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Quiz on Fi nancial nancial Statem Statement ent A nalys nalys is 1. Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective? A. Management is always interested in maximum maximum profitability. B. Management is interested interested in the the view of investors. C. Management is interested in in the financial financial structure structure of the entity. entity. D. Management is interested in in the asset asset structure structure of the entity. entity. 2. Statements in which all items are expressed only in relative terms (percentages of a base) are termed: A. Vertical statements statements C. Funds Statements B. Horizontal Statements D. Common-Size Statements 3. The percentage analysis of increases and decreases in individual items in comparative financial statements is called: A. vertical analysis C. profitability analysis B. solvency analysis D. horizontal analysis 4. Trend analysis allows a firm to compare its performance to: A. other firms in the industry industry C. other industries B. other time periods within the firm D. none of the above 5. Ratios are used as tools in financial analysis A. instead of horizontal and vertical vertical analysis. B. because they can provide information that may not be apparent from inspection inspection of the individual individual components of a particular ratio. C. because even even single ratios by themselves are quite meaningful. D. because they are prescribed prescribed by GAAP. 6. Short-term creditors are usually most interested in assessing A. solvency. C. marketability. B. liquidity. D. profitability. 7. Which of the following is a measure of the liquidity position of a corporation? A. earnings per share B. inventory turnover C. current ratio D. number of times interest charges earned 8. The set of ratios that is most useful in evaluating solvency is A. debt ratio, current ratio, and times interest earned earned B. debt ratio, times interest earned, and return on assets C. debt ratio, times interest earned, and quick ratio D. debt ratio, times interest interest earned, and cash flow to debt 9.Stockholders are most interested in evaluating A. liquidity. B. solvency.
C. profitability. D. marketability.
10. The debt ratio indicates: A. a comparison of liabilities liabilities with total assets B. the ability of the firm to to pay its current obligations obligations C. the efficiency efficiency of the use use of total assets D. the magnification magnification of earnings earnings caused caused by leverage 11. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in 2008. The respective net income reported by Kline Corporation Corporation for 2007 and 2008 are: A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000 Answer: A 2007: P2,000,000 (1 – (1 – 0.7) 0.7) = P600,000
12. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007. The increase in net income of P300,000: A. can be stated as 0% C. cannot be stated as a percentage B. can be stated as 100% increase D. can be stated as 200% increase Question Nos. 13 through 15 are based on the data taken from the balance sheet of Nomad Company at the end of the current year: 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, short-term 85,000 Prepaid expenses 15,000 13. The amount of working capital for the company is: A. P351,000 C. P211,000 B. P361,000 D. P336,000 1:1, the equal change in current assets and current liabilities brings direct effect on the ratio, that is, equal increase in current assets and current liabilities causes the ratio to rise. Answer: A Working capital equals the difference between the total current assets and total current liabilities. Current Assets: Cash P 80,000 Marketable securities 250,000 14. The company’s current ratio as of the balance sheet date is: A. 2.67:1 C. 2.02:1 B. 2.44:1 D. 1.95:1 Answer: B Current Ratio: Current Assets ÷ Current Liabilities (P595,000 ÷ P244,000) = 2.44:1.00
15. The company’s acid-test ratio as of the balance sheet date is: A. 1.80:1 C. 2.02:1 B. 2.40:1 D. 1.76:1 Answer: A Acid-Test Ratio: Liquid Assets ÷ Current Liabilities (P440,000 ÷ P244,000) = 1.80:1.00
