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Multiple Choice Questions 1. Which of the following statements is false? a. Financial statement analysis involves little judgment on analysts when industry comparisons are available. b. Valid comparative financial analysis depends on the availability data for appropriately defined industries. c. Different accounting procedures may affect ratio comparison between individual companies and industry averages. d. The statement of cash flows summarizes à firm's operating investing and financing activities for a specific period and explains the change in cash from one period to the next. 2. Which of the following statements is false? a. Financial ratios serve as yardsticks to evaluate a firm's performance. b. A firm with a high current ratio may have trouble paying its bills when they become due. c. A quick ratio of 2.0 times indicates that a firm's current assets are twice as much as its current liabilities. d. A firm's average collection period is influenced by its credit and collection policies. 3. Which of the following statements is false? a. The first step in financial analysis is computing financial ratios. b. A decrease in accounts receivable is a source of cash. c. The quick ratio is a more rigorous test of short-term solvency than the current ration d. The statement of cash flows summarizes a firm's operating, investing and financing activities for a specific period and explains the change in cash from one period to the next. 4. Which of the following statements is true? a. A debt-equity ratio greater than 1.0 indicates that a firm finances more of its assets through owners than creditors. b. The times-interest-earned ratio is a broader measure of a firm's coverage capabilities than the fixed-charge coverage ratio. c. Creditors view a firm as more risky when the fixed-charge coverage ratio increases d. Financial leverage is the extent to which a firm uses debt financing. 5. Which of the following statements is false? a. Creditors tend to favor a firm with high financial leverage. b. A firm's return on equity exceeds its return on investment under conditions of favorable leverage. c. Common-size statements are used to evaluate trends and to make industry comparisons. d. A common-size balance sheet states each asset, liability, and shareholders' equity account as a percentage of total assets. 6. Which of the following statement is false? a. A net profit margin of 10 percent indicates that a firm generates 10 centavos in net income for every peso of total assets.

b. Time-series analysis measures a firm's financial ratios over time. c. Some ratios can be computed in several ways. d. Liquidity ratios measure a firm's ability to meet short-term obligations. 7. Liquidity ratios are computed using information from the a. balance sheet b. income statement c. statement of changes in financial position d. both a and B. 8. Which of the following statements is false? a. Financial leverage concerns only owner b. Financial leverage provides owners with the opportunity to increase their rate of return c. High financial leverage may increase the cost of obtaining additional debt financing d. Financial leverage affects the riskiness of a firm 9. Which type of ratio measures the earning power of a firm? a. Liquidity b. Asset management c. Debt management d. Profitability 10. Which of the following are used in comparative financial analysis as standards? a. Historical standards b. Company goals c. Industry averages d. All of the above 11. All of the following statements about management's discussion and analysis that accompany financial statements are true, except: a. it is restricted to a discussion and analysis of the historical data presented in the financial statements. b. the SEC requires it of public corporations. c. it is useful because top management is in the best position to know how well the company is performing. d. it helps investors and creditors interpret the financial statements. 12. Creditors and investors use financial statement analysis to: a. help determine the cause of a company's financial problems. b. predict the amount of expected returns, as well as the risks associated with those returns. c. help determine how to solve a company's financial problems. d. both a and b are correct. 13. Creditors are most concerned with assessing: a. short-term liquidity b. long-term solvency c. ability to generate income on a continuing basis

d. both a and b are correct 14. The tools and techniques used to analyze financial statements are divided into broad categories including all of the following except a. ratio analysis b. vertical analysis c. horizontal analysis d. profitability analysis 15. Horizontal analysis involves the study of: a. the changes in individual financial statement amounts as a percentage of some related total. b. the peso amount of the change in various financial statement amounts from year to year. c. the change in key financial statement ratios over a certain time frame or horizon. d. percentage changes in the balances shown in comparative financial statements. 16. The percentage change in any individual item shown on comparative financial statements is calculated by dividing the peso amount of the change from the base period to the current period by: a. the amount shown for the current period b. the average of the amounts shown for the base and the current periods c. the base period amount d. 100 17. A company reported P10,000 of income for 2004, P12,000 for year 2005, and P13,000 for 2006. The percentage change in net income from 2005 to 2006 was: a. 10.0% b. 8.3% c. 7.7% d. 8.0% 18. Given the following data for total sales: 2004 P50,000 2005 55,000 2006 56,000 2007 53,000 A table showing trend percentages for 2004 - 2007, respectively, using 2004 as the base year would show: a. 100%, 110%, 102%, and 95% b. 100%, 10%, 2%, and (5%) c. 100%, 110%, 112%, and 106% d. 94%, 1.04%, 1.06%, and 100% 19. Vertical analysis looks at: a. percentage changes in the balances shown in comparative financial statements. b. individual financial statement items expressed as a percentage of a base (which represents 100%).

