FINANCIAL MANAGEMENT QUIZ 2 – FINANCIAL STATEMENT ANALYSIS

THEORY D. No change in any terms because there was no investment in the previous year.
Basic concepts
1. When a balance sheet amount is related to an income statement amount in computing a ratio, Liquidity ratios
A. Comparisons with industry ratios are not meaningful. 5. Which one of the following ratios would provide a best measure of liquidity?
B. The balance sheet amount should be converted to an average for the year. A. Sales minus returns to total debt.
C. The income statement amount should be converted to an average for the year. B. Total assets minus goodwill to total equity.
D. The ratio loses its historical perspective because a beginning-of-the-year amount is C. Net profit minus dividends to interest expense.
combined with an end-of-the-year amount. D. Current assets minus inventories to current liabilities.

Vertical analysis 6. Which ratio is most helpful in appraising the liquidity of current assets?
2. A useful tool in financial statement analysis is the common-size financial statement. What A. Accounts receivable turnover. C. Current ratio.
does this tool enable the financial analyst to do? B. Acid-test ratio. D. Debt ratio.
A. Ascertain the relative potential of companies of similar size in different industries.
B. Evaluate financial statements of companies within a given industry of approximately the Activity ratios
same value. 7. The ratio that measures a firm's ability to generate earnings from its resources is
C. Determine which companies in the same industry are at approximately the same stage of A. Asset turnover. C. Days' sales in receivables.
development. B. Days' sales in inventory. D. Sales to working capital.
D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company
over time or between companies within a given industry without respect to relative size.
Profitability ratios
3. Which of the following is not revealed on a common size balance sheet? 8. Which of these ratios are measures of a company’s profitability?
A. The debt structure of a firm. 1. Earnings per share 5. Return on assets
B. The capital structure of a firm. 2. Current ratio 6. Inventory turnover
C. The peso amount of assets and liabilities. 3. Return on sales 7. Receivables turnover
D. The distribution of assets in which funds are invested. 4. Debt-equity ratio 8. Price-earnings ratio
A. 1, 3, and 5 only C. 1, 3, 5, 6, 7, and 8 only.
Horizontal analysis B. 1, 3, 5, and 8 only. D. All eight ratios.
4. 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 9. The ratio of analytical measurements which measures the productivity of assets regardless of
expressed as capital structure is
A. An absolute value of P100,000, and an increase of 100% A. Current ratio. C. Quick (acid test) ratio.
B. An absolute value of P100,000 and an increase of 1,000% B. Debt ratio. D. Return on total assets.
C. An absolute value of P100,000 and no value for a percentage change
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 FINANCIAL MANAGEMENT QUIZ 2 – FINANCIAL STATEMENT ANALYSIS

Market-test ratios
10. How are the following used in the calculation of the dividend-pay-out ratio for a company with 14. In a comparison of 1992 to 1991, Neir Co.’s inventory turnover ratio increased substantially
only common stock outstanding? although sales and inventory amounts were essentially unchanged. Which of the following
A. B. C. D. statements explains the increased inventory turnover ratio?
Dividends per share Denominator Denominator Numerator Numerator A. Cost of goods sold decreased.
Earnings per share Numerator Not used Denominator Not used B. Total asset turnover increased.
Book value per share Not used Numerator Not used Denominator C. Gross profit percentage decreased.
D. Accounts receivable turnover increased.

