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FINANCIAL STATEMENT ANALYSIS EXERCISEProblem 1Horizontal and vertical analysis. The financial position of Twig Company at the end of 2006 and 2007 is as follows:(in thousands) 2007 2006 Assets Cash P 3,000 P 5, Accounts receivable 40,000 25, Inventory 27,000 30, Long-term investments 15,000 0 Land, ...

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FINANCIAL STATEMENT ANALYSIS EXERCISE Problem 1 Horizontal and vertical analysis. The financial position of Twig Company at the end of 2006 and 2007 is as follows: (in 2007 Assets Cash P 3,000 Accounts receivable 40,000 Inventory 27,000 Long-term investments 15,000 Land, buildings and equipment (net) 100,000 Intangible assets 10,000 Other assets 5,000 Total Assets P200,000 Liabilities Current liabilities P30,000 Long-term liabilities 88,000 Total liabilities 118,000 Stockholder’s Equity 8% Preferred stock 10,000 Common stock 54,000 Additional paid-in capital 5,000 Retained earnings 13,000 Total stockholder’s equity 82,000 Total liabilities ad stockholder’s equity P200,000 Sales and cost of goods sold insignificantly change in 2007 in relation with 2006.

thousands) 2006 P 5,000 25,000 30,000 0 75,000 10,000 20,000 P165,000 P47,000 74,000 121,000 9,000 42,000 5,000 (12,000) 44,000 P165,000

Required: 1. Prepare a comparative balance sheet showing peso and percentage changes for 2007 as compared with 2006. 2. Prepare a common0size balance sheet as of December 31, 2006 and 2007. 3. Based on your data derived in requirements 1 and 2, comment on the financial position of Twig Company as of December 31, 2007

Requirement 1.

(In

2007

thousands)

Increase (Decrease )

Percentage

2006

Assets Cash Accounts receivable Inventory Long-term investments Land, buildings and equipment (net) Intangible assets Other assets Total Assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholder’s Equity 8% Preferred stock Common stock Additional paid-in capital Retained earnings Total stockholder’s equity Total liabilities ad stockholder’s equity

P 3,000 40,000 27,000 15,000 100,000 10,000 5,000 P200,000

P 5,000 25,000 30,000 0 75,000 10,000 20,000 P165,000

P (2,000) 15,000 (3,000) 15,000 25,000 0 (15,000) 35,000

(40%) 60% (10%) 100% 33% 0 (75%) 21%

P30,000 88,000 118,000

P47,000 74,000 121,000

(17,000) 14,000 (3,000)

(36%) 19% (2%)

10,000 54,000 5,000 13,000 82,000 P200,00

9,000 42,000 5,000 (12,000) 44,000 P165,000

1,000 12,000 0 25,000 38,000 35,000

11% 29% 0 200.08% 86% 21%

Requirement 2 2007 Assets Cash Accounts receivable Inventory Long-term investments Land, buildings and equipment (net) Intangible assets Other assets Total Assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholder’s Equity 8% Preferred stock Common stock

Percentage in

2006

Percentage in

P 3,000 40,000 27,000 15,000 100,000 10,000 5,000 P200,000

1.5% 20% 13.5% 7.5% 50% 5% 2.5% 100%

P 5,000 25,000 30,000 0 75,000 10,000 20,000 P165,000

3% 15% 18% 0% 45% 6% 12% 100%

P30,000 88,000 118,000

15% 44% 59%

P47,000 74,000 121,000

28% 45% 73%

10,000 54,000

5% 27%

9,000 42,000

5% 25%

Additional paid-in capital Retained earnings Total stockholder’s equity Total liabilities and stockholder’s equity

5,000 13,000 82,000 P200,00

2.5% 6.5% 41% 100%

5,000 (12,000) 44,000 P165,000

3% 0% 27% 100%

Requirement 3 Based on your data derived in requirements 1 and 2, comment on the financial position of Twig Company as of December 31, 2007. Assets and liabilities have evolved over time, as demonstrated by comparable balance sheets and a common-size balance sheet. • According to the comparable balance sheet, the percentage increases in assets, liabilities, and stockholder's equity show that the business is doing well, and that its financial status is improving and stabilizing as sales rise by 21% and liabilities decrease by 2%, culminating in an 86 percent increase in stockholder's equity. • On a comparable balance sheet, the rise in noncurrent assets such as Long-Term Investments, Land, Buildings, and Equipment (Net), and Intangible Assets shows that they were financed by the increase in long-term liabilities, as shown by the percentage increase. • Using the common-size balance sheet, the reduction in existing assets from 36% to 35% and the decrease in current liabilities from 28% to 15% result in an improvement in the company's total net worth.

