FINANCIAL STATEMENTS ANALYSIS

Management Accounting Review

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True or False

1. Common-size statements are financial statements of companies of similar size.

2. One limitation of vertical analysis is that it cannot be used to compare two companies that
are significantly different in size.
3. The sale of used equipment at book value for cash will increase earnings per share.
4. An increase in the number of shares of common stock outstanding will decrease a
company's price-earnings ratio if the market price per share remains unchanged.
5. If a company's acid-test ratio increases, its current ratio will also increase.
6. Short-term borrowing is not a source of working capital
7. Profitability ratios are frequently used as a basis for evaluating management's operating
effectiveness

MC THEORIES

1. Which of the following below generally is the most useful in analyzing companies of
different sizes?
a. comparative statements
b. common-sized financial statements
c. price-level accounting
d. audit report
e. trend analysis

2. A balance sheet that displays only component percentages is called

a. trend balance sheet
b. comparative balance sheet
c. condensed balance sheet
d. common-sized balance sheet
e. trend analysis

3. In horizontal analysis each item is expressed as a percentage of the

a. base year figure
b. retained earnings figure
c. total assets figure
d. net income figure
e. all of the above

4. The acceleration in the collection of receivables will tend to cause the accounts receivable
turnover to
a. decrease
b. remain the same
c. either increase or decrease
d. increase

5. A company with P60,000 in current assets and P40,000 in current liabilities pays a P1,000
current liability. As a result of this transaction, the current ratio and working capital will
a. both decrease
b. both increase
c. increase and remain the same, respectively
d. remain the same and decrease, respectively

6. Roselyn Corp has a 2 to 1 current ratio. This ratio would increase if

a. The company wrote off an uncollectible receivable
 b. The company purchased inventory on open account
c. The company sold merchandise on open account that earned a normal gross
margin
d. A previously declared stock dividend were distributed

7. A measure of the company’s long term debt paying ability is

a. Return on assets
b. Dividend out ratio
c. Times interest earned ratio
d. Operating cycle

8. Financial ratio, which assess the profitability of a company, include all of the following
except:
a. Dividend yield ratio
b. Gross profit rate
c. Earnings per share
d. Return on sales

9. Kevin Inc. has a current ratio of 0.65 to 1. A cash dividend declared last month is paid this
month. What is the effect of this dividend payment on the current ratio and working
capital respectively?
a. Rise and decline
b. Rise and no effect
c. Decline and no effect
d. No effect on both ratios

10. A high receivable turnover ratio indicates

a. Many customers are not paying the company’s receivables
b. Customers are making payments quickly
c. The company’s sales have increased
d. A large portion of the company’s sales are on credit

INCREASE/DECREASE/NO EFFECT

State the effect of the following transactions on the current ratio. Use increase, decrease, or
no effect for your answer. Assume the current ratio is currently greater than 1.

1. Collection of an accounts receivable __________________

2. Collection of an accounts receivable within the discount period __________________
3. Declaration of cash dividends __________________
4. Additional stock is sold for cash. __________________
5. Accounts payable are paid. __________________
6. Equipment is purchased for cash. __________________
7. Inventory purchases are made for cash. __________________
8. Inventory purchases are made on account. __________________
9. Sold an inventory on account __________________
10. Sold an inventory for cash __________________

State the effect of the following transactions on the current ratio. Use increa se, decrease, or
no effect for your answer. Assume the current ratio is currently less than 1.

11. Collection of an accounts receivable __________________

12. Collection of an accounts receivable within the discount period __________________
13. Declaration of cash dividends __________________
14. Additional stock is sold for cash. __________________
15. Accounts payable are paid. __________________
16. Equipment is purchased for cash. __________________
17. Inventory purchases are made for cash. __________________
18. Inventory purchases are made on account. __________________
19. Sold an inventory on account __________________
20. Sold an inventory for cash __________________

PROBLEM #1

SOPHIA TRADING CORP.

Balance Sheet
December 31
2019 2018
ASSETS
Current Assets
Cash P4,800 P4,200
Marketable Securities 2,700 1,800
Accounts Receivable, net 72,000 66,000
Inventory 120,000 102,000
Prepaid Insurance 1,500 1,800
Total Current Assets P201,000 P175,800
Long - Term Investment 3,000 3,300
Property and Equipment
Land 36,000 36,000
Building, net 330,000 312,000
Equipment, net 150,000 138,000
Total Property and Equipment, net 516,000 486,000
TOTAL ASSETS P720,000 P665,100

