ACCT 2A&B: Accounting for Partnership & Corporation

BCSV

ACCTG 2A&B: Accounting for Partnership & Corporation II

Financial Reporting & Analysis

A. THEORIES
Multiple Choice.
Choose the letter of the best answer.

1. Which of the following statements regarding financial analysis is TRUE?

A. Financial analysis will show how a company is guaranteed to perform in the future.
B. Financial analysis should not be relied upon as an indicator of future performance.
C. Financial analysis should be performed only by managers and creditors.
D. Financial analysis provides supplemental information not provided directly by the
financial statements.

2. 3A4, Inc. is a retailer with annual sales of more than P 500,000. At the end of 2013, ratio
analysis is performed on 3A4’s financial statements by various stakeholders. 3A4’s 2013
ratios are not likely to be compared to:
A. 3A4’s 2012 ratios
B. A manufacturer with annual sales of more than P 500,000
C. Other retailers with annual sales of more than P 500,000
D. 3A4’s 2013 budgeted ratios

3. Analyzing financial statement account balances over time for the same company is called:
A. Vertical analysis
B. Horizontal analysis
C. Common size analysis
D. Ratio variance analysis

4. To perform vertical analysis

A. Items on the balance sheet need to be restated to their fair market values
B. Items on the balance sheet need to be indexed for inflation
C. Common-size financial statements need to be prepared
D. Horizontal analysis should have been done already

5. In the near term, the important ratios that provide the information critical to the short-run
operation of the firm are
A. Liquidity, activity, and profitability
B. Liquidity, activity, and debt
C. Liquidity, activity, and equity
D. Activity, profitability, and debt

6. Which of the following is a measure of the liquidity position of a corporation?

A. Earnings per share (EPS)
B. Inventory turnover
C. Current ratio
D. Times interest earned ratio

7. The acid-test or quick ratio

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A. Is used to quickly determine a company’s solvency and long term debt paying ability
B. Relates cash, short-term investments, and net receivables to current liabilities
C. Is calculated by taking one item from the income statement and one item from the
balance sheet
D. Is the same as the current ratio except it is rounded to the nearest whole percent.

8. Which of the following does not bear on the quality of receivables?

A. Shortening the credit terms
B. Lengthening the credit terms
C. Lengthening the outstanding period
D. All of the foregoing

9. A general rule to use in assessing the average collection period is

A. That it should not exceed 30 days
B. It can be any length as long as the customer continues to buy merchandise
C. That it should not greatly exceed the discount period
D. That it should not greatly exceed the credit term period

10. Which one of the following ratios would not likely to be used by a short-term creditor in
evaluating whether to sell on credit to a company?
A. Current ratio
B. Acid-test ratio
C. Asset turnover
D. Receivable turnover

11. Solvency measures a company’s ability

A. To meet long-term obligations as they fall due
B. To meet short-term obligations as they fall due
C. To make a profit in the short-run
D. To make a profit in the long-run

12. The statement of cash flows

A. Reports the revenues earned and expenses incurred by the firm during the period.
B. Shows the company’s total assets, breaking down into current and non-current assets.
C. Shows the company’s capital structure for a period of time.
D. Reports the net changes in cash of the firm during the period.

13. In cash flow analysis, the cash flows from operating activities
A. Are the cash effects of transactions that create revenues and expenses.
B. Generally relate to changes in non-current assets
C. Generally relate to changes in long-term liabilities and stockholders’ equity accounts
D. Are irrelevant.

14. When a balance sheet amount is related to an income statement amount in computing a
ratio
A. The income statement account should be converted to an average for the year.
B. Comparison with industry ratios is not meaningful.
C. The ratio loses its historical perspective because a beginning of the year amount.
D. The balance sheet amount should be converted to an average for the year.

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15. In 2011, Shaina Corp.’s profit was P 800,000 and in 2012 it was P 200,000. What percentage
increase in profit must Shaina achieve in 2013 to offset the 2012 decline in profit?
A. 60%
B. 600%
C. 400%
D. 300%

16. A major problem in comparing profitability measures among companies is the

A. Lack of general agreement over which profitability
B. Differences in the size of the companies
C. Differences in the accounting methods used by the companies
D. Differences in the dividend policies of the companies

17. Through financial statements analysis, interested parties – managers, investors, and
creditors – can identify the company’s financial strengths and weaknesses and know about
the following, except
A. Profitability of the firm
B. The firm’s ability to meet its obligations
C. Safety of the investment in the firm
D. Composition of management running the firm

18. Which ratio is most helpful in appraising the liquidity of current assets?
A. Current ratio
B. Debt ratio
C. Quick ratio
D. Receivable turnover

19. Which of the following statements would be the best interpretation of a company’s low
debt-to-equity ratio?
A. The company chooses to pay cash for most of its major purchases.
B. The company is not liquid
C. The company prefers to pay stockholders high dividends out of their retained earnings.
D. The company prefers to raise funds by issuing capital stock than long-term borrowing.