Problem 2 Financial mix ratios. The data given below were obtained from the financial records of Dennis V. Corporation for the year ended December 31, 2007: Dennis V. Corporation Balance Sheet December 31, 2007 (000s omitted) Assets Cash Marketable Securities Trade receivables, net Inventory, at cost Prepaid Expenses Equipment, net Other assets

P85,000 25,000 245,000 220,000 10,000 320,000 15,000

Total assets

P920,000 Equities

Trade payables Accrued expenses Other current liabilities Mortgage payable Capital stock, P100 par Additional paid in capital Retained earnings - appropriated Retained earnings - unappropriated Total equities

P165,000 25,000 10,000 120,000 300,000 30,000 80,000 190,000 P920,000 Dennis V. Corporation Income Statement Year Ended December 31, 2007 (000s omitted)

Net sales Cost of goods sold: Inventory, December 31, 2004 P250,000 Purchases 720,000 Inventory, December 31, 2005 (220,000) Gross profit Selling, administrative, and other expenses Income before taxes Provision for income taxes Net income for the year Retained earnings, beginning Total Dividends paid Retained earnings, end Required: Compute the following for 2006: 1. Net working capital 2. Current ratio 3. Acid-test ratio 4. Accounts receivable turnover and average collection period 5. Inventory turnover and average days to sell inventory 6. Gross profit rate on sales 7. Book value per common share 8. Rate of return on sales 9. Earnings per share 10. Rate of return on invested capital 11. Debt-to-equity ratio 12. Debt ratio

P 1,000,000

750,000 250,000 125,000 125,000 35,000 90,000 130,000 220,000 30,000 P190,000

Requirement 1 (Net Working Capital) Current Assets: Cash Marketable Securities Trade Receivables, net Inventory at cost Prepaid Expenses Total Current Assets Less: Current Liabilities Trade payables Accrued Expenses Other Current Liabilities Total Current Liabilities Net Working Capital

85,000 25,000 245,000 220,000 10,000 585,000 165,000 25,000 10,000 200,000 385,000

Requirement 2 (Current Ratio) Current Ratio= Current Assets/ Current Liabilities Current Ratio= 585,000/ 200,000 = 2.925:1 Requirement 3 (Acid Test Ratio) Acid Test= Cash+ Marketable Securities+ Accounts Receivable (trade)/ Current Liabilities Acid Test= 85,000+ 25,000+ 245,000/ 200,000 = 1.775:1 Requirement 4 Accounts Receivable Turnover and average collection period Accounts Receivable Turn over Accounts Receivable Turn over= Net Credit Sales/ Average Trade Receivables Accounts Receivable Turn over= 1,000,000/ 122,500 = 8 times Average Collection Period Average Collection Period= 360/ Accounts Receivable Turnover

Average Collection Period= 360/8 = 45 days Requirement 5 Inventory turnover and average days to sell Inventory Turnover Inventory Turnover= Cost of Goods Sold/ Average Inventory Inventory Turnover= 750,000/ (250,000+220,000/2) = 3 times Average Day to Sell Average Day to Sell= 360 days/ Inventory Turnover Average Day to Sell= 360 days/3 = 120 days Requirement 6 Gross Profit on Sales Gross Profit on Sales= Gross Profit/ Sales Gross Profit on Sales= 250,000/1,000,000 = 25% Requirement 7 Book Value per Common Share Book Value per Common Share= Book Value/ Average Common Share Book Value per Common Share= 300,000/ (3,000/2) = 200 Requirement 8 Rate of Return Sale Return on Sales= Net Income/ Net Sales Return on Sales= 90,000/1,000,00 = 9% Requirement 9 Earnings per Share Earnings per Share= Net Income- Preference Share Dividends/ Average Common Share Earnings per Share= 90,000 – 0 / (3,000/2)