c. the peso amount of the change in various financial statement amounts from year to year. d. the change in key financial statement ratios over a specified period of time. 20. When an income statement is subjected to vertical analysis, the base (representing the 100% figure) is generally: a. net income after taxes b. B. gross profit c. net sales d. net income before taxes 21. If vertical analysis, using net sales as the base, showed a 67% figure for cost of goods sold in the prior year, and a 70% figure for the current yea this would mean that: a. the peso amount of cost of goods sold has increased. b. cost of goods sold as a percentage of net sales has increased. c. gross profit has declined. d. both a and b are correct. 22. If a balance sheet is subjected to vertical analysis which shows that total liabilities (using total liabilities plus shareholders' equity as the base) have increased from 50% to 63%, this would mean that: a. liabilities have increased as a percentage of shareholders' equity. b. the peso amount of liabilities has increased c. shareholders' equity has decreased d. the current ratio has decreased 23. If assets shown or a balance sheet are subjected to vertical analysis (using total assets as the base), a decrease in the figure for current assets from 40% to 34% would mean that: a. the peso amount of non-current assets has increased. b. the current ratio has decreased. c. the peso amount of total current assets has decreased. d. total non-current assets have increased as a percentage of total current assets. 24. Of the items listed below, the one that would be most helpful comparison of differentsized companies is: a. comparison of their working capital balances b. preparation of common-size financial statements c. horizontal analysis d. to look at the amount of income earned by each company 25. A company that generates a great deal of “free cash" each year generally considered to be: a. financially weak because it does not have enough investment opportunities available to put all its cash to work. b. financially strong because it generates more than enough cash to satisfy reinvestment opportunities. c. one that raises most of its cash from stock sales that do not require the payment of interest. d. using its cash unwisely

26. All of the following ratios measure the profitability of a company except: a. rate of return on total assets b. earnings per ordinary share c. price/earnings ratio d. rate of return on net sales 27. All of the following ratios directly relate to the analysis of a given share as an investment except: a. debt ratio b. P/E ratio c. dividend yield d. book value per share of ordinary share 28. Company A has total current liabilities equal to P500,000, and working capital of P20,000. Company B has the same amount of working capital, but it has current liabilities of P30,000. The company with the better working capital position is: A. they both have exactly the same working capital position B. Company A C. Company B D. cannot determined with the information given 29. The ratio(s) that help in the analysis of working capital are: A. debt ratio B. current ratio C. quick ratio D. both b and c are correct. 30. Which of the following statements about inventory is most appropriate? A. high comapanFIF indicates the company is having trouble selling its inventory B. a low inventory turnover ratio generally means the company is not keeping enough inventory on hand C. companies generally strive to have the highest possible inventory turnover ratio. D. the most profitable inventory turnover ratio may not necessarily be the highest 31. If ending inventory balance was overstated on the financial statements, and the beginning inventory balance was understated, but all other items were properly reported the calculated inventory turnover ratio A. would be too high B. would be too low C. would be unaffected by these errors D. cannot be determined with the information given. 32. A high accounts receivable turnover would most likely indicate that A. Accounts receivable balances have been overstated B. The company is unsuccessful in its effort to collect cash from customers C. Policies from extending credit to customers are too high

D. Net credit sales for the year have been understated 33. If accounts receivable turnover is being computed for a retail store that does a great deal of business in the Summer and Winter months, but very little business in the Fall and Spring, the denominator in the equation would probably be calculated as: A. (total of 12 month-end net accounts receivable balances) / 12 B. (beginning plus ending net accounts receivable) / 12 C. (sales for the first month plus last month of year) /2 D. (total of sales for each month) / 12

