STRAIGHT PROBLEMS

1. FINANCING RATIOS. Yolanda Corporation and Pablo Company disclose the following data
on their balance sheet (in thousands):

Yolanda Corp. Pablo Corp.

Debt, 10% P 250,000 P 500,000
Shareholders equity 500,000 250,000
Total equity P 750,000 P 750,000
Earnings before interest and taxes P 375,000 P 375,000
Interest expense 25,000 50,000

Required:

a. For each company, compute the following

Ratios Formula Yolanda Corp. Pablo Corp.
a. Debt rate Total Debt/Total Assets 33% 67%
b. Debt-equity ratio Debt/SHE 0.50:1 2:1
c. Equity multiplier Total Equity/SHE 1.50x 3x
d. Times interest earned EBIT/Interest expense 15.00 7.50

b. Comment on the data you have computed.

2. INVESTING RATIOS. Char Corp. and Maine Co. revealed the following information on
their published financial statements for the 2013 business operations (in thousands):

Char Maine

Current assets P640,000 P225,000

Investments 56,000 500,000
Property, plant, and equipment 56,000 50,000
Intangibles 32,000 15,000
Other assets 16,000 10,000
Total assets P800,000 P800,000

Required : For each company, determine the ratio component of each asset over the total assets.
Comment on the data you computed

Char Maine
Current Assets 80% 28%
Investments 7 63
Property, Plant and Equipment 7 6
Intangibles 4 2
Other Assets 2 1
Total Assets 100% 100%
3. HORIZONTAL AND VERTICAL ANALYSIS. The financial position of Primus Company
at the end of 2012 and 2013 is as follows (pesos in thousands):

2013 2012

Assets
Cash and cash equivalents P3,000 P5,000
Trade and other receivables 40,000 25,000
Inventory 27,000 30,000
Investment property 15,000 0
Property plant, and equipment (net) 100,000 75,000
Intangible assets 10,000 10,000
Other noncurrent assets 5,000 20,000
Total assets P200,000 P165,000

Liabilities
Current liabilities P30,000 P47,000
Long-term liabilities 88,000 74,000
Total liabilities 118,000 121,000

Shareholders Equity
8% Preference equity 10,000 9,000
Ordinary equity 54,000 42,000
Share premium 5,000 5,000
Retained earnings 13,000 (12,000)
Total shareholders equity 82,000 44,000
Total liabilities and shareholders equity P200,000 P165,000

Sales and cost of goods sold insignificantly change in 2013 in relation with 2012.

Required:

1. Prepare a comparative balance sheet showing peso and percentage changes for 2013 as
compared with 2012.
2. Prepare a common-size balance sheet as of December 31, 2013 and 2012.
3. Based on your data derived in requirements 1 and 2, comment on the financial position of W
Company as of December 31, 2013.

4. COMPARATIVE AND COMMON-SIZE ANALYSIS. The operating activities of Franco

Company for the year ended December 31, 2013 and 2012 are summarized below:
(in thousands)
2012 2013
Sales P440,000 P480,000
Cost of Goods Sold (242,000) (360,000)
Selling and General Expenses (118,800) (96,000)
Interest expense (30,800) (33,600)
Profit (loss) before income tax 48,400 (9,600)
Income tax (refund) 19,360 (3,840)
Profit (loss) P29,040 P(3,760)

Required:
a. Prepare a horizontally analyzed Statement of Profit or Loss for 2013 and 2012.
b. Prepare a common-size Statement of Profit or Loss in 2013 and 2012.
c. Based on the above percentages, comment on the Ma. Co.s results of operations for
2013.

5. TREND RATIOS. G Corporations sales, current assets, and current liabilities have been
reported as follows over the last five years (amount in thousands):

2013 2012 2011 2010 2009

Sales P10,800 P 9,600 P 9,200 P 8,640 P 8,000
Current assets 2,626 2,181 2,220 2,267 2,225
Current liabilities 475 450 350 325 250

Required: Express all the sales, current assets, and current liabilities on trend index. Round your
decimals up to 2 places.
a. Use 2009 as the base year.
b. Use 2013 as the base year.