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts Payable P45,000 P42,300
Accrued Expenses 13,200 12,600
Notes Payable 21,800 17,400
Total Current Liabilities P80,000 P72,300
Long - Term Liabilities 220,000 216,000
Total Liabilities P300,000 P288,300
Shareholders' Equity
Preferred Stock, P200 par value at 8% 36,000 36,000
Common Stock, P10 par value 150,000 144,000
Additional Paid in Capital 24,000 22,800
Retained Earnings 210,000 174,000
Total Stockholders' Equity 420,000 376,800
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY P720,000 665,100
 SOPHIA TRADING CORP.
Income and Retained Earnings Statement
For the Years Ended December 31

2019 2018

Net Sales P522,000 P492,000

Less Cost of Sales 365,580 338,100
Gross Profit P156,420 P153,900
Less Operating Expenses 42,000 40,200
Net Operating Income P114,420 P113,700
Less Interest Expenses 24,180 23,340
Net Income Before Tax P90,240 P90,360
Less Taxes Expense 22,560 22,590
Net Income P67,680 P67,770
Add Retained Earnings, beg 174,000 136,710
Total P241,680 P204,480
Less Dividends 31,680 30,480
Retained Earnings, end P210,000 P174,000

Net Income P67,680 P67,770

Less Preferred Stock Dividends 2,880 2,880
Net Income Available to Common Stockholders P64,800 P64,800
Less Dividends 28,800 27,600
Addition to Retained Earnings P36,000 P37,920

Additional information:

1. In both 2018 and 2019, costs of sales were 80% variable while the operating expenses
were 60% fixed.
2. Common stocks are traded in the market at P20 per share.

Requirements:
1. Vertical Analysis
2. Horizontal Analysis
3. Compute for the financial ratios:
a. Liquidity Ratios
i. Current Ratio (CR)
ii. Quick or Acid Test Ratio (QR)
iii. Cash Ratio
b. Asset Management Ratios
i. Inventory Turnover (Inv. TO)
ii. Average Selling Period (ASP)
iii. Accounts Receivable Turnover (ARTO)
iv. Average Collection Period (ACP)
v. Operating Cycle (OC)
vi. Fixed Asset Turnover (FATO)
vii. Total Asset Turnover (TATO)
c. Debt Management Ratios
i. Accounts Payable Turnover (APTO)
 ii. Times-Interest Earned Ratio (TIER)
iii. Fixed Charge Coverage Ratio (FCCR)
iv. Cash Flow Coverage Ratio (CFCR)
d. Profitability Ratios
i. Gross Profit Margin (GP Margin)
ii. Operating Profit Margin (OP Margin)
iii. Profit Margin
iv. Return on Sales (ROS)
v. Return on Assets (ROA)
vi. Return on Equity (ROE)
vii. Earnings Per Share (EPS)
viii. Dividends Per Share (DPS)
ix. Dividend Pay-Out ratio (DPOR)
e. Market Ratios
i. Price-Earnings Ratio (PER)
ii. Market Book Ratio (MBR)
iii. Dividend Yield Ratio (DYR)

PROBLEM #2

Erica Trading Corp had net income of P2 million in 2017. Using the 2017 financial elements
as the base data, net income decreased by 40% in 2018 and increased by 125% in 2019.

1. The net income reported by the company for 2018 is ____________________

2. The net income reported by the company for 2019 is ____________________

PROBLEM #3

The following financial data have been taken from the records of Salido Company:

Accounts receivable P200,000

Accounts payable 80,000
Bonds payable, due in 10 years 500,000
Cash 100,000
Interest payable, due in 3 months 25,000
Inventory 440,000
Land 800,000
Notes payable, due in 6 months 250,000

1. Current Ratio is ____________________

2. Quick Ratio is ____________________

If the inventory amounting to P50,000 was sold with 40% markup on cost, compute for
3. Current Ratio is ____________________
4. Quick Ratio is ____________________
PROBLEM #4

Mariano Corp had the following data in its balance sheet on December 31, 2016:

Accounts payable P145,000

Accounts receivable 110,000
Accrued liabilities 4,000
Cash 80,000
Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
Notes payable, due in 3 months 85,000
Prepaid expenses 15,000

1. The amount of working capital is ____________________

2. The amount of quick assets is ____________________

PROBLEM #5

During 2019, Salas Company purchased P520,000 of inventory. The cost of goods sold for
2019 was P480,000, and the inventory on December 31, 2019 was P180,000.

1. What was the inventory turnover for 2019?

2. Days in inventory is
3. The times interest earned ratio of Salas Company was 3.25 times. The interest expense for the
year was P30,000 and the company’s tax rate is P40%. What was company’s net income?

