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Which of the following statements is CORRECT?
A. The balance sheet gives us a picture of the firm’s financial position at a point in time. B. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity. C. The income statement gives us a picture of the firm’s financial position at a point in time. D. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
Which one of the following accounts is the most liquid?
A. accounts receivable B. inventory C. prepaid expenses D. equipment
Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? A. The company issues new common stock. B. The company pays a dividend. C. The company gives customers more time to pay their bills. D. The company purchases a new piece of equipment.
It is the difference between the issue or selling price and the par value of the shares. A. Share premium B. Capital stock C. Ordinary shares D. Preference shares
All else being equal, which of the following will increase a company’s current ratio? A. An increase in accounts receivable. B. An increase in accounts payable. C. An increase in net fixed assets. D. All of the statements are correct.
Topstar Hotels and Lakewood Hotels both have P100 million in total assets and a 10 percent return on assets (ROA). Each company has a 40 percent tax rate. Topstar, however, has a higher debt ratio and higher interest expense. Which of the following statements is most correct? A. Topstar has a higher return on equity (ROE). B. The two companies have the same equity. C. Topstar has a lower level of operating income (EBIT). D. All of the statements are correct. As a short-term creditor concerned with a company’s ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Mark only one oval. A. Current ratio (1.5); TIE (1.5); Debt ratio (0.50) B. Current ratio (0.5); TIE (0.5); Debt ratio (0.33) C. Current ratio (1.0); TIE (1.0); Debt ratio (0.50) D. Current ratio (2.0); TIE (1.0); Debt ratio (0.67) E. Current ratio (2.5); TIE (0.5); Debt ratio (0.71)
You are an analyst following two companies, Red Company and Blue Company. You have collected the following information: The two companies have the same total assets. Red Company has a higher total assets turnover than Blue Company. Red Company has a higher profit margin than Blue Company. Blue Company has a higher inventory turnover ratio than Red Company. Blue Company has a higher current ratio than Red Company. Which of the following statements is most correct? A. Red Company must have a higher net income. B. Red Company must have a higher ROE. C. Blue Company must have a higher ROA. D. All of the statements are correct.
Retained earnings on the balance sheet represents
A. the cumulative total of earnings reinvested in the firm. B. net profits after taxes. C. cash. D. net profits after taxes minus preferred dividends.
In the near term, the important ratios that provide the information critical to the short-run operation of the firm are A. liquidity ratios, activity ratios, and profitability ratios. B. liquidity ratios, activity ratios, and common stock ratios. C. liquidity ratios, activity ratios, and debt ratios. D. activity ratios, debt ratios, and profitability ratios.
This is useful in evaluating credit and collection policies.
A. days sales outstanding B. days payable outstanding C. banker's ratio D. days inventory outstanding
The _________ is a measure of liquidity which excludes _________, generally the least liquid asset. A. quick ratio; inventory B. current ratio; accounts receivable C. quick ratio; accounts receivable D. current ratio; inventory
They are especially interested in the days payable outstanding, since it provides them with a sense of the bill paying patterns of the firm. A. Lenders and other creditors B. Customers C. Stockholders D. Borrowers and buyers
If the inventory turnover is divided into 360, it becomes a measure of
A. the average age of the inventory. B. sales efficiency. C. sales turnover. D. the average collection period.
It measures the proportion of total assets financed or provided by the firm’s creditors. A. debt ratio B. total asset turnover C. fixed asset turnover D. current ratio
The higher the value of _________ , the better able the firm is to fulfill its interest obligations. A. times interest earned B. debt ratio C. average collection period D. average payment period
Financial statement analysis involves the evaluation of an entity’s past performance, present condition, and business potentials by way of analyzing the financial statements to obtain information about the following, except: A. All of the statements, no exception B. Profitability of the business firm C. Ability to meet company obligations D. Safety of investment in the business E. Effectiveness of management
A disadvantage of horizontal analysis is that
A. if the base year amounted to zero, percentage change is impossible to analyze. B. if the second year amounted to zero, percentage change is impossible to analyze. C. if the percentage change amounted to zero, the situation is impossible to analyze. D. if the change in peso amounted to zero, the amount of change is impossible to analyze.
Which of the following is not a limitation of financial statement analysis?
A. Sufficiency of information. B. Analysts need to look beyond ratios. C. Valuation problem/ differences in accounting methods and estimates. D. Management influence in the preparation of financial statements.
This analysis brings together the net profit margin, which measures the firm’s profitability on sales, with its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales. A. DuPont system of analysis B. Ratio analysis C. Financial statement analysis D. Profitability analysis
It measures the amount of net income earned by each common share.
