ACTG21C FINAL EXAM ANSWER SHEET

Name: ___________________________________ Date: _____________________________________

Section: _________________________________ Student No.:________________________________

Note: Please write the letter of your answer. Strictly NO ERASURES. CAPITAL LETTERS only.

1. 11. 21. 31. 41.

2. 12. 22. 32. 42.

3. 13. 23. 33. 43.

4. 14. 24. 34. 44.

5. 15. 25. 35. 45.

6. 16. 26. 36. 46.

7. 17. 27. 37. 47.

8. 18. 28. 38. 48.

9. 19. 29. 39. 49.

10. 20. 30. 40. 50.

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 ACTG21C FINAL EXAM QUESTIONNAIRE

Instructions: Read the questions carefully. Write the letter of your answer on the ANSWER SHEET provided. Use
CAPITAL LETTERS.

1. An example of a liquidity ratio is _______.

a. fixed asset turnover d. A and C
b. current ratio e. B and C
c. acid test or quick ratio

2. __________ a snapshot of the financial condition of the firm at a particular time.

a. The balance sheet provides d. All of the above provide
b. The income statement provides e. None of the above provides
c. The statement of cash flows provides

3. __________ of the cash flow generated by the firm's operations, investments and financial activities.
a. The balance sheet is a report d. the auditor's statement of financial condition
b. The income statement is a report e. None of the above is a report
c. The statement of cash flows is a report

4. A firm has a higher asset turnover ratio than the industry average, which implies
a. the firm has a higher P/E ratio than other firms in the industry.
b. the firm is more likely to avoid insolvency in the short run than other firms in the industry.
c. the firm is more profitable than other firms in the industry.
d. the firm is utilizing assets more efficiently than other firms in the industry.
e. the firm has higher spending on new fixed assets than other firms in the industry.

5. __________ of the profitability of the firm over a period of time such as a year.
a. The balance sheet is a summary d. The audit report is a summary
b. The income statement is a summary e. None of the above is a summary
c. That statement of cash flows is a summary

6. Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in
generating return to shareholders.
a. Gross profit margin and net profit margin c. Total asset turnover and operating profit
b. Return on investment margin
d. Return on investment and return on equity

7. Why is the quick ratio a more rigorous test of short-term solvency than the current ratio?
a. The quick ratio considers only cash and marketable securities as current assets.
b. The quick ratio eliminates prepaid expenses for the numerator.
c. The quick ratio eliminates prepaid expenses for the denominator.
d. The quick ratio eliminates inventory from the numerator.

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8. How would the repayment of debt principal be classified?
a. Operating outflow. c. Investing outflow.
b. Operating inflow. d. Financing outflow.

9. How would the sale of a building be classified?

a. Operating outflow. c. Investing inflow.
b. Operating inflow. d. Financing outflow.

10. What is a creditor’s objective in performing an analysis of financial statements?

a. To decide whether or not the borrower has the ability to repay interest and principal on borrowed funds.
b. To determine the firm’s capital structure.
c. To determine the company’s future earnings stream.
d. To decide whether or not the firm has operated profitably in the past.

11. Which of the following items is included in the adjustment of net income to obtain cash flow from operating
activities?
a. Depreciation expense for the period.
b. Increase in accounts receivable.
c. Decrease in accounts payable.
d. All of the above.

12. How would revenue from sale of goods and services be classified?
a. Operating outflow. c. Investing inflow.
b. Operating inflow. d. Financing inflow.
13. How is it possible for a firm to be profitable and still go bankrupt?
a. Earnings have increase more rapidly than sales.
b. The firm has positive net income but has failed to generate cash from operations.
c. Net income has been adjusted for inflation.
d. Sales have not improved even though credit policies have been eased.

14. Which profit margin measures the overall operating efficiency of the firm?
a. Gross profit margin. c. Net profit margin.
b. Operating profit margin. d. Return on equity.

15. Which method of calculating cash flow from operations requires the adjustment of net income from deferrals,
accruals, non-cash, and non-operating expenses?
a. The direct method. c. The inflow method.
b. The indirect method. d. The outflow method.

16. What do asset turnover ratios measure?

a. The liquidity of the firm’s current assets.
b. Management’s effectiveness in generating sales from investments in assets.
c. The overall efficiency and profitability of the firm.
d. The distribution of assets in which funds are invested.

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17. An outflow of cash would result from which of the following?
a. The decrease in current asset account other than cash.
b. The increase in a current liability account.
c. The decrease in a current liability account.
d. The increase in an equity account.

18. What is a limitation common to both the current and quick ratio?
a. Accounts receivable may not be truly liquid.
b. Inventories may not be truly liquid.
c. Marketable securities are not liquid.
d. Prepaid expenses are potential sources of cash.

19. The statement of cash flows segregates cash inflows and outflows by:
a. Operating and financing activities.
b. Financing and investing activities.
c. Operating and investing activities.
d. Operating, financing, and investing activities.

20. How would the decrease in accounts receivables be presented in cash flow from operating activities using the
indirect method?
a. Increase in cash flow.
b. Decrease in cash flow.
c. Not included in cash flow from operations.
d. No effect.

21. How would the increase in inventory be presented in cash flow from operating activities using the indirect
method?
a. Increase in cash flow. c. Not included in cash flow from operations.
b. Decrease in cash flow. d. No effect.

