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MS 3709 – FINANCIAL STATEMENTS ANALYSIS OCTOBER 2024

LECTURE NOTES

Financial analysis is designed to determine the relative ratio of a firm with older, lower-cost fixed
strengths and weaknesses of a company. Financial assets compared to one with recently
analysis concentrates on financial statement analysis, acquired, higher-cost fixed assets.
which highlights the key aspects of a firm’s 4. The total assets turnover ratio measures
operations. the utilization, or turnover, of all the firm’s
Financial statement analysis involves a study of the assets.
relationships between income statement and balance
sheet accounts, how these relationships change over C. Debt management ratios measure the extent
time (trend analysis or horizontal analysis), and how a to which a firm is using debt financing, or
particular firm compares with other firms in its financial leverage, and the degree of safety
industry (bench-marking or vertical analysis). afforded to creditors. Financial leverage has
three important implications: (1) By raising
Financial statements are used to help predict the funds through debt, stockholders can maintain
firm’s future earnings and dividends. From an control of a firm while limiting their
investor’s standpoint, predicting the future is what investment. (2) Creditors look to the equity,
financial statement analysis is all about. From or owner-supplied funds, to provide a margin
management’s standpoint, financial statement analysis of safety, so if the stockholders have provided
is useful both to help anticipate future conditions and, only a small proportion of the total financing,
more important, as a starting point for planning the firm’s risks are borne mainly by its
actions that will influence the future course of events. creditors. (3) If the firm earns more on
investments financed with borrowed funds than
Three basic tools in financial statements analysis. it pays in interest, the return on the owners’
1. Horizontal Analysis or Trend Analysis. A capital is magnified, or “leveraged.”
technique for evaluating a series of financial
statement data over a period. Its purpose is to 1. The debt ratio measures the percentage of
determine the increase or decrease that has taken funds provided by creditors. Total debt
place expressed either an amount or a percentage. includes both current liabilities and long-
2. Vertical Analysis or Common Size Analysis. It is term debt. The lower the ratio, the greater
a technique for evaluating financial statement data the protection afforded creditors in the
that expresses each item in a financial statement as event of liquidation. Stockholders, on the
a percent of a base amount. other hand, may want more leverage
because it magnifies expected earnings.
3. Ratio Analysis. This technique establishes 2. The times-interest-earned (TIE) ratio
relationships among financial statement accounts measures the extent to which operating
at given date or period. These ratios analyze firm’s income can decline before the firm is
liquidity, the use of leverage, asset management, unable to meet its annual interest costs.
cost control, profitability, growth, and valuation. This ratio has two shortcomings: (1)
A. Liquidity ratios are used to measure a firm’s Interest is not the only fixed financial
ability to meet its current obligations as they charge.
come due. The current ratio measures the (2) EBIT does not represent all the cash
extent to which current liabilities are covered flow available to service debt, especially if
by current assets. It is the most commonly a firm has high depreciation and/or
used measure of short-term solvency. Acid- amortization charges.
test ratio is a more stringent measurement of
an entity’s liquidity. D. Profitability ratios show the combined effects
of liquidity, asset management, and debt on
B. Asset management ratios measure how operating results.
effectively a firm is managing its assets and 1. The profit margin on sales gives the profit
whether the level of those assets is properly per peso of sales.
related to the level of operations as measured 2. The basic earning power (BEP) ratio is
by sales. calculated by dividing earnings before
1. Inventory turnover ratio is used to interest and taxes (EBIT) by total assets.
measure the velocity of inventory. It shows the raw earning power of the
2. Days sales outstanding (DSO), also called firm’s assets, before the influence of taxes
the “average collection period” (ACP), is and leverage. It is useful for comparing
used to appraise accounts receivable. The firms with different tax situations and
DSO represents the average length of time different degrees of financial leverage.
that the firm must wait after making a sale 3. The return on total assets (ROA) measures
before receiving cash. the return on all the firm’s assets after
3. The fixed assets turnover ratio measures interest and taxes.
how effectively the firm uses its plant and 4. The return on common equity (ROE)
equipment. A potential problem can exist measures the rate of return on the
when interpreting the fixed assets turnover stockholders’ investment. Stockholders

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EXCEL PROFESSIONAL SERVICES, INC.

