04 REO HO-MAS FS Analysis Consultation HO

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Page 1 of 3 | MANAGEMENT ADVISORY SERVICES Handouts No.

04

FINANCIAL STATEMENT ANALYSIS-CONSULTATION HO


RHAD VIC F. ESTOQUE, CPA, MBA, CAT, MICB, RCA, CMA

Financial Statement Analysis

RHAD VIC F. ESTOQUE, CPA, MBA, CAT, MICB, RCA, CMA

FINANCIAL FORECASTING USING ADDITIONAL FUNDS NEEDED (AFN)


It is a concept used most commonly in business looking to expand operations, the business must have some
plan to actually finance the new assets that will be needed to increase sales. Additional funds needed (AFN) is calculated
as the excess of required increase in assets over the increase in liabilities and increase in retained earnings, specifically
Additional Funds Needed = A0 × ΔS − L0 × ΔS − S1 × PM × b
S0 S0
Where,
Ao = current level of assets
Lo = current level of liabilities
ΔS/So = percentage increase in sales i.e. change in sales divided by current sales
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate

ILLUSTRATION
A company had $500,000 of sales for the year just ended and is projecting sales of $600,000 for the coming
year. For every $1 increase in sales, 38 cents of additional financing is required for the purchase of additional assets. The
projected profit margin is 20%, and 25% of profits will be retained for reinvestment in the company. What is the amount of
additional external financing needed by the company in the coming year?

Feasibility Study and Financial Statement Analysis


The methods of analyzing actual financial statements and projected financial statements of a Project Feasibility
study are the same.

DRILLS
1. Zubin Corporation experiences a decrease in sales and the cost of good sold, an increase in accounts receivable, and
no change in inventory. If all else is held constant, what is the total effect of these changes on the receivables turnover and
inventory ratios?
A. Inventory turnover increased; receivables turnover decreased.
B. Inventory turnover decreased; receivables turnover decreased.
C. Inventory turnover decreased; receivables turnover increased.
D. Inventory turnover increased; receivables turnover increased.

2. All of the following are affected when merchandise is purchased on credit except
A. total current assets. B. net working capital. C. current ratio. D. total current liabilities.

3. Markowitz Company increased its allowance for uncollectible accounts. This adjustment will
A. reduce debt-to-asset ratio. C. increase the acid test ratio
B. reduce the current ratio. D. increase working capital.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience


www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW

(074) 665 6774 0916 840 0661 [email protected] MAY 2022 CPA REVIEW SEASON
Page 2 of 3 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA


FINANCIAL STATEMENT ANALYSIS

4. In computing inventory turnover, the base to use is the


A. Cost of sales base because it eliminates any changes due solely to sales price changes.
B. Sales base because it is more likely to reflect a change in trend.
C. Sales base because it more clearly represents operational activity.
D. Sales base because it provides turnover rates that are considerably higher.

5. If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the current ratio will
A. decrease. B. remain unchanged. C. move closer to the quick ratio. D. increase.

6. Garstka Auto Parts must increase its acid test ratio above the current 0.9 level in order to comply with the terms of a
loan agreement. Which one of the following actions is most likely to produce the desired results?
A. Making a payment to trade accounts payable.
B. Selling auto parts on account.
C. Purchasing marketable securities for cash.
D. Expediting collection of accounts receivable.

7. Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting
purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction
described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in
its retained earnings account. The issuance of serial bonds in exchange for an office building, with the first installment
of the bonds due late this year,
A. Affects all of the answers as indicated. C. Decreases the quick ratio.
B. Decreases the current ratio. D. Decreases net working capital.

8. The days' sales in receivables ratio will be understated if the company


A. Uses average receivables in the ratio calculation.
B. Uses a calendar year for its accounting period.
C. Does not use average receivables in the ratio calculation.
D. Uses a natural business year for its accounting period.

9. Stock options are frequently provided to officers of companies. Stock options that are exercised improve
A. The total asset turnover. C. The ownership interest of existing stockholders.
B. The debt-to-equity ratio. D. Basic earnings per share.

10. Ray Corporation has long-term debt of P1,200,000 and equity of P1,000,000. The board of directors has set a goal of
1:1 for the company's debt-equity ratio. Which of the following could the company employ to achieve this goal?
A. Issuing new bonds. C. Issuing rights to purchase new common stock.
B. Paying a dividend on its common stock. D. Paying a stock dividend to the existing shareholders.

11. In assessing the financial prospects for a firm, financial analysts use various techniques. An example of vertical,
common-size analysis is
A. Advertising expense increased by 3% over the previous year.
B. Advertising expense is 4% of sales.
C. An assessment of the relative stability of a firm's level of vertical integration.
D. A comparison in financial ratio form between two or more firms in the same industry.

12. All other things being equal, which one of the following factors would result in an increase in cash reported on the
balance sheet from one period to the next?
A. Decrease in the accrued vacation liability. C. Reduction of days' sales outstanding of accounts receivable.
B. Increase in the level of inventory held. D. Faster settlement of accounts payable

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience


www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 [email protected] MAY 2022 CPA REVIEW SEASON
Page 3 of 3 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA


FINANCIAL STATEMENT ANALYSIS

13. When reviewing a credit application, the credit manager should be most concerned with the applicant's
A. price-earnings ratio and current ratio. C. working capital and return on equity.
B. profit margin and return on assets. D. working capital and current ratio.

14. All of the following financial indicators are measures of either liquidity or activity except the
A. Accounts receivable turnover. C. Merchandise inventory turnover.
B. Times-interest-earned ratio. D. Average collection period in days.

15. A company's cash ratio will decrease if the company


A. purchases commercial paper. C. receives cash by issuing a short-term note payable.
B. purchases materials on account. D. sells goods for cash at a selling price lower than cost.

16. When compared to a debt-to-assets ratio, a debt to equity ratio would


A. Be higher than the debt to assets ratio. C. Be about the same as the debt to assets ratio.
B. Be lower than the debt to assets ratio. D. Have no relationship at all to the debt to assets ratio.

17. Which one of the following statements concerning the effects of leverage on earnings before interest and taxes (EBIT)
and earnings per share (EPS) is correct?
A. For a firm using debt financing, a decrease in EBIT will result in a proportionally larger decrease in EPS.
B. A decrease in the financial leverage of a firm will increase the beta value of the firm.
C. If Firm A has a higher degree of operating leverage than Firm B, and Firm A offsets this by using less financial
leverage, then both firms will have the same variability in EBIT.
D. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT.

18. Firms with high degrees of financial leverage would be best characterized as having
A. high fixed-charge coverage. C. zero coupon bonds in their capital structures.
B. high debt-to-equity ratios. D. low current ratios.

19. The purchase of treasury stock with a firm's surplus cash


A. Increases a firm's equity. C. Increases a firm's interest-coverage ratio.
B. Increases a firm's financial leverage. D, Increases a firm's assets.

20. The use of debt in the capital structure of a firm


A. decreases its operating leverage. C. increases its financial leverage.
B. increases its operating leverage. D. decreases its financial leverage.

21. Assume that a company's total debt to total assets 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 to asset ratio as
measured by the balance sheet will
A. Increase if the assets are purchased, and remain unchanged if the assets are leased.
B. Increase whether the assets are purchased or leased.
C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Remain unchanged whether the assets are purchased or leased.

--- END OF HANDOUTS ---

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience


www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 [email protected] MAY 2022 CPA REVIEW SEASON

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