22. A measure of asset utilization is ________.

a. sales divided by working capital c. return on equity capital
b. return on total assets d. return on sales

23. operating profit divided by sales

A firm's current ratio is above the industry average; however, the firm's quick ratio is below the industry
average. These ratios suggest that the firm _________.
a. has relatively more total current assets and even more inventory than other firms in the industry
b. is very efficient at managing inventories
c. has liquidity that is superior to the average firm in the industry
d. is near technical insolvency

24. Ferris Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week.
The action of __________ will have the desired effect.
a. payment of current payables from cash c. write down of impaired assets
b. sales of current marketable securities for d. delay of next payroll
cash

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25. ______ is a measure of what the firm would have earned if it did not have any obligations to creditors or tax
authorities.
a. Net Sales d. Non-operating Income
b. Operating Income e. Earnings Before Interest and Taxes
c. Net Income

26. Coroner Corporation had a current ratio of 2.0 at the end of 2010. Current assets and current liabilities increased
by equal amounts during 2011. The effects on net working capital and on the current ratio, respectively, were
a. no effect; increase. c. increase; increase.
b. no effect; decrease. d. decrease; decrease.

27. Which of the following statements are false?

A) When all the figures in a balance sheet are stated as percentage of the total, it is termed as horizontal
analysis.
B) When financial statements of several years are analyzed, it is termed as vertical analysis.
C) Vertical Analysis is also termed as dynamic analysis.

a. Both A and B c. Both B and C

b. Both A and C d. A, B , C

28. State which of them are true?

A) When ratios of previous years are compared with current years, they are called trend ratios.
B) Trend percentages and trend ratios are used in static analysis.
C) Reliability of financial analysis depends upon the reliability of financial data.

a. Both A and B c. Both B and C

b. Both A and C d. A, B, C

29. Management is a user of financial analysis. Which of the following comments does not represent a fair
statement as to the management perspective?
a. Management is always interested in maximum profitability.
b. Management is interested in the view of investors.
c. Management is interested in the financial structure of the entity.
d. Management is interested in the asset structure of the entity.

30. The percentage analysis of increases and decreases in individual items in comparative financial statements is
called:
a. vertical analysis
b. profitability analysis
c. solvency analysis
d. horizontal analysis

31. 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.

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32. 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.

Question Nos. 33 through 35 are based on the data taken from the balance sheet of Nomad Company at the end
of the current year:
Accounts payable P145,000 Inventory 140,000
Accounts receivable 110,000 Marketable securities 250,000
Accrued liabilities 4,000 Notes payable, short-term 85,000
Cash 80,000 Prepaid expenses 15,000
Income tax payable 10,000

33. The amount of working capital for the company is:

a. P351,000 c. P361,000
b. P211,000 d. P336,000

34. The company’s current ratio as of the balance sheet date is:
a. 2.67:1 c. 2.44:1
b. 2.02:1 d. 1.95:1

35. The company’s acid-test ratio as of the balance sheet date is:
a. 1.80:1 c. 2.40:1
b. 2.02:1 d. 1.76:1

36. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for the year. The
Accounts Receivable balances at the beginning and end of the year were P600,000 and P700,000, respectively.
The receivables turnover was
a. 7.7 times. c. 10.8 times.
b. 9.3 times. d. 10.0 times.

37. 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. 65 days
b. 73 days d. 36 days

38. Deity Company had net income 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. P35,000
b. P34,000 d. P25,000

39. Selected information from the accounting records of Eternity Manufacturing Company follows:
Net sales P3,600,000 Inventories at January 1 P672,000
Cost of goods sold 2,400,000 Inventories at December 31 576,000

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 What is the number of days’ sales in average inventories for the year?
a. 102.2 c. 94.9
b. 87.6 d. 68.1

40. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the
ending total asset balance?
a. P2,000,000. c. P1,200,000.
b. P2,800,000. d. P1,600,000.

41. House of Fashion Company had the following financial statistics for 2018:
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 2018?

a. 11.4 times c. 3.3 times
b. 3.1 times d. 3.7 times

42. Brava Company reported the following on its income statement:

Income before taxes P400,000 Net income P300,000
Income tax expense 100,000

An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s times
interest earned (TIE) was
a. 5 times c. 4 times
b. 3.5 times d. 3 times
43. Jordan Manufacturing reports the following capital structure:
Current liabilities P100,000 Common stock 100,000
Long-term debt 400,000 Premium on common stock 180,000
Deferred income taxes 10,000 Retained earnings 170,000
Preferred stock 80,000

What is the debt ratio?

a. 0.48 c. 0.49
b. 0.93 d. 0.96
44. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term
debt and collection of accounts receivable have on the ratio?

A. B. C. D.
Short-term borrowing Increase Increase Decrease Decrease
Collection of receivables No effect Increase No effect Decrease

45. Long-term creditors are usually most interested in evaluating

a. liquidity. c. marketability.
b. profitability. d. solvency.

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46. A general rule to use in assessing the average collection period is
a. that is 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.

47. Which of the following generally is the most useful in analyzing companies of different sizes?
a. comparative statements c. common-sized financial statements
b. price-level accounting d. profitability index

48. A weakness of the current ratio is

a. the difficulty of the calculation.
b. that it does not take into account the composition of the current assets.
c. that it is rarely used by sophisticated analysts.
d. that it can be expressed as a percentage, as a rate, or as a proportion.

49. The acid-test or quick ratio

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.

50. 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

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