invest to get a return on their money, and this Significance: Tests the ability of a firm to meet its
ratio tells how well they are doing in an currently maturing obligations using current assets
accounting sense.
2. Acid-test ratio = Total Liquid Assets/ Total Current
E. Market value ratios relate the firm’s stock price Liabilities
to its earnings, cash flow, and book value per Significance: A stringent test of a firm’s ability to
share, and thus give management an pay current liabilities
indication of what investors think of the
company’s past performance and future 3. (Cash ratio: Cash + Marketable
prospects. If the liquidity, asset management, securities)/Current liabilities
debt management, and profitability ratios all Significance: Test the ability of a firm to meet its
look good, then the market value ratios will be current obligation in the strictest manner
high, and the stock price will probably be as
high as can be expected. 4. Accounts Receivable Turnover = Net Credit Sales/
1. The price/earnings (P/E) ratio shows how Ave. Accts Receivable
much investors are willing to pay per peso Significance: Tests the efficiency of credit and
of reported profits. P/E ratios are higher collection policies. Evaluates the quality of
for firms with strong growth prospects, accounts receivable.
other things held constant, but they are
lower for riskier firms. 5. Average Collection Period = Accounts
2. The price/cash flow ratio is the ratio of Receivable/Average Daily Credit Sales
price per share divided by cash flow per
share. It shows the peso amount investors 6. Inventory Turnover = Cost of goods sold/ Ave.
will pay for P1 of cash flow. Inventory
3. The market/book (M/B) ratio, calculated as Significance: Measures the efficiency in managing
market price per share divided by book inventory
value per share, gives another indication of
how investors regard the company. 7. Working Capital Turnover = Net Sales/ Ave.
Working Capital
The Extended Du Pont Equation shows how return on Significance: Evaluates adequacy and effectiveness
equity is affected by assets turnover, profit margin, in the use of working capital
and leverage. The profit margin times the total assets
turnover is called the Du Pont Equation. This equation 8. Asset Turnover = Net Sales/Ave Total Assets
gives the rate of return on assets (ROA): Significance: Measures the efficiency of managing
assets
The ROA times the equity multiplier (total assets
divided by common equity) yields the return on equity Debt Management (Solvency) Ratios
(ROE). This equation is referred to as the Extended 8. Debt Ratio = Total Liabilities/Total Assets
Du Pont Equation: Significance: Shows proportion of all assets that
are financed with debt
Benchmarking is the process of comparing the ratios
of a particular company with those of a smaller group 9. Equity Ratio = Total Owners’ Equity/Total Assets
of “benchmark” companies, rather than with the entire Significance: Shows proportion of assets provided
industry. by owners

Benchmarking makes it easy for a firm to see exactly 10. Debt to Equity Ratio = Total Liabilities/Total
where the company stands relative to its competition. Owners’ Equity
Significance: Measures the debt relative to
Inherent problems and limitations amount of owners’ equity
1. Ratios are often not useful for analyzing the
operations of large firms that operate in many 11. Book Value per Share = Total Common
different industries because comparative ratios are Equity/Number of Common Shares Outstanding
not meaningful. Significance: Measures recoverable amount in
2. Inflation affects depreciation charges, inventory case of liquidation assuming assets are realized
costs, and therefore, the value of both balance at their book values
sheet items and net income. For this reason, the
analysis of a firm over time, or a comparative 12. Times Interest Earned = EBIT/Annual Interest
analysis of firms of different ages, can be mis- Expense
leading. Significance: Measures how many times interest
3. Ratios may be distorted by seasonal factors or expense is covered by operating profit
manipulated by management to give the
impression of a sound financial condition (window Profitability
dressing techniques). 13. Gross Margin ratio = Gross Profit/Net Sales
4. Different operating policies and accounting Significance: Measures profitability after covering
practices, such as the decision to lease rather than cost of product sold
to buy equipment, can distort comparisons.
14. Operating Profit Margin = Operating Profit/Net
SUMMARY OF FINANCIAL RATIOS Sales
Significance: Measures profit generated after
Liquidity covering operating expense
1. Current ratio = Total Current Assets/ Total
Current Liabilities 15. Net Margin = Net Profit/Net Sales

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EXCEL PROFESSIONAL SERVICES, INC.