Situational Use the following information to answer question 34 to 45 The following data represent selected information from the comparative income statement and balance sheet for Little Mermaid Company for the years ended December 31, 2006 and 2007:

Net sales (all on credit) Cost of goods sold Gross profit Income from operations expense Net income Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Total current liabilities Total noncurrent liabilities Ordinary share capital, no-par* Retained earnings

Selected Data 2007 P 370 000 160,000 210,000 95,000 8,000 70,000 10,000 30,000 43,000 5,000 88,000 70,000 40,000 60,000 30,000

2006 P 333.000 150,000 183,000 87,000 Interest 8,000 57,000 14,000 25,000 40.000 7,000 86,000 60,000 45,000 60,000 25,000

• Note: 10,000 ordinary shares have been issued and outstanding since the company was establisheD. They had a market value of P90 per share at 12/31/06, and they were selling for P91 50 per share at 12/31/07 34. The current ratio for Little Mermaid Company at 12/31/07 is: A. 0.80 C. 1.02 B. 1.26 D. 0.57 35. The acid-test ratio for Little Mermaid Company at 12/31/06 is: A. 0.23 C. 0.65 B. 1.43 D. 1.32 36. The inventory turnover for Little Mermaid Company for the year ended 12/31/07 is: A. 8.92 C. 3.72 B. 5.06 D. 3.86

37. Little Mermaid's accounts receivable turnover for the year ended 12/31/07 is: A. 5.82 C. 13.45 B. 0.07 D. 12.78 38. Little Mermaid's days' sales in receivables for the year ended 12/31/07 is: A. 12.33 C. 82.19 B. 26.77 D. 75. 34 39. Little Mermaid's debt ratio at 12/31/07 is: A. 0.55 B. 1.82

C. 0.36 D. 2.80

40. Little Mermaid's times-interest-earned ratio for the year ended 12/31/07 A. 11.875 C. 8.75 B. 26.25 D. 46.25 41. For the year ended 12/31/06, Little Mermaid's rate of return on net sales is: A. 0.17 C. 0.26 B. 0.55 D. cannot be determined with the information given 42. Little Mermaid's rate of return or total assets for the year ended 12/31/07 is A. 0.515 C. 0.475 B. 0.36 D. 0.40

43. Little Mermaid's rate of return on ordinary shareholders' equity for the year ended 12/31/07 is:

A. 1.17 B. 0.80 given

C. 2.55 D. cannot be determined with information

44. Little Mermaid's earnings per share for the year ended 12/31/07 is A. P21.00 C. P 7.00 B. P9.50 D. P 37.00

45. Little Mermaid’s price/earnings ratio at 12/31/07 is A. 2.47 C. 9.63 B. 4.36 D. 13.07 46. A company's current ratio is 2.2 to 1 and quick (acid test) ratio is Loto 1 at the beginning of the year. 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 1. Which of the following could help explain the divergence in the raties from the beginning to the end of the year? A. An increase in inventory levels during the current year B. An increase in credit sales in relationship to cash sales C. An increase in the use of trade payables during the current year D. An increase in the collection rate of accounts receivable. 47. Which of the following will cause a decrease in a company's accounts receivable turnover ratio? A. Tighten credit standards B. Enforce credit terms more aggressively C. Ease enforcement of credit terms D. Factor all accounts receivable 48. If, just prior to a period of rising prices, a company changed its inventory measurement method from LIFO to FIFO, the effect in the next period would be to A. increase both the current ratio and inventory turnover B. decrease both the current ratio and inventory turnover C. increase the current ratio and decrease inventory turnover D. decrease the current ratio and increase inventory turnover. 49. A firm that has substantial leased assets that need not be capitalized world tend A. overstate its debt ratio B. overstate its earnings per share C. overstate its return on assets D. overstate its debt to tangible net worth 50. A measure of profitability and not short-term liquidity is the A. accounts receivable turnover ratio