6. PROFITABILITY RATIOS. The following data were taken from the records of F Company
and T company (amounts in thousands and balance sheet data are on average)

F Co. T Co.
Sales P 80,000 P 10,000
Profit (loss) 3,050 640
Interest expense 50 40
Total assets 12,000 2,000
Ordinary shareholders equity 6,000 500
Preference dividends, cumulative 200 200
No. of ordinary shares outstanding 600 50
Tax rate 40% 40%

Required: Determine the following for F Company and T Company.

7. BASIC PROFITABILITY RATIOS. Find the missing data (amount in millions).

a b c
Net income P50 ? ?
Net sales P1,000 4,000 ?
Total Assets P400 ? P3,000
Shareholders equity P150 ? ?
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000
Profit margin ? 20% ?
Asset turnover ? 0.2 ?
ROA ? ? 12%
ROE ? 10% 10%
EPS ? ? ?

8. BASIC PROFITABILITY RATIOS. Find the missing data.

a b c
Profit margin 10% 12% 10%
Asset turnover 4 5 ?
Equity multiplier 1.25 ? ?
ROE ? ? 20%
Debt ratio ? 40% 25%
Hint: EM = 1/ER

9. BASIC GROWTH RATIOS. Consider the following data for the year ended December 31,
2012:
R Co. J Co.
Earnings per share P 50 P 200
Market price per ordinary share 150 500
Dividend per ordinary share 40 120
Dividend per preference share 10 20
Total shareholders equity Pl0 million P60 million
Ordinary shares outstanding 1 million 4 million
Preference shares outstanding 500,000 2 million, cumulative
Peference shares liquidation value P1.30 per share P1.30 per share

10. BASIC GROWTH RATIOS.2. Find the missing data.

a b c
P/O rate 96%? 40% 75% ?
P/E rate 8 50% ? 40%
Yield rate 12% 80% 187.5% ?
Retention rate 4% ? 60% ? 25%
Hint: P/O rate = P/E Rate x yield Rate

11. BASIC LIQUIDITY RATIOS. You are asked by the Chief Financial Officer of D
Corporation to analyze its liquidity position in 2012. You have gathered the following data from
the records of the company and industry published reports (in thousands):
 D Corp Industry Average
Average cash P3,500 P2,000
Average trade receivables 8,000 10,000
Average inventory. 6,500 7,000
Average trade payables 14,000 12,000
Net credit sales 200,000 150,000
Net sales 250,000 210,000
Cost of sales 130,000 112,000
Net credit purchases 140,000 96,000
Net purchases 180,000 120,000
Daily cash operating expenses 30,000 42,000

The company uses a 360-day a year base. The credit terms offered to customers are 2/10, n/40.
Suppliers give credit terms of 3/20, n/40.

Required:

a. For D Corporation and the industry, compute the following (days are rounded):

Formulas D Corp. Industry Average

1. Receivables turnover NCS/AR 25 15
2. Collection period 360/RT 15 24
3. Inventory Turnover CGS/Invty 20 16
4. Days to sell inventory 360/IT
5. Payables turnover NCP/AP
6. Payment period 360/PT
7. Operating cycle CP+ID
8. Net cash cycle OC-PP
9. Net working capital CA-CL
10. Working capital turnover NS/NWC
11. Current ratio CA/CL
12. Quick-assets ratio QA/CL
13. Defensive interval ratio Quick Assets/Daily
cash operating
expenses

b. Comment on the ratios computed

12. EFFECTS OF LEVERAGE ON RETURN ON ORDINARY EQUITY. You are in the

process of organizing a new company to produce and sell a lady beauty product. You feel that P5
million would be enough to finance the new companys operations. You are considering
following financing mix in raising the needed money for investment.
Straight ordinary equity : All the PS million would be raised by issuance of ordinary shares.

Shareholders equity mix: P3.5 million would be raised from ordinary shares issuances and P1.5
million from the sale of P100 pr, 10%, preference stock.

Leverage and equity mix: P3.0 million would be obtained from ordinary shares issuances and
P2.0 million from issuance of a 12% bonds payable.

You estimated that the operations would generate an earning of P2 million each year before
interest and taxes. The tax rate is 40%.

Required: Determine the best financing mix that would maximize return on ordinary equity.