Significance: Measures profit after covering all Give the effect in terms of increase (+), decrease(-), or
expenses no effect (0).

16. Return on Assets = Net Operating Profit/Average PROBLEM NO. 2.

Total Assets Gray Corporation's financial statements for the last
Significance: Measures overall efficiency in year are shown below. All figures are in thousands
generating profits using assets. (P000). The firm paid a P1,000 dividend to its
stockholders during the year. Two million shares of
17. Return on Equity = Net Income/Stockholders’ stock are outstanding. The stock is currently trading
Equity at a price of P50. There were no sales of new stock.
Significance: Measures rate of return on resources Lease payments totaling P400 are included in cost and
provided by owner/stockholders expense.

18. Price/Earnings Ratio = Market price per BALANCE SHEET

Share/Earnings per Share ASSETS
Measures relationship between the price of Cash P 2,000
common shares in the open market and profit Accounts receivable 12,000
earned on a per share basis. Inventory 14,000
Current Assets P28,000
19. Dividend Yield = Dividend per Share/ Market Value Gross Fixed assets P27,000
per Share Accumulated depreciation (16,000)
Significance: Shows the rate earned by Net fixed assets 11,000
stockholders from dividends based on current price Total assets P39,000
of the stock LIABILITIES
Accounts payable P 3,000
20. Payout Ratio = Dividend per Share/Earnings per Accruals 1,000
Share Current Liabilities P 4,000
Significance: Shows percentage of earnings paid Long term Debt 10,000
to stockholders Equity 25,000
Total liabilities & equity P39,000
STRAIGHT PROBLEMS
INCOME STATEMENT
PROBLEM NO. 1. Sales P100,000
Debit Company’s working capital accounts at the COGS 80,000
beginning of the year are given below: Gross Margin P 20,000
Cash P 50,000 Cash Expenses 8,000
Marketable securities 30,000 Depreciation 1,600
Accounts receivable, net 200,000 Total expenses 9,600
Inventory 210,000 EBIT P 10,400
Prepaid expenses 10,000 Interest 800
Accounts payable 250,000 EBT P 9,600
Notes Due within one year 30,000 Tax 2,600
Accrued liabilities 20,000 Net Income P 7,000

During the year, Debit completed the following Requirements: Compute the following for Gray
transactions: Corporation:
1. Issued additional shares of capital stock for 1. Current Ratio
cash, P100,000. 2. Quick Ratio
2. Sold inventory costing P50,000 for P80,000, on 3. Average Collection Period (ACP)
account. 4. Inventory Turnover
3. Wrote off uncollectible accounts in the amount of 5. Fixed Asset Turnover
P10,000. The company uses the allowance 6. Total Asset Turnover
method of accounting for doubtful accounts. 7. Debt Ratio
4. Declared a cash dividend, P15,000. 8. Debt to Equity ratio
5. Paid accounts payable. 9. Times Interest Earned (TIE)
6. Borrowed cash on a short-term note with the 10. Cash Coverage
bank, P35,000. 11. Return on Sales (ROS)
7. Sold inventory costing P15,000 for P10,000 cash. 12. Return on Assets (ROA)
8. Purchased inventory on account. 13. Return on Equity (ROE)
9. Paid off all short-term notes due. 14. Price Earnings Ratio (P/E)
10. Purchased equipment for cash. 15. Market to Book Value Ratio
11. Sold marketable securities costing P18,000 for
cash. PROBLEM NO. 3.
12. Collected cash on accounts receivable. The following data are from Sharon Stone, Inc., financial
13. Sold slow-moving inventory at a substantial loss. statements. The firm manufactures home decorative
14. Sold a fully-depreciated machine. material.
15. Increased the amount of petty cash fund from Sales (all credit) were P60 million
P5,000 to P15,000. Sales to total assets 3.0 times
Total debt to total assets 40 percent
Requirement: Indicate the separate effect of each of the Current ratio 2.0 times
transactions given above on the beginning of the year’s Inventory turnover 10.0 times
working capital, the current ratio, and the acid-test ratio. Average collection period 18.0 days

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 EXCEL PROFESSIONAL SERVICES, INC.