A. Earnings per share B. Price-earnings ratio C. Dividends payout ratio D. Dividends Yield
Sacrament Inc. has never paid a dividend to its common stockholders since it has been incorporation three years ago. Which of the following statements is CORRECT?
A. Cumulative preference shareholders will receive dividends pertaining to past three years dividends plus this year's dividends if the company decides to declare dividends this year. B. Non-cumulative preference shareholders will not receive dividends this year if the company decides to declare dividends this year. C. Participating preference shareholders will receive only the preference dividends pertaining to this year if the company decides to declare dividends this year. D. All of the statements are true.
If the firm's plowback ratio is greater than the dividends payout ratio, then the profit reinvested in the company's operation is higher than the profits distributed to the owners. A. True B. False
All other things are constant, which of the following will cause the debt ratio to increase? A. Acquisition of fixed assets through issuance of bonds B. Collection of accounts receivable C. Sale of inventories on account D. Issuance of ordinary shares
All other things are constant, which of the following will cause the price earnings ratio to decrease? A. Increase in the net income of the company B. Increase in the number of shares issued C. Increase in the market value of the stocks D. Increase in number of stocks available in the market
Problem: Axie Trading
You are requested to reconstruct the accounts of Axie Trading for analysis. The following data were made available to you:
Gross margin for 2021: P700,000
Gross margin ratio: 40% Times interest earned: 7x Quick ratio, 1.3:1 Ratio of operating expenses to sales: 28% Long-term liabilities consisted only of bonds payable with interest expense rate of 15%
The condensed balance sheet as of December 31, 2021 of #PostponedCPALE Company is given below. Figures shown by a question mark (?) may be computed from the additional information given:
Accounts payable, P(?) 160,000 Current notes payable, P80,000 Long-term payable, P(?) Common stock, P280,000 Retained earnings, P(?) 120,000 Total Liabilities & SHE, P960,000
Additional information: a. Current ratio (as of Dec. 31, 2021): 1.9 to 1 b. Ratio of total liabilities to total stockholders’ equity: 1.4 to 1 c. Sales amounted to 3 million pesos. d. Inventory turnover based on cost of goods sold and ending inventory: 10 times e. Gross margin for 2021: P500,000
Cash 120,000 Trade receivable 86,000 Inventory 250,000 Current Assets 456,000
Current Liability = CA / CR = 456,000 / 1.9 = 240,000
Current liabilities 240,000
Current notes payable (80,000) Accounts payable 160,000 D.E ratio = 1.4 E.R = 1 / 2.4 = 0.4167 or 41.67% D.R = 58.33% E.M = 1 / 0.4147 = 2.4
Total Equity and Liabilities 960,000
Equity ratio x 41.67% Total Equity 400,000
Common stock 280,000
Retained earning 120,000 squeeze Equity 400,000
Problem: Artwork Company
Selected data from the year-end financial statements of Artwork Corp. are presented below. The difference between average and ending inventories is immaterial.
Current ratio: 2.0
Quick ratio: 1.5 Current liabilities: P300,000 Inventory turnover (based on cost of sales): 8 times Gross profit margin: 40%
Current ratio - Quick ratio = 2.0 - 1.5 = 0.5
Inventory 300,000 x 0.5 150,000
CGS = Inventory turnover x Inventory
= 8 x 150,000 = 1,200,000
Net sales 2,000,000 100%
CGS 1,200,000 60% Gross profit 800,000 40%
Problem: November and December
December Company has a new management team that has developed an operating plan to improve upon last year’s ROE. The new plan would place the debt ratio at 75 percent, which will result in interest charges of P20,000 per year. EBIT is projected to be P220,000 on sales of P3,000,000, it expects to have a total assets turnover ratio of 1.5, and the average tax rate will be 25 percent. What does December Company expect its return on equity to be following the changes? (answer must be in percentage without decimal, ex. 90%)
Debt ratio 75%
Equity ratio 25% Interest Expense 20,000 EBIT 220,000 Sales 3,000,000 ATO 1.5x Tax rate 25% ROE ??
EBIT 220,000 Interest expense (20,000) EBT 200,000 Tax rate 25% Net Income 150,000
November Office Supply had P6,000,000 in sales last year. The company’s net income was P100,000, its total assets turnover was 6.0, and the company’s ROE was 16 percent. The company is financed entirely with debt and common equity. What is the company’s debt ratio? (answer must be in percentage with one decimal place, ex. 18.3%)
Sales 6,000,000 Net Income 100,000 Total AssetsTurnover 6.0 ROE 16% Debt Ratio ??