MULTIPLE CHOICE QUESTIONS

BASIC CONCEPTS

1. Which of the following does not belong to the list?

A. Common-size financial statements.
B. Peso and percentage changes on financial statements.
C. Financial ratios.
D. Long-form report

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

3. 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

HORIZONTAL AND TREND ANALYSIS

4. In financial statement analysis, expressing all financial statement items as a percentage of base
year amounts is called

A. Horizontal common-size analysis

B. Vertical common-size analysis
C. Trend analysis
D. Ratio analysis

5. In 2011, MPX Corporations net income was P800,000 and in 2012 it was P200,000. What
percentage increase in net income must MPX achieve in 2013 to offset the 2012 decline in net
income?
A. 60% B. 600% C. 400% D. 300%

6. The following ordinary size income statement is available for S Corporation for the two years
ended December 31, 2013, and 2012
2013 2012
Sales 100% 100%
Cost of sales 55 70
Gross profit on sales 45 30
Operating expenses (including income tax expense) 20 18
Net income 25% 12%

The trend percentages for sales are as follows:

2012 130%
2011 100%
What should be the trend percentage for gross profit on sales for 2013?
A. 58.5 B. 130% C. 150% D. 195%

Questions 7 and 8 are based on the following information:

7. K Co. is preparing its ordinary-size financial statements and revealed the following
information:
(in thousands of pesos)
Accounts receivable 10,000
Inventory 20,000
Total current assets 35,000
Total assets 84,000
Bonds payable 21,000
Retained earnings 7,000
Sales revenue 75,000
Cost of goods sold 62,000
Income taxes expense 22,000

7. How would Ks inventory appear on a ordinary-size balance sheet?

A. 11.9 % B. 23.8% C. 57.15% D. 65.3 %

8. How would Ks retained earnings appear on a ordinary-size balance sheet?

A. 8.3% B. 9.4% C. 20.0% D. 33.3%

9. Index numbers would probably be most interested in which ratio?

A. Trend analysis. C. Vertical analysis.
B. Ratio analysis. D. Ordinary-size statements.

VERTICAL ANALYSIS
10. An income statement showing only component percentages is known as
A. Common pesos statement
B. Condensed income statement
C. Common-size income statement
D. Comparative income statement

11. In assessing the financial prospects for a firm, financial analysts use various techniques.
Which of the following is an example of vertical ordinary-size analysis?
A. an assessment of the relative stability of a firms level of vertical integration.
B. a comparison in financial ratio from between two or more firms in the same industry.
C. a statement that current advertising expense is 2% greater than in the prior year.
D. a statement that current advertising expense is 2% of sales.

12. Horizontal, vertical, and ordinary-size analyses are techniques that are used by analysts in
understanding the financial statements of companies. Which of the following is an example of
vertical, ordinary-size analysis?
A. Commission expense in 2013 is 10% greater than it was in 2012
B. A comparison in financial ratio from between two or more firms in the same industry
C. A comparison in financial form between two or more firms in different industries
D. Commission expense in 2013 is 5% of sales.

LEVERAGE RATIOS (FINANCING RATIOS)

questions 13 and 14 are based on the following data:
Gold Corporation
Selected Financial Data
For the Year ended December 31, 2013

Operating Income P900,000

Interest expense 100,000
Income before income tax 800,000
Income tax expense 320,000
Profit 480,000
Preference share dividends 200,000
Profit available to ordinary shareholders 280,000
Ordinary shares dividends 120,000
Increase in retained earnings 160,000

13. The times interest earned ratio is

A.2.8 to 1 B.4.8 to 1 C.8.0 to 1 D. 9.0 to 1

14. The times preference dividend earned ratio is

A. 1.4 to 1 B. 1.7 to C. 2.4 to 1 D. 4.0 to 1

QuestiOns 15 nd 16 are based on the following information. Selected data from financial
statements for the Years indicated ar prepared in thousands:

Year 2 Operations
Net Sales P4,175
Cost of goods sold 2,880
Interest expense 50
Income tax 120
Gain on disposal of a segment (net of tax) 950
Administrative expense 385

December 31
Year 2 Year 1
Cash P32 P 28
Trading securities 169 172
Accounts receivable (net) 210 204
Merchandise inventory 440 420
Tangible fixed assets 480 420
Current liabilities 370 268
Total liabilities 790 225
Ordinary shares outstanding 225 210
Retained earnings 361 380