Fixed asset turnover 7.5 times 6. CVD, Inc. has a debt ratio of 50%, and an equity
Requirements: Compute the balance or amount for the multiplier of 2. What is CVD's stockholders'
following: equity if total debt is P100,000?
1. Cash
2. Accounts receivable 7. How much cash does Gray Computer Co. have if
3. Inventory the firm has a current ratio of 2.5, a quick ratio
4. Fixed assets of 1.2, and current liabilities of P12,000? Gray's
5. Current liabilities credit sales are P98,000 and its average
6. Long-term debt collection period is 40 days. (Assume 365 days
7. Equity per year.)

PROBLEM NO. 4. 8. If Power-On has a total asset turnover of 1.8, a

The following ratios and other data pertain to the fixed asset turnover of 3.2, a debt ratio of .5 and
financial statements of the Bulacan Company for the a total debt of P200,000, how much then the
year then ended. amount of fixed assets?
Current ratio 1.75 to 1
Acid-test ratio 1.27 to 1 9. What is Babcock's times interest earned, if its
Working capital P33,000 total interest charges are P20,000, sales are
Fixed assets to stockholders’ equity ratio 0.625 to 1 P220,000, and its net profit margin is 6 percent?
Inventory turnover (based on cost of Assume a tax rate of 40 percent.
closing inventory) 4X
Gross profit percentage 40% 10. Determine the cost of sales for a firm with the
Earnings per share P0.50 following financial ratios and data:
Average age of outstanding accounts Current ratio = 3.0; Quick ratio = 2.0; Current
receivable (based on calendar year of 365 liabilities P1,000,000; Inventory turnover = 6
days) 73 days times.
Capital stock outstanding; 20,000 no par 20,000 no par
Earnings for the year as a percentage of 11. Given the following information, determine
capital stock 25% Salem Company's net fixed assets.
The company has no prepaid expenses, deferred, Sales = P10,000,000
intangible assets or long-term liabilities. Total asset turnover = 4 times
Current ratio = 2.40
Requirement: Reconstruct in as much detail as is Current liabilities = P500,000
possible the company’s balance sheet and income
statement for the year. 12. Find the sales of the Sakto Company using the
following information:
PROBLEM NO. 5. Current ratio 2.0
Answer the question(s) for each of the following Quick ratio 1.6
independent situations. Current liabilities P200,000
1. The current ratio is 2.5 to 1; the acid-test ratio is Inventory turnover based on COGS 8.0
0.9 to 1; cash and receivables are P270,000. The Gross margin % 10%
only current assets are cash, receivables, and
inventory. (a) What are current liabilities? (b) How PROBLEM NO. 6.
much is inventory? Shaker Corporation experienced a fire on December 31,
2024, in which its financial records were partially
2. Accounts receivable turnover is 5 times; inventory destroyed. It has been able to salvage some of the
turnover is 4 times. The company recently bought records and has ascertained the following balances:
inventory. (a) On the average, how long will it be December December
before the new inventory is sold? (b) On the 31, 2024 31, 2023
average, how long after the inventory is sold will Cash P 300,000 P100,000
cash be collected? Receivables (net) 720,500 1,260,000
Inventory 2,000,000 1,800,000
3. A company had current assets of P600,000. It Accounts payable 500,000 900,000
then paid a current liability of P90,000. After the Notes payable 300,000 600,000
payment, the current ratio was 2 to 1. What were Common stock, P100 par 4,000,000 4,000,000
current liabilities before the payment was made? Retained earnings 1,135,000 1,010,000

4. Accounts receivables equal 45 days’ credit sales. Additional information:

The coming year should see sales of P900,000 1. The inventory turnover is 3.6 times
spread evenly over the year. What should 2. The return on common stockholders’ equity is
accounts receivable be at the end of the year? 22%. The company had no additional paid in
capital.
5. Williamson Trucking has current sales of P10,000 3. The receivables turnover is 9.4 times
and a cost of goods sold of P4,300. Williamson 4. The return on assets is 20%
has projected sales to increase 50% and expects 5. Total assets as at December 31, 2023, were
the new cost ratio to decrease by 2% due to P6,050,000.
increased efficiency. Assuming that Williamson
wants to maintain an inventory turnover of 5.0, Requirements: Compute the following:
calculate their projected level of inventory. 1. Cost of goods sold for 2024
(round to the nearest P). 2. Net income for 2024
3. Total assets as at December 31, 2024

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 EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 7. a. Reduce the days sales outstanding ratio.