Ratio analysis 15. Minix Co. has a high sales-to-working-capital ratio. This could indicate
A. The firm is not profitable.
11. In comparing the current ratios of two companies, why is it invalid to assume that the company B. The firm is undercapitalized.
with the higher current ratio is the better company? C. Working capital is not profitably utilized.
A. The current ratio includes assets other than cash. D. The firm is likely to have liquidity problems.
B. A high current ratio may indicate inadequate inventory on hand.
C. The two companies may define working capital in different terms. 16. You observe that a firm’s profit margin and debt ratio are below the industry average, while its
D. A high current ratio may indicate inefficient use of various assets and liabilities. return on equity exceeds the industry average. What can you conclude?
A. Return on assets is above the industry average.
12. 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. B. Total assets turnover is below the industry average.
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 C. Total assets turnover is above the industry average.
0.1 Which of the following could help explain the divergence in the ratios from the beginning D. Statements A and C are correct.
to the end of the year?
A. An increase in inventory levels during the year. Sensitivity analysis
B. An increase in credit sales in relationship to sales 17. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what
C. An increase in the use of payables during the current year. change if any, will occur in total assets?
D. An increase in the use of payables during the current year. A. Assets will be decreased. C. No change in total assets.
B. Assets will be increased. D. None of the above.
13. If the ratio of total liabilities to equity increases, a ratio that must also increase is 18. Which of the following actions will increase a company’s quick ratio?
A. Return on equity. A. Issue equity and use the proceeds to purchase inventory.
B. The current ratio. B. Issue short-term debt and use the proceeds to purchase inventory.
C. Times interest earned. C. Reduce inventories and use the proceeds to reduce long-term debt.
D. Total liabilities to total assets. D. Issue long-term debt and use the proceeds to purchase fixed assets.
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 FINANCIAL MANAGEMENT QUIZ 2 – FINANCIAL STATEMENT ANALYSIS

E. Reduce inventories and use the proceeds to reduce current liabilities.

24. What would be the effect on book value per share and earnings per share if the corporation
19. On December 31, 1991, Northpark Co. collected a receivable due from a major customer.
purchased its own shares in the open market at a price greater than book value per share?
Which of the following ratios would be increased by this transaction?
A. B. C. D.
A. Current ratio. C. Quick ratio.
Book value per share Increase No effect Decrease Decrease
B. Inventory turnover ratio. D. Receivable turnover ratio.
Earnings per share Increase Increase Increase Decrease
20. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of
the following transactions would improve Mabuhay’s current ratio? PROBLEMS
A. Paying P40,000 of short-term accounts payable. Basic concepts
B. Collecting P20,000 of short-term accounts receivable. 25. A service company's working capital at the beginning of January of the current year was
C. Refinancing a P60,000 long-term mortgage with a short-term note. $70,000. The following transactions occurred during January:
D. Purchasing P100,000 of merchandise inventory with a short-term accounts payable. Performed services on account $30,000
Purchased supplies on account 5,000
21. Recording cash dividend payment when declaration was recorded earlier would Consumed supplies 4,000
A. Increase both current ratio and working capital Purchased office equipment for cash 2,000
B. Decreases both current ratio and working capital Paid short-term bank loan 6,500
C. Have no effect on current ratio or earnings per share Paid salaries 10,000
D. Increase current ratio but no effect on working capital. Accrued salaries 3,500
What is the amount of working capital at the end of January?
22. If, just prior to the period of rising prices, a company changed its inventory measurement from A. $47,500 C. $80,500
FIFO to LIFO, the effect in the next period would be to B. $50,500 D. $90,000
A. B. C. D.
Vertical analysis
Current ratio Increase Increase Decrease Decrease
26. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of goods
Inventory turnover Increase Decrease Increase Decrease
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,
23. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets either
P75,000, finished goods, P55,000. The selling expenses is 5%, general and administrative
by using borrowed funds for the purchase or by entering into an operating lease. The
expenses 2.5% of cost of sales, respectively. The net profit in the year 1990 is
company's debt ratio as measured by the balance sheet will
A. P45,725 C. P83,000
A. Increase whether the assets are purchased or leased.
B. P53,850 D. P90,000
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.
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 FINANCIAL MANAGEMENT QUIZ 2 – FINANCIAL STATEMENT ANALYSIS