15. The firms interest-earned ratio for M Corp. for year 2 is:
A. 0.57 times C. 3.50 times
B. 7.70 times D. 6.90 times

16. The total debt-to-equity ratio for M Corp in year 2 is

A. 3.49 B. 0.77 C. 2.07 D. 1.30

17. The following information pertains to AL Corporation as of and for the year ended Dec. 31,
2013?
Liabilities P 60,000
Shareholders equity P 500,000
Ordinary shares issued and outstanding 10,000 shares
Net income P 30,000

During 2013, AL officers exercised share options for 1,000 shares of share at an option price of
P8 per share. What was the effect of exercising the share option?
A. No ratios were affected
B. Assets turnover increased to 5.4%
C. Debt to equity ratio decreased to 12%
D. Earnings per share increased by P0.33

18. It refers to the practice of financing assets with borrowed capital. Its extensive use may
impact on return on ordinary shareholders equity to be above or below the rate or return on total
assets.
A. Discounting. C. Leverage.
B. Mortgage. D. Arbitrage.

19. When compared to a debt-to-asset ratio, a debt-to-equity ratio would

A. Be lower than the debt-to-asset ratio
B. Be higher than the debt-to-asset ratio
C. Be about the same a the debt-to-asset ratio
D. Have no relationship at all to the debt-to-asset ratio

20. If the ratio of total liabilities to shareholders equity increases, a ratio that must also increase
is
A. Time interest ratio
B. The current ratio
C. Total liabilities to total assets
D. Return on shareholders equity

21. A measure of the companys long-term debt paying ability is

A. Return on assets C. Dividend payout
B. Times interest earned D. Length of the operating cycle

22. The relationship of the total Debt to the total equity of a corporation is a measure of
A. Liquidity C. Creditor risk
B. Profitability Solvency

23. In the process of investing of surplus cash, the term riding the yield curve refers to
A. Diversifying securities portfolio so that the firm has an equal balance of long-term versus
short-term securities.
B. Swapping different maturities of similar quality Debt securities in order to obtain higher yield.
C. purchasing only the longest maturities for given rates of return.
D. Adherence to the liquidity preference theory of securities investment

24. The company issued new ordinary shares in a three-for-one share split. Identify the
statements that indicate the correct effect(s) of this transaction.
1. It reduces equity per share of ordinary share.
2. Share of each ordinary shareholder is reduced
3. The peso amount of capital share is increased.
4 Working capital and current ratio are increased.

A. Statements 1 and 4 only are correct

B. Statement 1 only is correct
C. All four statements are correct
D. Statements 3 and 4 only are correct

PROFITABILITY RATIOS
25. Which of these ratios are measures of a companys profitability:
1.Earnings per shares 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Return on sales 7. Receivable turn-over
4. Debt-equity ratio 8. price earnings ratio

A. All eight ratios

B. 1, 3, 5 and 8 only
C. 1,3,5,6,7 and 8 only
D. 1, 3 and S only

26. F Corporations books disclosed the following information as of & for the year ended Dec.
31, 2013:

Net Credit Sales P2,000,000

Net Cash Sales 500,000
Merchandise Purchases 1,000,000
Inventory At Beginning 600,000
Accounts Receivable At Beginning 200,000
Accounts Receivable At End 700,000
Profit 100,000
Fs percent of net income on sales is
A.4% C. 44%
B. 9% D. 56%

Questions 27 to 29 are based on the following information: Northern Division reported the
following results for 2013:
Annual sales P500,000
Net earnings 80,000
Investment 250,000

27. What is Northern Divisions return on sales?

A. 16% B. 20% C. 25% D. 32%

28. What is Northern Divisions asset turnover?

A.0.5 to 1 B. l to l C.2 to l D.3.125 to 1

29. What is Northern Divisions return on investment?

A. 10% B. 16% C. 24% D. 32%

30. J Goods, Inc. has a total asset turnover of 0.30 and a profit margin of 10 percent. The
president is unhappy with the current return on assets; and he thinks it could be doubled. This
could be accomplished (1) by increasing the profit margin to 15 percent and (2) by increasing the
total assets turnover. What new asset turnover ratio, along with the is percent profit margin, is
required to double the return on assets?
A. 35% B. 45% C. 40% D. 50%