= 60 Requirement 10 Rate of Return on Invested Capital Rate of Return on Invested Capital= Net Income/ Average Invested Capital Return on Invested Capital= 90,000/ (600,000/2) = 30% Requirement 11 Debt-to-equity Ratio Debt-to-Equity= Total debt / Net stockholders' equity Debt-to-Equity= 320,000/600,000 = 53%

Requirement 12 Debt Ratio Debt Ratio= Total Debts/ Total Assets Debt Ratio= 320,000/ 920,000 = 35% Problem 3 Trend ratios. Uptown Girl Corporation’s sales, current assets, and current liabilities have been reported as follows over the last five years (amounts in thousands): 2007 2006 2005 2004 2003 Sales P8,775 P7,800 P7,475 P7,020 P6,500 Current assets: Cash 96 108 132 138 120 Accounts receivable 425 440 450 475 500 Inventory 488 464 440 420 400 Total current assets 1009 1,012 1,022 1,033 1,020 Current liabilities 475 450 350 325 250 Required: Express all the sales, current assets, and current liabilities on trend index. Round your decimals up to two (2) places. 1. Use 2003 as the base year 2. Use 2004 as the base year Requirement 1 (2003 Base Year)

Sales 2007 1.35

2006 1.20

2005 1.15

2004 1.08

2003 1

2006 .99

2005 1

2004 1.01

2003 1

2006 1.8

2005 1.4

2004 1.3

2003 1

Current Assets 2007 .99 Current Liabilities 2007 1.9

Requirement 2 (2004 base year) Sales 2007 1.25

2006 1.11

2005 1.06

2004 1

2006 .98

2005 .99

2004 1

2006 1.38

2005 1.08

2004 1

Current Assets 2007 .98 Current Liabilities 2007 1.46

Problem 4 Financing Ratios. The data were taken from the financial records of East Company and West Company on December 31, 2007 (in thousands): East Company West Company Debt P200,000 P300,000 Stockholder’s equity 300,000 200,000 Total equity P500,000 P500,000 Preferred dividends P1,000 P3,000

Common stockholder’s equity Earnings before interest and tax Interest expense Income before income tax Income tax (40%) Income tax

P200,000 P10,000 2,000 8,000 3,200 P4,800

P150,000 P12,000 6,000 6,000 2,400 P3,600

Required: calculate the following ratios for East Company and West Company for 2006: 1. 2. 3. 4. 5. 6.

Debt ratio Equity ratio Debt-equity ratio Equity multiplier Times interest earned Financial leverage

Requirement 1 (Debt Ratio) East Company Debt Ratio= Total Debts/ Total Assets Debt Ratio= 200,000/500,000 = 40:1 West Company Debt Ratio= Total Debts/ Total Assets Debt Ratio= 300,000/500,000 = 60:1 Requirement 2 (Equity Ratio) East Company Equity Ratio= Net Stockholders Equity/ Total Assets Equity Ratio= 300,00/500,00 =60:1 West Company

Equity Ratio= Net Stockholders Equity/ Total Assets Equity Ratio= 200,00/500,00 =40:1 Requirement 3 (Debt-to-Equity Ratio) East Company Debt-to Equity Ratio= Total debt / Net stockholders' equity Debt-to-Equity Ratio= 200,000/300,000 = 66.67:1 West Company Debt-to Equity Ratio= Total debt / Net stockholders' equity Debt-to-Equity Ratio= 300,000/200,000 = 1.5:1 Requirement 4 (Equity Multiplier) East Company Equity Multiplier= Total Assets/ Net Stockholders Equity Equity Multiplier= 500,000/300,000 = 1.67 times West Company Equity Multiplier= Total Assets/ Net Stockholders Equity Equity Multiplier= 500,000/200,000 =2.5 times Requirement 5 (Times Interest Earned) East Company Times Interest Earned= EBIT / Interest expense Times Interest Earned= 10,000/2,000 = 5 times West Company