20. A firm with a lower net profit margin can improve its return on assets by
A. Increasing its debt ratio
B. Decreasing its fixed assets turnover
C. Increasing its total asset turnover
D. Decreasing its total asset turnover

B. PROBLEMS

PROBLEM 1:
CVP Co.’s accountant is preparing the company’s statement of cash flows for 2013. Selected
information that may be helpful in the preparation of the statement is as follows:

12/31/13 12/31/12
Cash P 53,760 ?
Accounts receivable 62,000 48,800

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Inventories 66,720 69,360

Accounts payable 41,680 40,080

From the 2013 income statement:

Sales P 526,640
Operating expenses (464,000)
Income before tax P 62,640
Income tax (28,240)
Profit P 34,400

Other information:
 Included in the operating expenses are:
 Loss of P 1,920 resulting from the sale of a machine for P 21,600 cash.
 Depreciation of P 70,400
 The company purchased equipment for P 60,000 cash during the year.
 The income tax shown on the income statement was paid in full during the year.
 During the year, the company declared and paid dividends of P 16,000

Questions:
1. If the indirect method is used, how much cash was provided (taken) by
operating activities?
2. How much is the net cash flows from investing activities?
3. How much is the net cash flows from financing activities?
4. What is the 12/31/12 cash balance?

PROBLEM 2:
Consider the following data about Chienna Co.:

Current ratio 3.5:1

Acid-test ratio 3.0:1
Current liabilities, P 150,000
12/31
Inventory, 1/1 P 125,000
Inventory turnover 8.0x

Questions:
5. What is the balance of the company’s inventory account at the end of the year?
6. How much is the company’s cost of sales during the year?

PROBLEM 3:
Given are the profitability ratios of Kathryn Co. for the year ended December 31, 2012:
 Return on Sales 5%
 Return on Asset 10%
 Return on Equity 25%

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The Total Assets of the company amounted to P 60,000,000. The average tax rate is 40%
and the interest rate is 5%. There is no current liability maintained by Kathryn.

Questions:
7. What is the Equity Ratio of Kathryn Co.?
8. What is the Debt-to-Equity Ratio of Kathryn Co.?
9. What is the equity multiplier of Kathryn Co.?
10. What is the Asset Turnover ratio of Kathryn Co.?
11. What is the Times Interest Earned Ratio of Kathryn Co.?

PROBLEM 4:
Equity multiplier – 1.25
Total liabilities – P 165,060

Given the limited information for Boy Golden Co. determine the following
12. Debt-to-equity ratio.
13. Total assets.

PROBLEM 5:
The following ratios were computed from CARBS Co.’s financial statements for 2013:
Return on asset – 24%
Times interest earned ratio – 6.7
Asset turnover – 1.6x

Question:
14. What was the co.’s profit margin ratio?

PROBLEM 6:
The current assets of Joy enterprises consists of cash, accounts receivable, and inventory.
The following information is available:
Credit sales – 75% of total sales
Inventory turnover – 5x
Working capital – P 1,120,000
Gross margin – 30% (based on cost)
Current ratio – 2.0:1
Days sales outstanding – 45 days
Acid-test ratio – 1.25:1
Working days – 360 days

Questions:
15. What is the balance of the inventory?
16. How much sales was generated during the year?
17. What is the balance of accounts receivables?
18. How much cash does the enterprise have?

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PROBLEM 7:
Selected data from Nyx Co.’s yearend financial statements are presented below. The
difference between average and ending inventory is immaterial.

Current ratio – 2.0:1

Inventory turnover – 8x
Quick ratio – 1.5:1
Current liabilities – P 120,000
Gross margin rate – 40%

Question:
19. How much sales was generated during the year?

PROBLEM 8:
You are given the following relationships for the Chienna Co.:

Sales-to-assets ratio – 1.5

Return on assets – 3%
Return on equity – 5%

Question:
20. What is the co.’s debt ratio?

PROBLEM 9:
The following were reflected from the records of OD Co.

Earnings before interests and taxes – P 1,250,000

Interest expense – P 250,000
Preferred dividends- P 200,000
Payout ratio – 40%
Shares outstanding throughout 2012:
Common – 25,000
Preferred – 20,000
Income tax rate – 40%
Price earnings ratio – 5x

Questions:
21. How much is the market price per common share?
22. What is the dividend yield ratio?

PROBLEM 10:
The balance sheet and income statement data for Brittie Factory indicate the following:
Bonds payable, 10% per annum (issued 2000 due 2016) - P 1,000,000
Preferred 5% stock, P 100 par – P 300,000
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Common stock, P50 par – P 2,000,000

Income before income tax for the year – P 350,000
Income tax expense – P 80,000
Preferred dividends – P 15,000

Questions:
23. How many times interest charges were earned?
24. What is the rate of return on common equity?
25. How much is the earnings per share (EPS)?
26. What is the payout ratio?
27. What is the retention ratio?

PROBLEM 11:
During 2013, the Pattian Co. purchased P 960,000 goods. Cost of sales for 2013 was P
900,000 and the ending inventory is150% of the beginning inventory.