31. JE & Co. has a Debt ratio of OSO, a total assets turnover of 0.25, and a profit margin of 10%.
The president is unhappy with the current return on equity, and he thinks it could be doubled.
This could be accomplished (1) by increasing the profit margin to 14% and (2) by increasing
debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14%
profit margin, is required to double the return on equity?
A. 0.75 B. 0.70 C. 0.65 D. 0.55

32. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to put a
financial report. You have found the return on equity to be 12% and the debt ratio was 0.40.
What was the return on assets?
A.5.35% B.8.4% C. 6.60% D. 7.20%

33. Selected information for M Corp is as follows:

December 31
2012 2013
Preference shares P180,000 P180,000
Ordinary shares 648,000 840,000
Retained earnings 192,000 360,000
Profit for year ended 144,000 240,000
What is Ms rate of return on average shareholders equity for 2013?
A. 16.0% B. 20.0% C. 23.5% D. 26.0%

34. Selected information for V Company is as follows:

December 31
2012 2013
Preference shares, 8%, par P100
nonconverte, non-cumulative P125,000 P125,000
Ordinary shares 300,000 400,000
Retained earningS 75,000 185,000
Dividends paid on Preference share for the year ended 10,000 10,000
Profit for the year then ended 50,000 120,000

Y Co.s return on ordinary shareholders equity, rounded to the nearest percentage point, for
2013 is
A. 8.3% B. 19% C. 23% D. 25%

Questions 35 to 38 are based on the following information:

The management of Q Corporation is preparing its plans for the year 2013. The average assets to
be employed for the year are estimated at P2,600,000 with 20% of this amount borrowed at no
interest cost. Materials and labor cost for the year is budgeted at p4,000,OO while operating
costs is estimated at p1,500,000 All sales are to be billed at 162.5% of materials and labor cost.
Income taxes is an average of 35% of income before income tax.

35. The estimated rate of return on sales for 2013 is

A. 10.00% B. 12.50% C. 14.29% D. 27.86%

36. The estimated rate of return on average total assets for 2013 is
A. 20.00% B. 25.00% C. 31.25% D. 40.50%

37. The expected asset turnover for 2013 is

A. 20.00% B. 25.00% C. 31.25% D. 40.50%

38. The rate of return on shareholders equity for 2013 is

A. 1.5 times C. 3.36 times
B. 2.5 times D. 3.75 times

39. If the return on total assets is 10% and if the return on ordinary shareholders equity is 12%
then
A. The after-tax cost of long-term debt is probably greater than 10%.
B. The after-tax cost of long-term debt is 12%.
C. Leverage is negative.
D. The after-tax cost of long-term debt is probably less than 10%.

40. Which of the following is an appropriate computation for return on investment?

A. Income divided by total assets
B. Income divided by sales
C. Sales divided by total assets
D. Sales divided by shareholders equity

41. Financial ratio, which assess the profitability of a company, include all of the following
except the
A. Dividend yield ratio C. Earnings per share ratio
B. Gross profit percentage D. Return on sales ratio

42. Which of the following statements is incorrect?

A. Profitability evaluation ratios have a higher power than solvency determination ratios
predicting for performance for both income and solvency.
B. Gross profit percentages do not vary a great deal among industries.
C. It is appropriate to compare a companys current financial ratio with same financial ratio for
(1) that company in prior years and/or (2) the ratio for the industry in which the company is
affiliated.
D. Companies which product costs present a high percentage of total costs could be expected to
have a low gross profit percentage.

43. This ratio of analytical measurement measures the productivity of assets regardless of capital
structures
A. Return on total assets. B. Current ratio
B. Quick ratio. D. Debt ratio

GROWTH RATIOS
44. At December 31, 2012, LM, Inc., had 100,000 shareS of PlO par value ordinary share issued
and outstanding. There was no change in the number of shares outstanding during 2013. Total
shareholders equity at December 31, 2013, P2,800,000. The net income for the year ended
December 31, 2013, was P800,000. During 2013 LM paid P3 per share in dividends on its
ordinary share. The quoted market value of LMs ordinary share was P48 per share on December
31, 2013. What was the price-earnings ratio on ordinary share for 2013?
A. 9.6 to 1 B. 8.0 to 1 C. 6.0 to 1 D. 3.5 to 1

