NAME: ____________________________________ COURSE AND YEAR: _________ DATE: ________

Financial Management
Final Examination

1. Market value ratios provide management with indication of how investors view the firm’s past
performance and especially its future prospects.
2. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and
operate in competitive product and capital markets. Under these conditions, these firms that have
high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will
tend to have low turnover ratios.
3. If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt
ratio must be 0.667.
4. One problem with ratio analysis is that relationships can be manipulated. For example, if our current
ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our
cash account would cause the current ratio to increase.
5. Ratio analysis involves analyzing financial statements in order to appraise a firm’s financial position
and strength.
6. High current and quick ratios always indicate that a firm is managing its liquidity position well.
7. Even though Firm A’s current ratio exceeds that of Firm B, Firm B’s quick ratio might exceed that of A.
However, if A’s quick ratio exceeds B’s, then we can be certain that A’s current ratio is also larger than
that of B.
8. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions,
the ROE will decrease.
9. The inventory turnover and current ratio are related. The combination of a high current ratio and a
low inventory turnover ratio, relative to industry norm, suggests that the firm has an above-average
inventory level and/ or that part of the inventory is obsolete or damaged.
10. Determining whether a firm’s financial position is improving or deteriorating requires analyzing more
than the ratios for a given year. Trend analysis is one method of measuring changes in a firm’s
performance over time.

II. Multiple Choice.

1. A ratio that compares investors’ and creditors’ stake in a company

a. Debt ratio
b. Debt to equity ratio
c. Equity Ratio
d. Investor Creditor Ratio
2. The ratio that explains how efficiently companies use their assets to generate revenue.
a. Revenue asset ratio
b. Receivables turnover ratio
c. Income ratio
d. Asset turnover ratio
3. What does the accounts receivable turnover ratio tell us?
a. How often A/R is received
b. How many times average A/R is collected
c. A/R Balance at the end of a period
d. Bad debt balances at year end
4. The best ratio to evaluate short-term liquidity is:
a. Current ratio
b. Working capital
c. Cash ratio
d. Debt to assets ratio
5. The DuPont Analysis uses the following ratios except:
a. Debt Ratio
b. Profit Margin
c. Total Asset turnover
d. Financial Leverage
6. Which if the following statements is CORRECT?
a. An increase in inventories would have no effect on the current ratio
b. If a firm increases its sales while holding its inventories constant, then, other things held constant,
its inventory turnover ratio will increase.
c. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE
d. If a firm increases its sales while holding its inventories constant, then, other things held constant,
its inventory turnover ratio will decrease.
7. Which of the following would indicate and improvement in a company’s financial position, holding
other things constant?
a. The inventory and total assets turnover ratios both decline.
b. The debt ratio increases
c. The profit margin declines
d. The current and quick ratios both increase
8. A firm’s new president wants to strengthen the company’s financial position. Which of the following
actions would make it financially stronger?
a. Increase accounts receivable while holding sales constant
b. Increase EBIT while holding sales constant.
c. Increase notes payable while holding sales constant.
9. A firm wants to strengthen its financial position. Which of the following actions would increase its
quick ratio?
10. Joseph Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce
the company’s current ratio?
a. Borrow using short-term notes payable and use the proceeds to reduce accruals
b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt
c. Use cash to reduce accruals
d. Use cash to reduce short-term notes payable
III. Problem Solving

1. The following data are taken from the balance sheet at the end of the current year.

Accounts Payable ₱ 145,000

Accounts Receivable 110,500
Accrued Liabilities 4,000
Cash 80,060
Income tax payable 10,000
Inventory 140,060
Marketable securities 250,000
Notes payable, short-term 85,000
Prepaid expenses 15,000

a) Determine the (a) working capital. (2pts) _________________

b) Determine the current ratio. (2pts) __________________
c) Determine the acid-test ratio. (2pts) _________________

2. Comparative information taken from the John Company financial statements is shown below:

2019 2018
a) Notes receivable ₱ 10,000 ₱ -0-
b) Accounts receivable 172,000 140,000
c) Retained earnings 30,000 (40,000)
d) Sales 830,000 750,000
e) Operating expenses 170,000 200,000
f) Income taxes payable 25,000 20,000

Using horizontal analysis, show the percentage change from 2018 to 2019 with 2018 as the base year, for
the following items:

a) Notes receivable. (2pts) _________________

b) Retained earnings. (2pts) ________________
c) Income taxes payable. (2pts) ______________

3. Wapakels Corp.’s Cost of Sales last year were ₱ 30,000, Gross income of ₱ 22,000 and its total assets
were ₱ 22,000. What was its total assets turnover ratio (TATO)? (2pts) ________________

4. Onion Corp.’s sales last year was ₱ 435,000, its operating costs were ₱362,500, and its interest charges
were ₱12,500. What was the firm’s times interest earned (TIE) ratio? (2pts) _____________

5. A new firm is developing its business plan. It will require ₱565,000 of assets, and it projects ₱452,800
of sales and ₱354,300 of operating costs for the first year. Management is quite sure of these numbers
because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank
requires it to have a TIE of atleast 4.0, and if the TIE falls below this level the bank will call in the loan
 and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (3pts)
_________________

6. Below are the balance sheet and income statement items and amounts (in Millions) for Jimuel
Company. Note that the firm has no amortization charges, it does not lease, none of its debt must be
retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet Items 2018 Income Statement Items 2018

P P
Cash and securities 1,554.00 Net sales 58,800.00
Accounts receivable 9,660.00 Operating costs including depreciation 54978
Inventories 13,440.00 Interest 1,050.00
Long-term bonds 10,920.00 Depreciation 1029
Accounts payable 7,980
Notes payable 5,880.00 Other data:
Accruals 4,620.00 Shares outstanding (millions) 175
Net plant and
equipment 17,346.00 Common dividends P 509.83
Interest rate on notes payable and long
Common stock 3,360 term bonds 6.25%
Retained earnings ? Income tax rate 30%
Year-end stock price P 77.69

a) Compute for Retained Earnings. (2pts) ___________________

b) Compute for ROA. (2pts) ____________________
c) Compute for ROE (2pts) ____________________
d) Compute for Profit Margin (2pts) ________________
e) Compute for Book Value per Share (2pts) ________________

- END -

Prepared by: Checked and verified by:

________________________ ________________________
KEVIN ELREY E. ARCE Dr. ELMER M. DELA CRUZ
Instructor Dean