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Financial Statement AnalysisPROBLEMS:Horizontal analysis i. 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. Therespective net income reported by Kline Corporat...

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Financial Statement Analysis

PROBLEMS: Horizontal analysis i . 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 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 ii

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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: C. cannot be stated as a percentage A. can be stated as 0% B. can be stated as 100% increase D. can be stated as 200% increase

Liqu Liquidi idi idity ty rat ratios ios iii . The following financial data have been taken from the records of Ratio Company: Accounts receivable P200,000 Accounts payable 80,000 Bonds payable, due in 10 years 500,000 Cash 100,000 Interest payable, due in three months 25,000 Inventory 440,000 Land 800,000 Notes payable, due in six months 250,000 What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of its accounts payable? C. D. A. B. Current ratio Increase Decrease Increase Decrease Acid-test ratio Increase Decrease Decrease Increase Question Nos. 4 through 6 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 15,000 567

Financial Statement Analysis

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The amount of working capital for the company is: A. P351,000 C. P211,000 B. P361,000 D. P336,000

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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

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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

Activity ratios Receivables turnover vii . Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were P600,000 and P700,000, respectively. The receivables turnover was A. 7.7 times. C. 9.3 times. B. 10.8 times. D. 10.0 times. viii

. Milward Corporation’s books disclosed the following information for the year ended December 31, 2007: Net credit sales P1,500,000 Net cash sales 240,000 Accounts receivable at beginning of year 200,000 Accounts receivable at end of year 400,000 Milward’s accounts receivable turnover is C. 5.00 times A. 3.75 times B. 4.35 times D. 5.80 times

Days receivable ix . Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the year and a balance of P410,000 at the end of the year. The net credit sales during the year amounted to P4,000,000. Using 360-day year, what is the average collection period of the receivables? A. 30 days C. 73 days D. 36 days B. 65 days Cash collection x . Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of P4,000. What was the cash collected from customers? 568

Financial Statement Analysis

A. P31,000 B. P35,000

C. P34,000 D. P25,000

Inventory turnover xi . During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What was the inventory turnover for 2007? A. 6.4 C. 5.3 B. 6.0 D. 5.0 xii

. 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 D. 3.57 times B. 3.85 times

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. 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 Inventory, end of 2007 The merchandise inventory turnover for 2007 is: A. 5.6 C. 7.5 B. 15.6 D. 7.7

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P3,007,124 P 930,247 P2,000,326 P1,000,120 P 341,169 P 376,526

. Based on the following data for the current year, what is the inventory turnover? Net sales on account during year P 500,000 Cost of merchandise sold during year 330,000 Accounts receivable, beginning of year 45,000 Accounts receivable, end of year 35,000 Inventory, beginning of year 90,000 Inventory, end of year 110,000 A. 3.3 C. 3.7 B. 8.3 D. 3.0 569

Financial Statement Analysis

Days inventory xv . Selected information from the accounting records of Eternity Manufacturing Company follows: Net sales P3,600,000 Cost of goods sold 2,400,000 Inventories at January 1 672,000 Inventories at December 31 576,000 What is the number of days’ sales in average inventories for the year? A. 102.2 C. 87.6 B. 94.9 D. 68.1 Turnover ratios Asset turnover Asset xvi . 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. Solvency ratios Debt ratio xvii . 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 Times interest earned xviii . 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

P100,000 400,000 10,000 80,000 100,000 180,000 170,000

P400,000 35,000 48,000 46,000 570

Financial Statement Analysis

Operating income What is the times interest earned for 2006? A. 11.4 times B. 3.3 times xix

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107,000 C. 3.1 times D. 3.7 times

. Brava Company reported the following on its income statement: Income before taxes P400,000 Income tax expense 100,000 Net income P300,000 An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s times interest earned (TIE) was A. 5 times C. 3.5 times B. 4 times D. 3 times

. The balance sheet and income statement data for Candle Factory indicate the following: Bonds payable, 10% (issued 1998 due 2022) P1,000,000 Preferred 5% stock, P100 par (no change during year) 300,000 Common stock, P50 par (no change during year) 2,000,000 Income before income tax for year 350,000 Income tax for year 80,000 Common dividends paid 50,000 Preferred dividends paid 15,000 Based on the data presented above, what is the number of times bond interest charges were earned (round to one decimal point)? C. 4.5 A. 3.7 B. 4.4 D. 3.5