The Penn Company’s partial income statements b. Increase the number of years over which fixed
indicate the following data: assets are depreciated.
2024 2023 Inc (Dec) c. Decrease the accounts payable balance.
Net sales 1,600,000 1,650,000 P(50,000) d. Statements a and b are correct.
Cost of goods sold 1,200,000 1,050,000 150,000
Gross profit P400,000 P600,0000 P(200,000) 6. A useful tool in financial statement analysis is the
Units sold 80,000 75,000 “common-size” financial statement. What does
this tool enable the financial analyst to do?
Requirement: Prepare an analysis of gross profit a. Evaluate financial statements of companies
variation for Penn Company. within a given industry of approximately the
same value.
PROBLEM NO. 8. b. Determine which companies in the same industry
The gross profit statements for 2024 and 2023 of May are at approximately the same stage of
Company follow: development.
2024 2023 c. Ascertain the relative potential of companies of
Sales P160,000 P120,000 similar size in different industries.
Cost of sales 120,000 72,000 d. Compare the mix of assets, liabilities, capital,
Gross profit P 40,000 P 48,000 revenue, and expenses within a company over
time or between companies within a given
Requirements: industry without respect to relative size.
1. Assume the unit cost decreased by 10% at the start
of 2024. What are the percentage changes in unit 7. Which one of the following statements concerning
selling price and units sold? liquidity is correct?
2. Assume that unit sales price increased by 20% at a. If you can sell an asset today, it is a liquid
the start of 2024. What are the percentage changes asset.
in unit cost and units sold? b. If you can sell an asset within the next twelve
3. Assume the quantity sold increased by 10% in 2024 months, then, it is considered highly liquid.
compared to 2023. What are the percentage c. Inventory is more liquid than accounts
changes in both unit selling price and unit cost? receivable.
d. An asset must be saleable quickly at full value
MULTIPLE CHOICE QUESTIONS to be considered liquid.

1. Which of the following ratios would be least 8. Liquidity is:

helpful in appraising the liquidity of current a. equal to net working capital.
assets? b. another term for current assets.
a. Accounts Receivable turnover c. equal to the market value of a firm's total
b. Current Ratio assets minus its current liabilities.
c. Days’ sales in inventory d. valuable to a firm even though holding liquid
d. Days’ sales in accounts receivable assets is not very profitable.

2. An increase in a company’s current ratio 9. The days’ sales outstanding (DSO) is a measure
accompanied by a decrease in its acid-test (quick) of
ratio could be a warning that the company is a. Asset value c. Profitability
a. depleting its inventories b. Sales performance d. Liquidity
b. having trouble collecting its receivables
c. tightening its credit policies 10. A measure of the company’s long-term debt
d. carrying excessive inventory paying ability is:
a. Return on assets
3. Raul Corporation had a current ratio of 2.0 at the b. Times interest earned
end of the current year. Current assets and c. Dividend payout ratio
current liabilities increased by equal amounts d. Length of the operating cycle
during the following year. The effects on net
working capital and on the current ratio, 11. The following financial data have been taken from
respectively, were the records of Lotion Company:
a. no effect; increase c. increase; increase Accounts receivable P200,000
b. no effect; decrease d. decrease; decrease Accounts payable 80,000
Bonds payable, due in 10 years 500,000
4. In comparing the current ratios of two companies, Cash 100,000
why is it invalid to assume that the company with Interest payable, due in three months 25,000
the higher current ratio is the better company? Inventory 440,000
a. A high current ratio may indicate inadequate Land 800,000
inventory on hand. Notes payable, due in six months 250,000
b. A high current ratio may indicate inefficient use What will happen to the ratios below if Lotion
of various assets and liabilities. Company uses cash to pay 50 percent of its
c. The two companies may define working capital in accounts payable?
different terms. Current Ratio Acid-test Ratio
d. The two companies may be different sizes. a. Increase Increase
b. Decrease Decrease
5. Which of the following alternatives could c. Increase Decrease
potentially result in a net increase in a company’s d. Decrease Increase
cash flow for the current year?

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EXCEL PROFESSIONAL SERVICES, INC.