PROBLEM #6

Selected information for Trieyt Corp as December 31,2019 is as follows:

2018 2019
Preferred stock, 8%, par P100 P250,000 P250,000
nonconvertible and noncumulative
Common stock 600,000 800,000
Retained earnings 150,000 370,000
Dividends paid on preferred stock for the
year 20,000 20,000
Net income 120,000 240,000

What was the return on common stockholders’ equity for 2019?

PROBLEM #7

On December 31, 2018 and 2019, Tripiptin Corporation had 100,000 shares of common
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
outstanding. Additional information are as follows:

Stockholders' equity at 12/31/2019 P4,500,000

Net income for the year ended 12/31/2019 1,200,000
Dividends on preferred stock for the year ended
12/31/2019 300,000
Market price per share of common stock at 12/31/2019 144

Compute for the price-earnings ratio on common stock on December 31, 2019.
PROBLEM #8

The current assets of Trisikstin Enterprise consist of cash, accounts receivable and
inventory. The following information is available.

Credit sales 75% of total sales

Inventory turnover 5 times
Working capital P1,120,000
Current ratio 2 to 1
Quick ratio 1.25 to 1
Average collection period 42 days
Accounts Payable
Turnover 10 times
Working days 360 days

Compute for the following:

1. The estimated inventory amount
2. Cash conversion cycle

PROBLEM #9

The December 31, 2019 balance sheet of RCR Corp is presented below. These are the only
accounts in RCR’s balance sheet.

Cash P25,000 Accounts Payable ?

Accounts
Receivable ? Income Taxes Payable 20,000
Inventory ? Long Term Debt 100,000
Plant & Equipment 294,000 Common Stock 200,000
Retained Earnings ?
Total Liabilities &
Total Assets 432,000 Equity ?

Additional information:

Current ratio (at year end) 1.5 to 1

Debt to equity ratio 0.8
Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold and ending
inventory 11 times
Gross margin for the year P 320,000

1. What was RCR’s December 31, 2019 balance in inventory account?

2. What was RCR’s December 31, 2019 balance in Accounts Receivable?
3. What was RCR’s December 31, 2019 balance in Retained Earnings?

PROBLEM #10

Cedric Corp has a current ratio of 3:1. The minimum desired ratio is 5:1. At present, the
net working capital is P40,000. How much current liabilities must be paid to achieve the minimum
current ratio?

PROBLEM #11
 Abokoutah Company reported cost of goods sold of P250,000 and operating expenses of
P150,000 (including depreciation of P20,000). Income taxes are 35%. The after-tax return on sales
is 23.4%. How much was the sales revenue?
MULTIPLE CHOICE PROBLEMS

1. Gottlob Corporation's most recent income statement appears below:

Sales (all on account) ₱824,000

Cost of goods sold 477,000
Gross margin ₱347,000
Selling and administrative expenses 208,000
Net operating income ₱139,000
Interest expense 37,000
Net income before taxes ₱102,000
Income taxes 30,000
Net income ₱ 72,000

The profit margin percentage is closest to

A. 8.74%.
B. 12.4%.
C. 16.9%.
D. 42.1%.

2. Erica Trading Corp had net income of P3 million in 2015. Using the 2015 financial elements as
the base data, net income decreased to 70% in 2013 and increased by 150% in 2014. The respective
net income reported by the company for 2016 and 2017 are:
A. P900,000 and P2,250,000
B. P900,000 and P7,500,000
C. P2,100,000 and P5,250,000
D. P2,100,000 and P7,500,000

3. During 2017, Dumapias Company purchased P900,000 of inventory. The cost of goods sold for
2017 was P960,000, and the inventory on December 31, 2016 was P180,000. What was the
inventory turnover for 2017?
A. 5.0 times
B. 5.3 times
C. 6.0 times
D. 6.4 times

4. The following financial data have been taken from the records of Salido Company:

Accounts receivable P 200,000

Accounts payable 80,000
Bonds payable, due in 10 years 500,000
Cash 100,000
Interest payable, due in 3 months 25,000
Inventory 440,000
Land 800,000
Notes payable, due in 6 months 250,000

What will happen to the current and quick ratios, respectively, if Salido Company uses cash to pay
50% of its accounts payable and collected ¼ of its accounts receivable?
A. Both ratios will increase
B. Both ratios will decrease
C. Only the current ratio will increase
D. Only the quick ratio will increase

5. UrTurn Game Lounge had the following data in its balance sheet on December 31, 2016:

Accounts payable P 145,000

Accounts receivable 110,000
Accrued liabilities 4,000
Cash 90,000
 Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
Notes payable, due in 3 months 85,000
Prepaid expenses 15,000

The amount of working capital for the company is

A. P211,000
B. P336,000
C. P351,000
D. P361,000

6. The times interest earned ratio of Chikel Company is 5.5 times. The interest expense for the year
was P20,000 and the company’s tax rate is P40%. The company’s net income is:
A. P22,000
B. P42,000
C. P54,000
D. P66,000

7. Selected information for Quarteros Corp as December 31 is as follows:

2016 2017
Preferred stock, 8%, par P100 P250,000 P250,000
nonconvertible and noncumulative
Common stock 700,000 800,000
Retained earnings 150,000 370,000
Net income 120,000 240,000

Quartero’s return on common stockholders’ equity for 2017 is

A. 17%
B. 19%
C. 21%
D. 23%

8. The current assets of Sabkiel Enterprise consist of cash, accounts receivable and inventory. The
gross profit rate is 40%. The following information is available.