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. The following data were abstracted from the records of Johnson Corporation for the year: Sales P1,800,000 Bond interest expense 60,000 Income taxes 300,000 Net income 400,000 How many times was bond interest earned? A. 7.67 C. 12.67 B. 11.67 D. 13.67

Net income . The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: A. P22,000 C. P54,000 B. P42,000 D. P66,000

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571

Financial Statement Analysis

Profitability Ratios Return on Common Equity xxiii

. Selected information for Ivano Company as of December 31 is as follows: 2006 2007 Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 noncumulative Common stock 600,000 800,000 Retained earnings 150,000 370,000 Dividends paid on preferred stock for the year 20,000 20,000 Net income for the year 120,000 240,000 Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for 2007 is A. 17% C. 21% B. 19% D. 23%

Dividend yield xxiv . The following information is available for Duncan Co.: 2006 Dividends per share of common stock P 1.40 Market price per share of common stock 17.50 Which of the following statements is correct? A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market price of their stocks. B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns on their investments. C. The dividend yield is 12.5%, which is of interest to bondholders. D. The dividend yield is 8.0 times the market price, which is important in solvency analysis. Market Test Ratios Market/Book value ratio Price per share xxv . What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of P3,000,000, and a market/book ratio of 3.5? A. P8.57 C. P85.70 D. P105.00 B. P30.00 P/E ratio xxvi . Orchard Company’s capital stock at December 31 consisted of the following:  Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.  10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares authorized, issued, and outstanding. Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per share on December 31. Orchard’s net income for the year ended December 31 was P50,000. The yearly 572

Financial Statement Analysis

preferred dividend was declared. No capital stock transactions occurred. What was the price earnings ratio on Orchard’s common stock at December 31? A. 6 to 1 C. 10 to 1 B. 8 to 1 D. 16 to 1 xxvii

. 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

Payout ratio xxviii . Selected financial data of Alexander Corporation for the year ended December 31, 2007, is presented below: Operating income P900,000 Interest expense (100,000) Income before income taxes 800,000 Income tax (320,000) Net income 480,000 Preferred stock dividend (200,000) Net income available to common stockholders 280,000 Common stock dividends were P120,000. The payout ratio is: A. 42.9 percent C. 25.0 percent B. 66.7 percent D. 71.4 percent P/E ratio & Payout ratio Use the following information for question Nos. 33 and 34: Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock exchange. xxix

xxx

. Terry Corporation’s price-earnings ratio is A. 3.8 times B. 15 times

C. 18.8 times D. 6 times

. Terry Corporation’s payout ratio for 2007 is A. P4 per share

C. 20.0 percent 573

Financial Statement Analysis

B. 12.5 percent

D. 25.0 percent

DuPont Model Debt ratio xxxi . The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio increase to achieve 20% ROE? A. Total debt ratio must increase by .5 B. Total debt ratio must increase by 5 C. Total debt ratio must increase by 5% D. Total debt ratio must increase by 50% xxxii

. Assume you are given the following relationships for the Orange Company: Sales/total assets Return on assets (ROA) Return on equity (ROE) The Orange Company’s debt ratio is A. 40% C. 35% B. 60% D. 65%

Leverage Ratio Degree of financial leverage xxxiii . A summarized income statement for Leveraged Inc. is presented below. Sales Cost of Sales Gross Profit Operating Expenses Operating Income Interest Expense Earnings Before Tax Income Tax Net Income The degree of financial leverage is: A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000 B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000

1.5X 3% 5%

P1,000,000 600,000 P 400,000 250,000 P 150,000 30,000 P 120,000 40,000 P 80,000

Other Ratios Book value per share xxxiv . M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: 574

Financial Statement Analysis

6% cumulative preferred stock, P100 par, liquidating value was P110 per share; issued and outstanding 50,000 shares Common stock, par, P5 per share; issued and outstanding, 400,000 shares Retained earnings Total Dividends on preferred stock have been paid through 2006. At December 31, 2007, M Corporation’s book value per share was A. P5.50 C. P6.75 B. P6.25 D. P7.50 xxxv

. The following data were gathered from the annual report of Desk Products. Market price per share Number of common shares Preferred stock, 5% P100 par Common equity The book value per share is: A. P30.00 C. P14.00 B. P15.00 D. P13.75