12. AA Company has current assets of P800,000 and to renew its loan, and bankruptcy will result.
current liabilities of P1,000,000. Which of the What is Alumbat’s current TIE ratio?
following would cause AA Company’s current ratio A. 2.4 D. 4.0
to rise? B. 3.4 E. 5.0
a. Payment of P60,000 accounts payable. C. 3.6
b. Purchase of P60,000 of inventory on account.
c. The collection of P60,000 of accounts 20. Presented below is information related to Milson,
receivable that was previously written off. Inc.:
d. Refinancing a P60,000 long-term loan with December 31,
short-term debt 2024 2023
Common stock P75,000 P60,000
13. Taylor Toys Inc. has P6 billion in assets, and its 6% Preferred stock 350,000 350,000
tax rate is 35 percent. The company’s basic Retained earnings (includes net
earning power (BEP) is 10 percent, and its return income for current year) 90,000 75,000
on assets (ROA) is 2.5 percent. What is Taylor’s Net income for year 60,000 32,000
times-interest-earned (TIE) ratio? What is Milson's rate of return on common stock
a. 1.625 c. 2.433 equity for 2024?
b. 2.000 d. 2.750 A. 48.8% C. 25%
B. 26% D. 22.4%
14. Last year, which is used as the base year, a firm
had cash of P46, accounts receivable of P132, 21. Given the following information, calculate the
inventory of P319, and net fixed assets of P640. market price per share of WAM Inc.
This year, the firm has cash of P52, accounts
Net income: P200,000 Earnings per share: P2.00
receivable of P147, inventory of P312, and net
Stockholders’ equity: P2,000,000 Market/Book ratio: 0.20
fixed assets of P576. What is the common-base
year value of accounts receivable? A. P20.00 D. P 2.00
a. .88 B. P 8.00 E. P 1.00
b. .90 C. P 4.00
c. 1.11
d. 1.13 22. A company has total assets of P400,000, net
income of P40,000, and return on equity of 20%.
15. A firm has total assets of P126,740 and net fixed The debt ratio is
assets of P82,408. The average daily operating A. 50% C. 20%
costs are P1,211. What is the firm’s interval B. 40% D. Zero.
measure?
a. 1.47 days 23. Harwichport Company has a current ratio of 3.5
b. 2.73 days to 1 and an acid-test ratio of 2.8 to 1. Current
c. 36.61 days assets equal P175,000 of which P5,000 consists
d. 68.05 days of prepaid expenses. Harwichport Company's
inventory must be:
16. The working capital of Regalado Co. is P600,000 A. P30,000. C. P50,000.
and its current ratio is 3 to 1. The amount of B. P40,000. D. P35,000.
current assets is
A. P900,000 C. P600,000 24. Shepherd Enterprises has an ROE of 15 percent, a
B. P1,200,000 D. P1,800,000 debt ratio of 40 percent, and a profit margin of 5
percent. The company’s total assets equal P800
17. Blasso Co.’s net accounts receivable were million. What are the company’s sales? (Assume
P500,000 at December 31, 2022 and P600,000 at that the company has no preferred stock.)
December 31, 2023. Net cash sales for 2023 a. P1,440,000,000 c. P 960,000,000
were P200,000. The accounts receivable turnover b. P2,400,000,000 d. P 360,000,000
for 2021 was 5.0. What were Blasso’s net sales
for 2023? 25. Selected data from Mars Company’s year-end
A. P2,950,000 C. P3,200,000 financial statements are presented below. The
B. P3,000,000 D. P5,500,000 difference between average and ending inventory
is immaterial:
18. During the year just ended, James Company Current ratio 2.0
purchased P425,000 of inventory. The inventory Acid-test ratio 1.5
balance at the beginning of the year was Current liabilities P120,000
P175,000. If the cost of goods sold for the year Inventory turnover 8 times
was P450,000, then the inventory turnover for Gross profit margin 40%
the year was: Mars’ sales for the year was:
A. 2.77 times. C. 3.00 times a. P800,000 c. P1,200,000
B. 2.57 times. D. 2.62 times b. P480,000 d. P 240,000