Question:
28. What was the inventory turnover for 2013?

PROBLEM 12:
Chienna Company has information pertaining to its total assets. However, only Cash and
Equipment has a determined amount of P 80,000.00 and P 750,000.00 respectively, other
assets were Account Receivables and Inventories. More so, the company has net sales
amounting to P800,000.00. If Operating profit margin (OPM) was 8%, Gross profit rate
(GPR) based on cost was 25%, Current ratio was 4:1,Turnovers based on year end balances
were 5 times and 4 times for Accounts Receivable and Inventory respectively.

Questions:
29. What is the ending balance of Accounts Receivable of Chienna Company?
30. What is the ending balance of Inventories of Chienna Company?
31. How much is the Total Liability and Equity of Chienna Company?
32. How much is the Operating Expense of Chienna Company?
33. What is the ending balance of Total Current Liabilities of Chienna Company?

PROBLEM 13:
Selected data from Pretty Pattie Co.’s 2012 statements are presented below. Turnover is
based on year end balances. Current Assets are comprised mainly of cash, receivables and
inventories.
 Current ratio 4.0
 Acid Test Ratio 3.0
 Current Liabilities P 600,000
 Return on Assets 10 %
 Gross Profit Margin 40 %
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 Net Income Margin 18 %

 Inventory Turnover (based on sales) 7.5 times

Questions:
34. What is Pretty Pattie Co.’s Cost of Sales for the year 2012?
35. What is Pretty Pattie Co.’s Net Income for the year 2012?
36. What is Pretty Pattie Co.’s balance of Non- Current Assets as of 2012?
37. What is Pretty Pattie Co.’s Inventory turnover if it is based on Cost of Sales?

PROBLEM 14:
SCI, Inc. has a total asset turnover of 0.3 and a profit margin of 10%. The president is
unhappy with the current return on assets, and he thinks it could be doubled. This could be
accomplished by (1) by increasing the profit margin to 15% and (2) by increasing the total
assets turnover.

38. What new asset turnover is required to double the return on assets?

PROBLEM 15:
It is the policy of NYX Corporation that the current ratio cannot fall below 1.5 to 1. Its
current liabilities are P 400,000 and the present current ratio is 2.0 to 1.

39. How much is the maximum level of new short-term loans it can secure without
violating the policy?

PROBLEM 16:
You are requested to reconstruct the accounts of Patrianne Supplies for analysis. The
following data were made available to you.

Gross margin for 2013 amounted to P 472,500. Ending balance of inventory was P 300,000.
Long-term liabilities consisted of bonds payable with interest rate of 20%. Total
shareholders’ equity as of December 31, 2013 was P 750,000. Gross margin ratio is 35%.
Debt-to-equity ratio is 0.8:1. Times interest earned is 10. Quick ratio is 1.3:1. Operating
expense ratio is 18%.

40. What is the operating profit for 2013?

41. How much was the bonds payable?
42. Total current liabilities would amount to?
43. Total current assets would amount to?

PROBLEM 17:
1. Sales amounted to P 900,000 (all on account) and operating profit amounted to P
151,350
2. Receivable turnover is 12.0.
3. Interest and tax rate is 16% and 50%, respectively.

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4. Debt ratio is 65% and total equity amounts to P 145,162.50.

5. Gross margin rate is 60% (based on cost)
6. Current and acid test ratio is 1.25 and 0.75, respectively; the net working capital is P
47,984.
7. The only component of non- current liabilities is bonds payable.

From the given information above, determine the following:

44. Net income for the year.
45. Debt-to-Equity ratio.
46. Cash balance.
47. Non - current asset.
48. Non-Current liabilities.
49. Return on Asset.
50. Return on Equity.
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“Don’t give up what you want most, for what you want now.”

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ACCT 2A&B: Accounting for Partnership & Corporation
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SUGGESTED KEY ANSWERS

THEORIES PROBLEMS
1. D 1. P 97,760 26. 20%
2. B 2. P (38,400) 27. 80%
3. B 3. P (16,000) 28. 6.0
4. C 4. P 10,400 29. P 160,000
5. A 5. P 75,000 30. P 160,000
6. C 6. P 800,000 31. P 1,150,000
7. B 7. 40% 32. P 96,000
8. D 8. 150% 33. P 100,000
9. D 9. 2.5 34. P 2,700,000
10. C 10. 2.0 35. P 810,000
11. A 11. 6.56 36. P 5,700,000
12. D 12. 25% 37. 4.5
13. A 13. P 825,300 38. 0.4
14. D 14. 15% 39. P 400,000
15. D 15. P 840,000 40. P 229,500
16. C 16. P 5,460,000 41. P 114,750
17. D 17. P 511,875 42. P 485,250
18. D 18. P 888,125 43. P 930,825
19. D 19. P 800,000 44. P 69,462.88
20. C 20. 40% 45. 1.86
21. P 80/share 46. P 68,952
22. 0.08 47. P 174,830
23. 4.5x 48. 77,651.50
24. 12.75% 49. 16.75%
25. P 6.38 50. 47.85%

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