B. sales to working capital ratio C. total asset turnover ratio D. acid-

test

ratio

51. Return on investment (ROI) is a tore often used to express income earned on capital invested in a business unit. A company's ROI would be increased if A. sales increased by the same peso amount as expense and total assets increased B. sales remained the same and expenses were reduced by the same peso amount that total assets increased C. sales decreased by the same peso amount that expenses increased D. sales and expenses increased by the same percentage that total assets increased (CMA adapted)

52. When a balance sheet amount is related to an income statement amount in computing a ratio A. the balance sheet amount should be converted to an average for the year B. the income statement amount should be converted to an average for the year C. both amounts should be converted to market value D. comparisons with industry ratios are not meaningful. (PhilCPA adapted) 53. Ratios are used for many purposes in financial statement analysis. In order to determine the return on investment for a company, the numerator of the fraction used should be A. net income B. income before nonrecurring items C. income before nonrecurring items and before income taxes D. Income before nonrecurring items plus interest expense net of income tax 54. The ratio that measures a firm's ability to generate earnings is A. times interest earned B. sales to working capital C. days’ sales in receivables D. operating asset Situational The following

data

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55

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Listed below are selected ratios for Romeo Company and Juliet Limited, both large firms in manufacturing pressure valves. Also listed are the industry average: for the same ratios. All of the ratios are for the same year. ________Ratio________

Romeo

Juliet

Industry

Current Ratio Quick (acid test) ratio 1.6 Accounts Receivable turnover Inventory turnover Total liabilities to net worth 2.1 Sales to net worth Sales to total assets 2.8 Net income to sales Net income to net worth Net income to net assets Times interest earned 4.3

Company 3.0

Limited 2.1 1.0

5.0 4.1

Average 1.8 1.0

6.3 6.3 3.0

15.0

6.0 5.3 2.0

20.0 7.3

2.4% 8.6% 6.6%

13.5 5.5

1.1% 16.5% 8.2% 2.6

1.6% 9.9% 7.8% 4.0

55. Based on the information presented, the ratios that should be used to determine which company has a stronger liquid position are A. current ratio and inventory turnover B. current ratio and quick ratio C. quick ratio and times interest earned D. total liabilities to net worth and current ratio 56. The ratios that can be used to determine which company is more efficiently using leverage to its advantage are 1. times interest earned and sales to net worth 2. net income to sales and sales to total assets 3. net income to net worth and net income to total assets 4. net income to sales and total liabilities to net worth. 57. The operating cycle represents the average time it takes to invest cash in inventory and eventually collect the cash from sales. If both Romeo Company and Juliet Limited make all sales on open account, which of the following items is most accurate? A. Romeo's operating eyele is about 12 days longer than Juliet's B. Juliet's operating eyele is about the same as the industry average C. Romeo's and Juliet's operating cycles are about equal in length D. Both Romeo and Juliet have operating cycles that are longer than the industry average 58. Af December 31, 2006, the Back Company had 350,000 ordinary shares outstanding. On September 1, 2007, an additional 150,000 ordinary shares were issueD. In addition, Back had P10,000,000 of 8 percent convertible bonds outstanding at December 31, 2006 which are convertible into 200,000 ordinary shares. The bonds were considered potential ordinary shares at the time of their issuance and no bonds were converted into ordinary shares in 2005. The net income for the year ended December 31, 2007, was P3,000,000. Assuming the income tax rate was 50 percent, what should be the diluted earnings per share for the year ended December 31, 2007? A. P 4.33 C. P 5.67

B. P 5.00

D. P 7.50 (AICPA adapted)

Situational Use the

following

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59

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The Brown Company was organized on January 1, 2006, at which time it issued 10,000 shares of P10 par ordinary shares. On July 1, 2006, Brown declared and issued a 10 percent ordinary share dividenD. On October 1, 2006, an additional 2,000 ordinary shares were issued at par. The net income for the year ended December 31, 2006, was P12,650. As a result of the events described, Brown Company had 13,000 ordinary shares outstanding as of January 1, 2007. On that date options were granted to certain employees which entitled them to buy 1,000 ordinary shares at P16 per share. The average price of the ordinary share during 2007 was P20 per share. The price of the ordinary share ...