19. Alumbat Corporation has P800,000 of debt 26. Edwards Enterprises follows a moderate current
outstanding, and it pays an interest rate of 10 asset investment policy, but it is now considering
percent annually on its bank loan. Alumbat’s a change, perhaps to a restricted or maybe to a
annual sales are P3,200,000, its average tax rate relaxed policy. The firm’s annual sales are
is 40 percent, and its net profit margin on sales is P400,000; its fixed assets are P100,000; its
6 percent. If the company does not maintain a target capital structure calls for 50% debt and
TIE ratio of at least 4 times, its bank will refuse 50% equity; its EBIT is P35,000; the interest rate
on its debt is 10%; and its tax rate is 40%. With

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 EXCEL PROFESSIONAL SERVICES, INC.

a restricted policy, current assets will be 15% of Assets:

sales, while under a relaxed policy they will be Cash 25,000
25% of sales. What is the difference in the Accounts receivable (net) ?
projected ROEs between the restricted and Inventory ?
relaxed policies? Property, plant and equipment (net) 294,000
a. 4.25% c. 5.25% Total 432,000
b. 4.73% d. 5.78% Liabilities and Stockholders’ Equity
Accounts payable (trade) ?
27. The following information is available for ABC Income taxes payable (current) 25,000
Company. Long-term debt ?
Current ratio 3.5 Common stock 300,000
Acid test ratio 3.0 Retained earnings ?
Inventory turnover 8.0 Total ?
Year-end current liabilities P600,000 Additional Information:
Beginning inventory P500,000 Current ratio (at year end) 1.5 to 1
How much is the cost of sales during the year? Total liabilities divided by total stockholders’ equity 0 .8
a. P1,600,000 c. P2,400,000 Inventory turnover based on sales and ending
b. P3,200,000 d. P6,400,000 inventory 15 times
Inventory turnover based on cost of goods sold
28. During the year, Raul Co. purchased P960,000 of and ending inventory 10.5 times
inventory. The cost of goods sold for the year Gross margin for the year P315,000
was P900,000, and the ending inventory was
P180,000. What was the inventory turnover for 32. What was Trend’s balance in trade accounts
the year? payable at year-end?
a. 6.4 c. 5.3 a. P67,000 c. P182,000
b. 6.0 d. 5.0 b. P92,000 d. P207,000

29. M Corporation’s stockholders’ equity at December 33. What was Trend’s balance in retained earnings at
31, 2024 consists of the following: year-end?
6% cumulative preferred stock, P100 par, a. P(60,000) c. P132,000
liquidating value was P110 per share; issued b. P70,000 d. P130,000
and outstanding 50,000 shares P5,000,000
Common stock, par, P5 per share; issued and 34. What was Trend’s balance in the inventory
outstanding, 400,000 shares 2,000,000 account at year-end?
Retained earnings 1,000,000 a. P138,000 c. P70,000
Dividends on preferred stock have been paid b. P60,000 d. PP135,000
through 2023 but have not been declared for 2024.
At December 31, 2024, M Corporation’s book value 35. The balance of Accounts Receivables as at the
per share was end of the year is
a. P5.50 c. P6.75 a. P138,000 c. P43,000
b. P6.25 d. P7.50 b. P70,000 d. P34,000

30. Milward Corporation’s books disclosed the 36. The balance of Long-term debt as at the end of
following information. the year is
Net credit sales P1,500,000 a. P300,000 c. P100,000
Net cash sales 240,000 b. P192,000 d. P230,000
Accounts receivable
Beginning of year 200,000 Use the following information for the next five questions.
End of year 400,000 The data presented below show actual figures for
Milward’s accounts receivable turnover is selected accounts of McKoy Company for the fiscal year
a. 3.75 times c. 4.35 times ended December 31, 2024. McKoy's controller is in the
b. 5.00 times d. 5.80 times process of reviewing the 2024 results. McKoy Company
monitors yield or return ratios using the average
31. Selected information from the accounting records financial position of the company.
of Thorn Company is as follows: 12/31/2024 12/31/2023
Net sales P900,000 Current assets P210,000 P180,000
Cost of goods sold for 600,000 Noncurrent assets 275,000 255,000
Inventory, beginning of year 180,000 Current liabilities 78,000 85,000
Inventory, end of year 156,000 Long-term debt 75,000 30,000
Common stock (P30 par value) 300,000 300,000
Thorn’s inventory turnover is Retained earnings 32,000 20,000
a. 5.36 times c. 3.85 times Excerpts from Statement of Comprehensive Income
b. 3.67 times d. 3.57 times Sales on credit P350,000
Cost of goods sold 160,000
Use the following information for the next five questions. Interest expense 3,000
The statement of financial position of Trend, Inc. is Income taxes (40% rate) 48,000
presented below. These are the only accounts in Trend’s Dividends declared and paid in 2024 60,000
statement of financial position. Amounts indicated by Administrative expense 67,000
question mark (?) can be calculated from the additional
information given.