45. Data pertaining to CA Corp.s ordinary share are presented for the fiscal year ending May 31,
2013:

Ordinary share outstanding P750,000

Stated value per share 15.00
Market price per share 45.00
2007 dividends paid per share 4.50
2008 dividends paid per share 7.50
Basic earnings per share 11.25
Diluted earnings per share 9.00

The price earnings ratio of ordinary share of CA Corp is:

A. 3.0 times. C. 6.0 times.
B. 7.0 times. D. 5.0 times.

46. Associated Co. paid out one-half of its 2012 earnings by dividends. Its earnings increased by
20% and the amounts of its dividends increased by 15% in 2013. Associated dividend payout
ratio for 2013 was
A. 51.5% B. 52.3% C. 75.00% D. 47.90%

47. Given a years end net income of P1.5 million and 50,000 ordinary shares outstanding
throughout the year with market price per share at years being P120, the price-earnings ratio is:
A. 2 times. B. 3 times. C. 4 times. D. 5 times.

48. The following data pertain to A Corporation for the calendar year 2013:

Net income 240000

Dividends paid on ordinary share 120,000
Ordinary share 0utstanding (unchanged during the year) 300,000 shares

The market price per share of As ordinary share at December 31, 2013 was P12.

The price- earnings ratio at December 31, 2013 was

A. 9.6 to 1 B. 10.0 to 1 C. 15.0 to 1 D. 30.0 to 1

Items 49 and 50 are based on the following data:

P Company was organized on January 2, 2013, with the following capital structure:
10% cumulative preference share, pare value P100 and liquidation value, P105;
authorized, issued and outstanding 1,000 shares P 100,000
Ordinary share, par value P25, authorized
100,000 sharea; issued and outstanding 10,000 shares P 250,000

Ps net income for the year ended December 31, 2013, was p450,000, but no dividends were
declared.

49. How much was Ps book value per preference share at December 31, 2013?
A. P100 B. P105 C. P110 D. P115

50. How much was Ps book value per ordinary share at December 31, 2013?
A. P45.00 B. P68.50 C. P69.50 D. P70.00

51. H Corporations shareholders equity at December 31, 2013, consisted of the following
Preference share, P50 par value,
10% noncumulative 10,000 shares issued and 0utstanding P500,000
Ordinary share, Pl0 par value; 80,000 shares issued and outstanding 800,000
Retained earnings 300,000

The preference share has a liquidating value of P55 per share. At December 31, 2013, the book
value per share of ordinary share is
A. P14.38 B. P13.75 C. P 13.13 D. P10.00

52. R Corporations current balance sheet reports the following shareholders equity balances:
5% cumulative preference share, P100 par value, 2,500 shares
issued and outstanding P 250,000
Ordinary share, P3.50 par value, 100,000 shares issued and outstanding 350,000
Share premium 125,000
Retained earnings 300,000

Dividends in arrears on the preference share amount to P25,000. If R were to be liquidated, the
preference shareholders would receive par value plus a premium of P50,000. The book value per
share of ordinary share is
A. P7.75 B. P7.50 C. P7.25 D. P7.00

53. V Corporation was authorized to issued 1,000 shares of p100 par, 8% cumulative preference
share and 100,000 shares of P100 par ordinary shari. The equity account balances at December
31, 2013 are as follows:
Cumulative preference share P50,000
Ordinary share 90,000
Share premium 9,000
Retained earnings 13,000
Treasury share, ordinary 100 shares at cost (2,000)

Dividends On preference share are in arrears for the year 2009. The book value of a share of
ordinary share at December 31, 2013 should be
A. P117.80 B. P119.10 C. P122.50 D. P123.60

54. For a company that has only ordinary share outstanding, total shareholders equity divided by
the number of shares outstanding represents the
A. Return on equity. C. Book value per share.
B. Stated value per share. D. Price-earnings ratio.