Times Interest Earned= EBIT / Interest expense Times Interest Earned= 12,000/6,000 = 2 times Requirement 6 (Financial Leverage) East Company Financial Leverage= EBIT / (EBIT-Interest expense - Preferred dividend before tax) Financial Leverage= 10,000/ (10,000- 2,000 – 1,000) = 1.43 West Company Financial Leverage= EBIT / (EBIT-Interest expense - Preferred dividend before tax) Financial Leverage= 12,000/ (12,000- 6,000 – 3,000) =4 Problem 5 Profitability ratios. Horizons, Inc. provided the following selected financial information relative to the 2007 operations (in thousands): Contribution margin Fixed costs and expenses Earnings before interest and tax Interest expense Income before income tax Tax (30%) Net income Preferred dividends (10% x 60% x 20,000 shares) Earnings available to common shareholders Average total assets Average stockholder’s equity Liquidation of value of preferred stock Net sales (after sales returns of P500,000 Required:

P40,000 (28,000) 12,000 (2,000) 10,000 (3,000) 7,000 (120) P6,880 P20,000 8,400 80 per share P350,000

1. Calculate the following ratios for horizons inc., for the year ended December 31, 2007: a. Return on sales b. Return on assets c. Return on stockholder’s equity d. Return on common stockholders’ equity e. Times preferred dividend earned f. Earnings per share

g. Degree of operating leverage 2. The management wants to double its return on assets in 2004 by increasing its net returns on sales to 5%. What should Horizon’s assets turnover in 2004? 3. Disregarding your answers in question 1 above, what would be the estimated debt ratio in 2004 assuming management wants to double its return on total equity last year by increasing its return on sales to 6% and its assets turnover to 20 times? Requirement 1 1.a (Return on Sales) Return on Sales= Net income/ Sales ROS= 7,000/350,000 = 2%

1.b (Return on Assets) Return on Assets= Net Income+ Interest Expense, net of tax/ Average Total Assets ROA= 7,000/20,000 = 35% 1.c (Return on Stockholders’ Equity) Return on Stockholders’ Equity= Net Income/Average Stockholders’ Equity RSE= 7,000/8,400 = 83.33% 1.d (Return on Common Stockholders’ Equity) Return on Common Stockholders’ Equity= Earnings available to common stockholders’ / Average common stockholders' equity RCSE= 6,880/8400 = 82% 1.e (Times Preferred Dividends) Times Preferred Dividends= Net Income/ Preferred Dividend Requirement TPD= 7,000/ 120 = 58.33

1.f (Earnings per Share) Earnings per Share= Net income - Preferred dividends / Average common shares outstanding EPS= 7,000-120/(8,000/2) = 1.72 1.g (Degree of Operating Leverage) Degree of Operating Leverage= Contribution Margin/ Contribution Margin- Fixed Cost DOL= 40,000/ 40,000-28,000 = 3.33

Requirement 2 (Assets Turnover) Assets Turnover= Net Sales/ Average Total Assets Assets Turnover= 350,000/ 20,000 = 17.5 times Requirement 3 (Debt Ratio) Debt Ratio= Total Debts/ Total Assets Debt Ratio= 11,600/ 20,000 = 58% Problem 6 Growth ratios. The following comparative data were taken from the records of Mindoro Corporation and Tarlac Corporation on December 31, 2006: Mindoro Corporation Tarlac Corporation Earnings per share P 50 P 30 Market price per share 200 90 Dividend per share 20 25 Net stockholder’s equity 10,000,000 12,000,000 Preferred stock at par 4,200,000 4,000,000 Preferred shares outstanding 40,000 40,000 shares The preferred shares have a liquidation value of P120 and P150 for Mindoro Corporation and Tarlac Corporation, respectively.

Required: Calculate the following ratios for Mindoro Corporation and Tarlac Corporation for 2006: 1. 2. 3. 4. 5.

Price-earnings ratio Payout ratio Yield ratio Book value per preferred share Book value per common share

Requirement 1 (Price-earnings Ratio) Mindoro Co. Price Earnings ratio= Market Price per share/ Earnings per Share PER= 200/50 =4

Tarlac Co. Price Earnings ratio= Market Price per share/ Earnings per Share PER=90/30 =3 Requirement 2 (Payout Ratio) Mindoro Co. Payout Ratio= Dividend per share/ Earnings per share PR= 20/50 = 40% Tarlac Co. Payout Ratio= Dividend per share/ Earnings per share PR= 25/30 =83.33% Requirement 3 (Yield Ratio) Mindoro Co. Yield Ratio= Dividend Per Share/ Market Price per Share