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 EXCEL PROFESSIONAL SERVICES, INC.

Current Assets 45. The change in gross profit due to the decrease in
12/31/2024 12/31/2023 selling price is:
Cash P 20,000 P10,000 a. P520,000 increase
Accounts receivable 100,00 70,000 b. P520,00 decrease
Inventory 70,000 80,000 c. P80,000 increase
Other current assets 20,000 20,000 d. P600,000 decrease

37. McKoy Company's debt-to-total-asset ratio at 46. The net change in gross profit in 2024 due to
12/31/2024 is quantity factor is:
a. 0.352 c. 0.264 a. P80,000 increase c. P400,000 increase
b. 0.315 d. 0.237 b. P150,000 increase d. P600,000 increase

38. The 2024 accounts receivable turnover for McKoy 47. Iken Berry Farms has P5 million in current assets,
company is P3 million in current liabilities, and its initial
a. 1.882 c. 5.000 inventory level is P1 million. The company plans
b. 3.500 d. 4.118 to increase its inventory, and it will raise
additional short-term debt (that will show up as
39. Using a 365-day year, McKoy's inventory turnover notes payable on the balance sheet) to purchase
is the inventory. Assume that the value of the
a. 2.133 c. 1.995 remaining current assets will not change. The
b. 2.281 d. 4.615 company’s bond covenants require it to maintain
a current ratio that is greater than or equal to
40. McKoy Company's total asset turnover for 2024 is 1.5. What is the maximum amount that the
a. 0.805 c. 0.722 company can increase its inventory before it is
b. 0.761 d. 0.348 restricted by these covenants?
a. P0.50 million
41. The 2024 return on assets for McKoy Company is b. P1.00 million
a. 0.261 c. 0.157 c. P1.33 million
b. 0.148 d. 0.166 d. P1.66 million

Use the following information for the next three questions. 48. A fire has destroyed a large percentage of the
The following are the selected account balances or financial records of the Carter Company. You
total as of January 1, 2024: have the task of piecing together information in
Accounts receivable P380,000 order to release a financial report. You have
Merchandise inventory P260,000 found the return on equity to be 18 percent. If
Current liabilities P280,000 sales were P4 million, the debt ratio was 0.40,
Selected relationships for the year: and total liabilities were P2 million, what would be
Gross profit rate 40 percent the return on assets (ROA)?
DSO based on average 40 days a. 10.80%
Inventory turnover based on COGS 8X b. 0.80%
Current ratio 3:1 c. 1.25%
Acid Test ratio 2:1 d. 12.60%

42. The balance of inventory, December 31, 2024 was 49. Humphrey Hotels’ operating income (EBIT) is P40
a. P260,000 c. P280,000 million. The company’s times interest earned
b. P270,000 d. P300,000 (TIE) ratio is 8.0, its tax rate is 40 percent, and
its basic earning power (BEP) ratio is 10 percent.
43. The cost of goods sold during 2024 amounted to What is the company’s return on assets (ROA)?
a. P2,080,000 c. P2,240,000 a. 6.45%
b. P2,160,000 d. P2,400,000 b. 5.97%
c. 4.33%
44. The balance of accounts receivable as of d. 5.25%
December 31, 2024 is
a. P400,000 c. P380,000 50. Selzer Inc. sells all its merchandise on credit. It
b. P420,000 d. P390,000 has a profit margin of 4 percent, days sales
outstanding equal to 60 days, receivables of
Use the following information for the next two questions. P150,000, total assets of P3 million, and a debt
2024 2023 ratio of 0.64. What is the firm’s return on equity
Sales P2,080,000 P2,000,000 (ROE)? Assume a 365-day year.
Cost of sales 1,755,000 1,500,000 a. 7.1%
Gross margin 325,000 500,000 b. 33.4%
Unit selling price decreased 20% at the start of 2024. c. 3.4%
d. 8.1%

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– end -

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