55. How are the dividends per share for ordinary share used in the calculation of the following?
Payout ratio Earnings per share
A. Denominator Denominator
B. Denominator Not used
C. Numerator Not used
D. Numerator Numerator

56. How are the following used in the calculation of the dividend payout ratio for a company
with only ordinary share outstanding?
Dividends per Earnings Book value
share per share per share
A. Denominator Numerator Not used
B. Denominator Not used Numerator
C. Numerator Denominator Not used
D. Numerator Not used Denominator

LIQUIDITY RATIOS
57. Information from M Corporations balance sheet is as follows:
Current assets:
Cash P 2,400,000
Held for trading 7,500,000
Accounts receivable 66,300,000
Inventories 57,600,000
Prepaid expenses 1,200,000
Total current assets P135,000,000

Current liabilities:
Notes payable P 1,500,000
Accounts payable 19,500,000
Accrued expenses 12,500,000
Income taxes payable 500,000
Payments due within one year on long-term-debt 3,500,000
Total current liabilities P 37,500,000

What is the quick (acid) test ratio?

A. 2.03 to 1 C. 1.99 to 1
B. 1.80 to 1 D. 3.60 to 1

58. A Corporations books disclosed the following information as of and for the year ended
December 31, 2013:
Net credit sales P3,000,000
Net cash sales 480,000
Accounts receivable at beginning 400,000
Accounts receivable at end 800,000

As accounts receivable turnover is

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

59. Selected information from the operating records of Kay Company is as follows:
Net sales P1,800,000
Cost of goods sold for 2013 1,200,000
Inventory at 12/31/12 360,000
Inventory at 12/31/13 312,000

Kays inventory turnover for 2013 is

A. 3.57 times C. 5.36 times
B. 3.85 times D. 5.77 times

60. Given an acid test ratio of 2.0, current assets of P5,000, and inventory of P2,000, the value of
current liabilities is
A. P1,500 C. P3,500
B. P2,500 D. P6,000 (cia)

61. Based on the data presented below, what is Beta Corporations cost of sales for the year?
Current ratio 3.5
Acid test ratio 3.0
Year-end current liabilities P600,000
Beginning Inventory P500,000
Inventory turnover 8.0

A. P1,600,000 C. P3,200,000
B. P2,400,000 D. P6,400,000 (cma)

62. During 2013, L Company purchased P960,000 of inventory. The cost of goods sold for 2013
was P900,000, and the ending inventory at December 31, 2013 was P180,000. What was the
inventory turnover for 2013?
A. 6.4 B. 6.0 C. 5.3 D. 5.0

63. Selected information from the accounting records of J Company is as follows:

Net sales for 2013 P 1,800,000
Cost of goods sold for 2013 1,200,000
Inventories at December 31, 2012 336,000
Inventories at December 31, 2013 288,000
Assuming there are 300 working days per year, what is the number of days sales in average
inventories for 2013.
A. 78 B. 72 C. 52 D. 48

64. The following computations were made from B Companys 2013 books
Number of days sales in inventory 61
Number of days sales in trade accounts receivable 33
What was the number of days in Bs 2013 operating cycle?
A. 33 B. 94 C. 61 D. 47

65. If the average age of the inventory is 90 days, the average age of accounts payable is 60 days,
and the average age of accounts receivables is 65 days, the number of days in the cash flow cycle
is
A. 95 days. C. 215 days.
B. 125 days. D. 85 days.

66. Selected data from the year-end financial statements of U Corp. are presented below. The
difference between average and ending inventories is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%

Us net sales for the year were

A. P2.4 million. C. P1.2 million.
B. P4.0 million. D. P6.0 million.

67. O Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1. What is
Os current ratio immediately after it has paid P2 million of its accounts payable?
A 3.75 to 1 C.3.25 to 1
B.2.75 to 1 D.4.75 to 1

68. E Companys net accounts receivable were P250,000 at December 31, 2012, and P300,000 at
December 31, 2013. The accounts receivable turnover for 2013 was 5.0. What were Es total net
sales for 2013?
A. P1,375,000 C. P1,600,000
B. P1,500,000 D. P2,750,000

69. It is the policy of F Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current
liabilities are p400,00 and the present current ratio is 2 to 1. How much is the maximum level of
new short-term loans it can secure without violating the policy?
A. P400,000 C. P266,667
B. P300,000 D. P800,000

70. Mr. S, the owner of FT Co. is arguing with his accountant as to the best measure of liquidity.
He was considering the following and you are to advise him which one is the best. Which one
will you choose?
A. Current assets minus inventories to current liabilities.
B. Total assets minus goodwill to total liabilities.
C. Net income minus dividends to interest expense.
D. Sales minus returns to total Debt.

