
Preference dividends, cumulative 200 200 Dividend per ordinary share 40 120 60
No. of ordinary shares outstanding 600 50 Dividend per preference share 10 20 40
Tax rate 40% 40% Total shareholders’ equity P10 million P60 million P70 million
Required: Determine the following ratios for F Company and T Company: Ordinary shares outstanding 1 million 4 million 5 million
a. Return on sales Preference shares outstanding 500,000 2 million, 2 million,
b. Return on investment cumulative cumulative
c. Return on ordinary equity Preference liquidation value per share P1.30 P1.30 P4.10
d. Earnings per share Dividends in arrears None None 2 years
Required: Calculate the following ratios for R Co., J Co., and T Co.:
7. BASIC PROFITABILITY RATIOS 2. Find the missing data (amount in a. Price-earnings ratio
millions) b. Dividend payout ratio
A B C c. Dividend yield ratio
Net income P50 d. Book value per preference share

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 e. Book value per ordinary share 9. Net working capital
f. Market to book value per share 10. Working capital turnover
11. Current ratio
10. BASIC GROWTH RATIOS 2. Find the missing data. 12. Quick-assets ratio
A B C 13. Defensive-interval ratio
P/O rate 40%
P/E rate 8% 40% 12. EFFECTS OF LEVERAGE ON RETURN ON ORDINARY EQUITY. You are in
Yield rate 12% 80% 187.5% the process of organizing a new company to produce and sell a lady
Retention rate 25% beauty product. You feel that P5 million would be enough to finance the
new company’s operations. You are considering following financing mix in
11. BASIC LIQUIDITY RATIOS. You are asked by the Chief Financial Officer of raising the needed money for investment.
D Corporation to analyze its liquidity position in 2015. You have gathered Straight ordinary All the P5 million would be raised by issuance of ordinary
the following data from the records of the company and industry equity: shares.
published reports (in thousands): Shareholders’ P3.5 million would be raised from ordinary shares issuances
D Corp Industry Average equity mix: and P1.5 million from the sale of P100 par, 10%, preference
Average cash P 3,500 P 2,000 stock.
Average trade receivables 8,000 10,000 Leverage and P3.0 million would be obtained from ordinary shares
Average inventory 6,500 7,000 equity mix: issuances and P2.0 million from issuance of a 12% bonds
Average trade payables 14,000 12,000 payable.
Net credit sales 200,000 150,000 You estimated that the operations would generate an earning of P2 million each
Net sales 250,000 210,000 year before interest and taxes. The tax rate is 40%.
Cost of sales 130,000 112,000
Net credit purchases 140,000 96,000 Required:
Net purchases 180,000 120,000 Determine the best financing mix that would maximize return on ordinary equity.
Daily cash operating expenses 30,000 42,000
The company uses a 360-day a year base. The credit terms offered to customers
are 2/10, n/40. Suppliers give credit terms of 3/20, n/40.
Required:
For D Corporation and the industry, compute the following (days are rounded):
1. Receivables turnover
2. Collection period
3. Inventory turnover
4. Days to sell inventory (Inventory days)
5. Payables turnover
6. Payment period
7. Operating cycle
8. Net cash cycle