YR= 20/200 = 10% Tarlac Co. Yield Ratio= Dividend Per Share/ Market Price per Share YR= 25/90 = 27.78 Requirement 4 (Book Value per Preferred Share) Mindoro Co. Book Value per Preferred Share= Preferred Stock at Par/ Preferred Shares Outstanding Book Value per Preferred Share= 4,200,000/40,000 = 105 Tarlac Co. Book Value per Preferred Share= Preferred Stock at Par/ Preferred Shares Outstanding Book Value per Preferred Share= 4,00,000/40,000 = 100 Requirement 5 (Book Value Per Common Share) BONUS Mindoro Co. Book Value per Common Share= Net Stockholders Equity - Preferred Stock at Par/ Total Outstanding Common Share Book Value per Common Share= 10,000,000 – 4,200,000 / 40,000 = 145 Tarlac Co. Book Value per Common Share= Net Stockholders Equity - Preferred Stock at Par/ Total Outstanding Common Share Book Value per Common Share= 12,000,000 – 4,000,000 / 40,000 = 200 Problem 7

Liquidity ratios. The records of JS Corporation and DV Corporation revealed the following data in relation to its operating activities in 2006 (in thousands): Net cash sales Net credit sales Cost of goods sold Net cash purchases Net credit purchases Average trade receivables Average inventories Average trade payables Cash operating expenses Average cash Average total assets Suppliers’ credit terms Required:

JS Corporation P10,000 190,000 110,000 5,000 96,000 9,500 2,750 2,400 18,000 600 80,000 2/10, n/30

DV Corporation P45,000 240,000 180,000 20,000 112,000 16,000 7,200 3,500 17,600 800 95,000 2/10, n/30

1. Calculate the following ratios for JS Corporation and DV Corporation in 2006 (use a 360-day year): a. Inventory turnover and inventory days b. Receivables turnover and collection period c. Payables turnover and payment period d. Operating cycle e. Net cash cycle f. Net working capital g. Working capital turnover h. Cash turnover and days/ in operating expenses i. Assets turnover. 2. Comment on the corporation’s ability to meet their suppliers’ credit terms Requirement 1.a (Inventory turnover and inventory days) JS Corporation Inventory Turnover= Cost of goods sold / Average inventory Inventory Turnover= 110,000/2,750 = 40 times Inventory Days= 360 days / Inventory turnover Inventory Days= 360 days/ 40 times = 9 days DV Corporation

Inventory Turnover= Cost of goods sold / Average inventory Inventory Turnover= 180,000/7,200 = 25 times Inventory Days= 360 days / Inventory turnover Inventory Days= 360 days/ 25 times = 14.4 days Requirements 1.b (Receivables turnover and collection period) JS Corporation Receivables Turnover= Net credit sales / Average trade receivables Receivable Turnover= 190,000/9,500 = 20 times Collection Period= 360/ Receivable Turnover Collection Period= 360/20 times = 18 days DV Corporation Receivables Turnover= Net credit sales / Average trade receivables Receivable Turnover= 240,000/16,000 = 15 times Collection Period= 360/ Receivable Turnover Collection Period= 360/ 15 times = 24 days Requirement 1.c (Payables turnover and payment period) JS Corporation Payables Turnover= Net credit purchases / Average trade payables Payables Turnover= 96,000/ 2,400 = 40 times Payment Period= 360 days / Payable turnover

Payment Period= 360 days/ 40 times = 9 days DV Corporation Payables Turnover= Net credit purchases / Average trade payables Payables Turnover= 112,000/3,500 = 32 times Payment Period= 360 days / Payable turnover Payment Period= 360 days/ 32 times = 11.25 days

] Requirement 1.d (Operating Cycle) JS Corporation Operating Cycle= Days Sales Inventory + Days Sales Outstanding Operating Cycle= 9 days + 18 days = 27 days DV Corporation Operating Cycle= Days Sales Inventory + Days Sales Outstanding Operating Cycle= 14.4 days + 24 days = 38.4 days Requirement 1.e (Net Cash Cycle) JS Corporation Net Cash Cycle= Operating Cycle- Payable Outstanding Net Cash Cycle= 27 days- 9 days = 18 days DV Corporation

Net Cash Cycle= Operating Cycle- Payable Outstanding Net Cash Cycle= 38.4 days- 11.25 days = 27.15 Requirement 1.f (Net working capital) JS Corporation N...