P5,000,000 2,000,000 1,000,000 P8,000,000

P30.00 10,000 P10,000 P140,000

Integrated ratios Liquidity & activity ratios Inventory xxxvi . The current assets of Mayon Enterprise consists of cash, accounts receivable, and inventory. The following information is available: Credit sales 75% of total sales Inventory turnover 5 times Working capital P1,120,000 Current ratio 2.00 to 1 Quick ratio 1.25 to 1 Average Collection period 42 days Working days 360 The estimated inventory amount is: A. 840,000 C. 720,000 B. 600,000 D. 550,000 xxxvii

. The following data were obtained from the records of Salacot Company: Current ratio (at year end) Inventory turnover based on sales and ending inventory

1.5 to 1 15 times 575

Financial Statement Analysis

Inventory turnover based on cost of goods sold and ending inventory 10.5 times Gross margin for 2007 P360,000 What was Salacot Company’s December 31, 2007 balance in the Inventory account? C. P 80,000 A. P120,000 B. P 54,000 D. P 95,000

Net sales .Selected data from Mildred Company’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities P120,000 Inventory turnover (based on cost of sales) 8 times Gross profit margin 40% Mildred’s net sales for the year were A. P 800,000 C. P 480,000 B. P 672,000 D. P1,200,000

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Gross margin . Selected information from the accounting records of the Blackwood Co. is as follows: Net A/R at December 31, 2006 P 900,000 Net A/R at December 31, 2007 P1,000,000 Accounts receivable turnover 5 to 1 Inventories at December 31, 2006 P1,100,000 Inventories at December 31, 2007 P1,200,000 Inventory turnover 4 to 1 What was the gross margin for 2007? A. P150,000 C. P300,000 B. P200,000 D. P400,000

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Market Test Ratio Dividend yield xl . Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio of 75%. The dividend yield is C. 7.5% A. 25.0% B. 22.0% D. 10.0% xli

. The following were reflected from the records of Salvacion Company: Earnings before interest and taxes Interest expense

P1,250,000 250,000 576

Financial Statement Analysis

Preferred dividends Payout ratio Shares outstanding throughout 2006 Preferred Common Income tax rate Price earnings ratio The dividend yield ratio is A. 0.50 B. 0.12

200,000 40 percent 20,000 25,000 40 percent 5 times C. 0.40 D. 0.08

Comprehensive xlii

. 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. 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

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. 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

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. 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

. 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. 12.4 577

Financial Statement Analysis

B. 12.1

D. 15.9

578

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Answer: A 2007: P2,000,000 (1 – 0.7) = P600,000 2008: P2,000,000 (1 + 1.75) = P5,500,000 Note: For 2007 & 2008, 2006 was used as a base year.

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Answer: C Answer: C Current Assets: Cash Accounts receivable Total liquid assets Inventory Total current assets Current Liabilities: Accounts payable Notes payable, due in 6 months Interest payable Total current liabilities

P100,000 200,000 300,000 440,000 P740,000 P 80,000 250,000 25,000 P355,000

Current Ratio (740,000 ÷ 355,000) 2.08:1.00 Acid-test Ratio (300,000 ÷ 355,000)

0.85:1.00

Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1. Therefore, the current ratio shall rise but acid test ratio shall go down. If any of these two ratios is below 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. iv

. 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 Accounts receivable 110,000 Total liquid assets 440,000 Inventory 140,000 Prepaid expense 15,000 Total Current Assets P595,000 Current Liabilities: Accounts payable Income tax payable Notes payable, short-term 85,000 Accrued liabilities

P145,000 10,000

Working Capital v

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Answer: B Current Ratio: Current Assets ÷ Current Liabilities (P595,000 ÷ P244,000) = 2.44:1.00 Answer: A

4,000

244,000 P351,000

Acid-Test Ratio: Liquid Assets ÷ Current Liabilities (P440,000 ÷ P244,000) = 1.80:1.00 vii

. Answer: D AR Turnover: Credit sales ÷ Average AR 6,500,000/650,000 = 10.0 times

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. Answer: C Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times

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Answer: D

Average Daily Sales: Annual credit sales ÷ Days’ Year P4 million ÷ 360 days = P11,111 Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales [(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days x

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Answer: A Sales Add decrease in Accounts Receivable Cash collected from sales

P30,000 1,000 P31,000

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Answer: B Inventory Turnover: Cost of G...