71. LT Corp. has an acid test ratio i.5 to 1.0. Which of the following will cause this ratio to
deteriorate?
A. payment of cash dividends previously declared
B. Borrowing short term loan from a bank
C. Sale of inventory on account
D. Sale of equipment at a loss

72. How are trade receivables used in the calculation of each of the following
Acid test (quick ratio) Receivable turnover
A. Numerator Numerator
B. Numerator Denominator
C. Denominator Denominator
D. Not used Numerator

73. If current assets exceed current liabilities, payments to creditors made on the last day of the
month will
A. Decrease current ratio
B. Increase current ratio
C. Decrease net working capital
D. Increase net working capital

74. X, Inc. has current ratio of 4:1. Which of the following transactions would normally increase
its current ratio?
A. purchasing inventory on account
B. purchasing machinery for cash
C. Selling inventory on account
D. Collecting an account receivable

75. Which of the following ratios measures short-term solvency?

A. Current ratio
B. Age of receivables
C. Creditors equity to total assets
D. Return on investment

76. Shortterm creditors would probably be most interested in which ratio?

A. Current ratio C. Debt-to-equity ratio
B. Earnings per share D. Quick ratio.

77. On December 31, 2013, F Company collected a receivable due from a major customer.
Which of the following ratios would be increased by this transaction?
A. Inventory turnover ratio
B. Quick ratio
C. Receivable turnover ratio
D. Current ratio

78. A company has a current ratio of 2 to 1. This ratio will decrease if the company
A. receives a 5% share dividend on one of its marketable securities
B. Pays a large account payable which had been a current liability
C. Borrows cash on a six-month note
D. Sells merchandise for more than cost and records the sale using the perpetual inventory
method

79. How is the average inventory used in the calculation of each of the following?
Acid test (quick ratio) Inventory turnover rate
A. Numerator Numerator
B. Numerator Denominator
C. Not used Denominator
D. Not used Numerator

80. The ratio that measures a firms ability to generate earnings from its resources is
A. Days sales in inventory C. Sales to working capital
B. Asset turnover D. Days sales in receivables

81. XO Co. has a high sales-to-working capital ratio. This could indicate
A. The firm is undercapitalized
B. The firm is likely to have liquidity problems.
C. Working capital is not profitability utilized.
D. The firm is not profitable.

82. The ratio of sales to working capital is a measure of

A. Collectibility C. Liquidity
B. Operational leverage D. Financial leverage

83. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less than 2
to 1 if
A. the company purchased inventory on open account.
B. the company sold merchandise on open account that earned a normal gross margin.
C. the company collected an account receivable.
D. the company paid an account payable.
COMPREHENSIVE PROBLEMS
Questions 84 through 87 are based on the following information:

You are requested to reconstruct the account of OS Supplies for analysis. The following data
were made available to you:
Gross margin for 2013 amounted to P472,500.
Ending balance of merchandise inventory was P300,000.
Long-term liabilities consisted of bonds payable with interest rate of 20%.
Total shareholders equity as of December 31, 2013 was P750,000.
Gross margin ratio 35%
Debt-to-equity ratio 0.8 to 1
Times interest earned 10
Quick ratio 1.3 to 1
Operating expenses to sales ratio 18%

84. What is the operating income for 2013?

A. P472,500 C. P206,500
B. P243,000 D. P229,500

85. How much was the bonds payable?

A. P400,000 C. P114,750
B. P200,750 D. P370,500

86. Total current liabilities would amount to

A. P600,000 C. P485,250
B. P714,750 D. P550,000

87. Total current assets would amount to

A. P630,825 C. P580,000
B. P780,000 D. P930,825

Questions 88 and 89 are based on the following information AA Corporation registered

accelerated increase in its net income from p437,500 in 2012 to P1,260,000 in 2013. Rate of
return on current assets increased from 25% in 2012 to 30% in 2013. Current asset turnover, on
the other hand, went up to 2.87 turnovers in 2011 from 2.45 turnovers in 2012

88. The average investment in current assets of AA Corporation in 2013 was:

A. P1,697,500 C. P4,200,000
B. P1,750,000 D. P5,040,000

89. The cost of goods sold and operating expenses, including depreciation, in 2013 amounted to:
A. P10,794,000 C. P6,022,500
B. P5,022,500 D. P12,054,000