Credit sales 75% of total sales

Inventory turnover 5 times
Working capital P1,120,000
Current ratio 2.60 to 1
Quick ratio 1.25 to 1
Average collection period 40 days
Working days 360 days

The estimated average inventory amount is:

A. P700,000
B. P840,000
C. P945,000
D. P980,000

9. Using the information in #8, what is the amount of cash sales?

A. P1,458,333
B. P1,968,750
C. P5,833,333
D. P7,875,000

10. Crandall Company's net income last year was ₱60,000. The company paid preferred dividends of
₱10,000 and its average common stockholders' equity was ₱480,000. The company's return on
common stockholders' equity for the year was closest to
A. 2.1%.
 B. 10.4%.
C. 12.5%.
D. 14.6%.

11. Ardor Company's net income last year was ₱500,000. The company has 143,700 shares of common
stock and 30,000 shares of preferred stock outstanding. There was no change in the number of
common or preferred shares outstanding during the year. The company declared and paid
dividends last year of ₱1 per share on the common stock and ₱0.70 per share on the preferred
stock. The earnings per share of common stock is closest to
A. ₱2.33.
B. ₱3.19.
C. ₱3.33.
D. ₱3.47.

12. The following information relates to Konbu Corporation for last year:

Price earnings ratio 1.5

Dividend payout ratio 30%
Earnings per share ₱5

What is Konbu's dividend yield ratio for last year?

A. 2.0%
B. 4.5%
C. 9.0%
D. 20%

13. Richmond Company has 100,000 shares of ₱10 par value common stock issued and outstanding
and 10,000 shares of 10%, P100 par value preferred stock. Total stockholders' equity is P2,800,000
and net income for the year is ₱800,000. During the year Richmond paid ₱2 per share in dividends
on its common stock. The market value of Richmond's common stock is ₱28. What is the price-
earnings ratio?
A. 3
B. 4
C. 7
D. 8

14. Using information from #13, determine the return on common equity.
A. 12.5%
B. 14.3%
C. 25.0%
D. 28.6%

15. Using information from #13, determine the dividend payout ratio.
A. 7.14%
B. 12.5%
C. 25.0%
D. 28.6%

16. The following reflected form the records of Salvacion Company:

Earnings before interest and taxes P1,250,000

Interest expense 250,000
Preferred stock dividends 200,000
Dividend pull-out ratio 40%
Share outstanding throughout 2015
Preferred 20,000 shares
Common 25,000 shares
Income tax rate 40%
Price earnings ratio 5 times
 The dividend yield ratio is
A. 0.08
B. 0.12
C. 0.40
D. 0.50

17. Cedric Corp has a current ratio of 2.6 to 1. The minimum desired ratio is 5 to 1. At present, the net
working capital is P40,000. How much current liabilities must be paid to achieve the minimum
current ratio?
A. P10,000
B. P15,000
C. P20,000
D. P25,000

18. Consolo Corporation's net income for the most recent year was ₱809,000. A total of 100,000 shares
of common stock and 200,000 shares of preferred stock were outstanding throughout the year.
Dividends on common stock were ₱2.05 per share and dividends on preferred stock were ₱1.50
per share. The earnings per share of common stock is closest to
A. ₱2.05
B. ₱4.49
C. ₱5.09
D. ₱8.09

19. Bary Corporation's net income last year was ₱2,604,000. The dividend on common stock was ₱2.50
per share and the dividend on preferred stock was ₱2.40 per share. The market price of common
stock at the end of the year was ₱73.50 per share. Throughout the year, 300,000 shares of common
stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest
to
A. 7.88
B. 8.68
C. 8.47
D. 9.33

20. Arntson Corporation's net income last year was ₱7,975,000. The dividend on common stock was
₱8.20 per share and the dividend on preferred stock was ₱3.50 per share. The market price of
common stock at the end of the year was ₱59.10 per share. Throughout the year, 500,000 shares of
common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio
is closest to
A. 0.139
B. 0.246
C. 0.514
D. 0.564