FINANCIAL

STATEMENT
ANALYSIS
1. The percent of property, plant and equipment to total
assets is an example of:
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis

A
2. Vertical analysis is a technique that expresses each item
in a financial statement
A. in pesos and centavos.
B. as a percent of the item in the previous year.
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.

C
3. In performing a vertical analysis, the base for prepaid
expenses is
A. total current assets. C. total liabilities.
B. total assets. D. prepaid expenses in a
previous year.

B
4. Horizontal analysis is also known as
A. linear analysis. C. trend analysis.
B. vertical analysis. D. common size analysis.

C
5. Horizontal analysis is a technique for evaluating a series
of financial statement data over a period of time
A. that has been arranged from the highest number to the
lowest number.
B. that has been arranged from the lowest number to the
highest number.
C. to determine which items are in error.
D. to determine the amount and/or percentage increase or
decrease that has taken place.

D
6. Trend analysis allows a firm to compare its
performance to:
A. other firms in the industry C. other industries
B. other time periods within the firm D. none of
the above

B
7. The ability of a business to pay its debts as they come
due and to earn a reasonable amount of income is referred to
as:
A. solvency and leverage C.solvency and liquidity
B. solvency and profitability D.solvency and equity

B
8. The current ratio is

A. calculated by dividing current liabilities by current assets.

B. used to evaluate a company’s liquidity and short-term
debt paying ability.
C. used to evaluate a company’s solvency and long-term
debt paying ability.
D. calculated by subtracting current liabilities from current
assets.

B
9. The debt ratio indicates:

A. a comparison of liabilities with total assets

B. the ability of the firm to pay its current obligations
C. the efficiency of the use of total assets
D. the magnification of earnings caused by leverage

A
10. A times interest earned ratio of 0.90 to 1 means that

A. the firm will default on its interest payment

B. net income is less than the interest expense
C. the cash flow is less than the net income
D. the cash flow exceeds the net income

B
 1. 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

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.
Question Nos. 2 through 4 are based on the data taken from the balance sheet of
Nomad Company at the end of the current year:

Accounts payable P145,000 Cash 80,000

Accounts receivable 110,000 Income tax payable 10,000
Accrued liabilities 4,000 Inventory 140,000
Marketable securities 250,000 Notes payable, short-term 85,000
Prepaid expenses 15,000

The amount of working capital for the company is:

A. P351,000 C. P211,000
B. P361,000 D. P336,000

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

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

Answers: 2. A 3. B 4. A
5. 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

A. 3.75 times C. 5.00 times
B. 4.35 times D. 5.80 times

Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts
Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
6. 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
B. 65 days D. 36 days

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
7. 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?

A. P31,000 C. P34,000
B. P35,000 D. P25,000

Answer: A
Sales P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales P31,000
8. 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
B. 3.85 times D. 3.57 times

Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times
9. Jordan Manufacturing reports the following capital structure:
Current liabilities P100,000
Preferred stock 80,000
Long-term debt 400,000
Common stock 100,000
Deferred income taxes 10,000
Premium on common stock 180,000
Retained earnings 170,000

What is the debt ratio?

A. 0.48 C. 0.93
B. 0.49 D. 0.96
.
Answer: B

Current liabilities P 100,000

Long-term debt 400,000
Deferred income tax 10,000
Total Liabilities 510,000
Stockholders’ Equity
Preferred stock P 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000 530,000
Total Assets P1,040,000

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

10. House of Fashion Company had the following financial statistics for 2006:

Long-term debt (average rate of interest is 8%) P400,000

Interest expense 35,000
Net income 48,000
Income tax 46,000
Operating income 107,000

What is the times interest earned for 2006?

A. 11.4 times C. 3.1 times
B. 3.3 times D. 3.7 times

Answer: D
Times interest earned: Earnings before interest ÷ Interest
Income before tax (P48,000 + P46,000) P 94,000
Add Interest expense 35,000
Income before Interest expense P129,000

TIE: P129,000 ÷ P35,000 3.7 times

11. 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

Answer: B
Earnings before interest expense (P20,000 x 4.5) P90,000
Deduct interest expense 20,000
Income before income tax P70,000
Deduct income tax (P70,000 x 0.4) 28,000
Net income P42,000
12. 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
B. P30.00 D. P105.00

Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M ÷ 100,000) P105
13. 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

Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
14. 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

Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
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.

15. Terry Corporation’s price-earnings ratio is

A. 3.8 times C. 18.8 times
B. 15 times D. 6 times

16. Terry Corporation’s payout ratio for 2007 is

A. P4 per share C. 20.0 percent
B. 12.5 percent D. 25.0 percent

Answer: B
Price-earnings ratio: Market price ÷ EPS
EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
P/E Ratio: P60 ÷ P415.0X

Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
17. A summarized income statement for Leveraged Inc. is presented below.
Sales P1,000,000
Cost of Sales 600,000
Gross Profit P 400,000
Operating Expenses 250,000
Operating Income P 150,000
Interest Expense 30,000
Earnings Before Tax P 120,000
Income Tax 40,000
Net Income P 80,000

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

Answer: B
Degree of Financial Leverage: Operating Income ÷ Interest Expense