Horizontal analysis A. P234,000 C. P250,000

27. In 19x5, MPX Corporation’s net income was P800,000 and in 19x6 it was P200,000. What B. P241,000 D. P225,000
percentage increase in net income must MPX achieve in 19x7 to offset the 19x6 decline in net
Market-test ratios
income?
32. Ehrenburg Co. had net income of $5.3 million and earnings per share of common stock of
A. 60% C. 400%
$2.50. Included in the net income was $500,000 of bond interest expense related to its long-
B. 300% D. 600%
term debt. The income tax rate was 50%. Dividends on preferred stock were $300,000. The
Activity ratios dividend payout ratio on common stock was 40%. What were the dividends on common
28. During 1989, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 1989 stock?
was $900,000, and the ending inventory at December 31, 1989 was $180,000. What was the A. $1,800,000 C. $2,000,000
inventory turnover for 1989? B. $1,900,000 D. $2,120,000
A. 5.0 C. 6.0
Integrated ratios
B. 5.3 D. 6.4
33. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount of
Solvency ratios current assets is
29. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 A. P600,000 C. P1,200,000
percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate B. P900,000 D. P1,800,000
is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain
34. India Oats pays dividends of $0.62 per quarter, and has annual earnings per share of $2.80.
a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.
What is India Oats's dividend yield and dividend payout ratio for 2000, respectively, if its recent
What is Alumbat’s current TIE ratio?
market price is $30.00 and its average market price was $28.00?
A. 2.4 C. 3.6
A. 8.27% and 22.1%. C. 8.86% and 22.1%.
B. 3.4 D. 5.0
B. 8.27% and 88.6%. D. 8.86% and 88.6%.
30. What would be a company’s “times interest earned ratio” if interest paid on loans amount to
P9,000 and its net income after income tax is P99,000. (Assume a 25% income tax rate on 35. Taft Technologies has the following relationships:
first P100,000 of income and 35% income tax rate on income in excess of P100,000.) Annual sales $1,200,000 Inventory turnover ratio 4.8
A. 10 times C. 13 times Current liabilities $ 375,000 Current ratio 1.2
B. 12 times D. 16.21 times Days sales outstanding (DSO) 40 (360-day year)
The company’s current assets consist of cash, inventories, and accounts receivable. How
Profitability ratios much cash does Taft have on its balance sheet?
31. The average stockholders equity for ABC Company for 2000 was P2,000,000. Included in this A. -$ 8,333 C. $125,000
figure is P200,000 par value of 8% preferred stock, which remained unchanged during the B. $ 66,667 D. $200,000
year. The return on common shareholders’ equity was 12.5% during the 2000. How much
was the net income of the company in 2000?
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 FINANCIAL MANAGEMENT QUIZ 2 – FINANCIAL STATEMENT ANALYSIS

36. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%. Fixed assets-net 252,000 Common stock 140,000
If the enterprise has total debt of $1,000,000, it has a sales level of Retained earnings ?
A. $200,000.00 C. $2,450,000.00 Total Assets P 480,000 Total L & SHE P 480,000
B. $408,163.26 D. $5,000,000.00 Additional information:
Current ratio (as of Dec. 31, 1982) 1.9 to 1
37. Selected information from the accounting records of the Blackwood Co. is as follows: Ratio of total liabilities to total stockholders’ equity 1.4
Net A/R at December 31, 2000 $ 900,000 Inventory turnover based on sales and ending inventory 15 times
Net A/R at December 31, 2001 $1,000,000 Inventory turnover based on cost of goods sold and ending inventory 10 times
Accounts receivable turnover 5 to 1 Gross margin for 1982 P500,000
Inventories at December 31, 2000 $1,100,000
Inventories at December 31, 2001 $1,200,000 39. The balance of accounts payable of San Matias as of December 31, 1982 is
Inventory turnover 4 to 1 A. P40,000 C. P95,000
What was the gross margin for 2001? B. P80,000 D. P280,000
A. $150,000 C. $300,000
B. $200,000 D. $400,000 40. The balance of retained earnings of San Matias as of December 31, 1982 is
A. P60,000 C. P200,000
38. Watson Corporation computed the following items from its financial records for the year just B. P140,000 D. P360,000
ended:
Price-earnings ratio 12 41. The balance of inventory of San Matias as of December 31, 1982 is
Payout ratio .6 A. P68,000 C. P168,000
Asset turnover .9 B. P100,000 D. P228,000
The dividend yield on Watson's common stock is
A. 5.0% C. 7.5%
B. 7.2% D. 10.8%

Questions 39 through 41 are based on the following information.

The condensed balance sheet as of December 31, 2022 of San Matias Company is given below.
Figures shown by a question mark (?) may be computed from the additional information given:
ASSETS LIAB. & STOCKHOLDERS’ EQUITY
Cash P 60,000 Accounts payable P ?
Trade receivable-net ? Current notes payable 40,000
Inventory ? Long-term payable ?
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