16. Selected information from the accounting records of Petals Company is as follows: Net sales for 2007 P900,000 Cost of goods sold for 2007 600,000 Inventory at December 31, 2006 180,000 Inventory at December 31, 2007 156,000 Petals’ inventory turnover for 2007 is A. 5.77 times C. 3.67 times B. 3.85 times D. 3.57 times Answer: D Average inventory: (P180,000 + P156,000) ÷ 2 P168,000 Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times 17. The Moss Company presents the following data for 2007. Net Sales, 2007 Net Sales, 2006 Cost of Goods Sold, 2007 Cost of Goods Sold, 2007 Inventory, beginning of 2007
P3,007,124 P 930,247 P2,000,326 P1,000,120 P 341,169
Inventory, end of 2007 The merchandise inventory turnover for 2007 is: A. 5.6 C. 7.5 B. 15.6 D. 7.7 Answer: A Average Inventory: (P341,169 + P376,526) ÷ 2 Inventory Turnover: (P2,000,326 ÷ P358,847.50)
P 376,526
P358,847.50 5.6 times
18.Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the ending total asset balance? A. P2,000,000. C. P2,800,000. B. P1,200,000. D. P1,600,000. Answer: A Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000 Net sales: (P950,000 x 5)
P4,750,000
19. Jordan Manufacturing reports the following capital structure: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Premium on common stock Retained earnings What is the debt ratio? A. 0.48 C. 0.93 B. 0.49 D. 0.96 Answer: B Current liabilities Long-term debt Deferred income tax Total Liabilities Stockholders’ Equity Preferred stock Common stock Premium on common stock Retained earnings Total Assets
P100,000 400,000 10,000 80,000 100,000 180,000 170,000
P 100,000 400,000 10,000 510,000 P 80,000 100,000 180,000 170,000
530,000 P1,040,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
20. House of Fashion Company had the following financial statistics for 2006: Long-term debt (average rate of interest is 8%) Interest expense Net income Income tax Operating income What is the times interest earned for 2006? A. 11.4 times C. 3.1 times B. 3.3 times D. 3.7 times Answer: D Times interest earned: Earnings before interest ÷ Interest Income before tax (P48,000 + P46,000) Add Interest expense Income before Interest expense TIE: P129,000 ÷ P35,000
P400,000 35,000 48,000 46,000 107,000
P 94,000 35,000 P129,000 3.7 times
21. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information: Stockholders’ equity at 12/31/07 P4,500,000 Net income year ended 12/31/07 1,200,000 Dividends on preferred stock year ended 12/31/07 300,000 Market price per share of common stock at 12/31/07 144 The price-earnings ratio on common stock at December 31, 2007, was A. 10 to 1 C. 14 to 1 B. 12 to 1 D. 16 to 1 . Answer: D EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00 P/E Ratio: 144 ÷ 9 16 The balance sheets of Magdangal Company at the end of each of the first two years of operations indicate the following: 2007 2006 Total current assets P600,000 P560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 150,000 80,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, P100 par 100,000 100,000 Common stock, P10 par 600,000 600,000 Paid-in capital in excess of par-common stock 60,000 60,000 Retained earnings 300,000 210,000 Net income is P115,000 and interest expense is P30,000 for 2007. 22. What is the rate earned on total assets for 2007 (round percent to one decimal point)? A. 9.3 percent C. 8.9 percent B. 10.1 percent D. 7.4 percent 23. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)? A. 10.6 percent C. 12.4 percent B. 11.2 percent D. 15.6 percent 24. What is the earnings per share on common stock for 2007, (round to two decimal places)? A. P1.92 C. P1.77 B. P1.89 D. P1.42 25. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to one decimal point)? A. 17.0 C. 12.4 B. 12.1 D. 15.9 Earnings before tax Less Income tax 40% Net income Less Preferred dividends Earnings to Common Stock Earnings per share 400,000/25,000 Dividend per share: 400,000 x 0.40 ÷ 25,000 Dividend yield 6.4 ÷ (16 x 5)
1,000,000 400,000 600,000 200,000 400,000 16.00 6.40 8.0%
Answer: B ROA: Operating income ÷ Average Total Assets P145,000 ÷ P1,430,000 = 10.1% . Answer: B Return on stockholders’ equity: Net income ÷ Average stockholders’ equity P115,000 ÷ P1,027,500 = 11.2% Answer: C Net income Deduct Preferred Dividends Income available to common shares
P115,000 9,000 P106,000
EPS: (P106,000 ÷ 60,000) Answer: A P/E Ratio: P30 ÷ 1.766 = 17.0 times
P1.77
