I.

THEORIES

1. 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. Comparisons 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 beginningof-the-year amount is combined
with an end-of-the-year amount.
2. How are financial ratios used in
decision making?
a. They can help identify the
reasons
for
success
and
failure
in
business,
but
decision
making
requires
information beyond the ratios.
b. They remove the uncertainty of
the business environment.
c. They
arent
useful
because
decision making is too complex.
d. They give clear signals about the
appropriate action to take.
3. A useful tool in financial statement
analysis is the common-size financial
statement.
What does this tool
enable the financial analyst to do?
a. Evaluate financial statements of
companies within a given industry
of approximately the same value.
b. Determine which companies in
the
same
industry
are
at
approximately the same stage of
development.
c. Compare the mix of assets,
liabilities, capital, revenue,
and
expenses
within
a
company
over
time
or
between companies within a

given
industry
without
respect to relative size.
d. Ascertain the relative potential of
companies of similar size in
different industries.

into
an
operating
lease.
The
company's debt ratio as measured by
the balance sheet will
a. Increase whether the assets are
purchased or leased.
b. Increase if the assets are
purchased,
and
remain
unchanged if the assets are
leased.
c. Increase
if
the
assets
are
purchased, and decrease if the
assets are leased.
d. Remain unchanged whether the
assets are purchased or leased.

4. Which of the following is not revealed

on a common size balance sheet?
a. The debt structure of a firm.
b. The capital structure of a firm.
c. The peso amount of assets
and liabilities.
d. The distribution of assets in which
funds are invested.
5. If a transaction causes total liabilities
to decrease but does not affect the
owners equity, what change if any,
will occur in total assets?
a. Assets will be increased.
b. Assets will be decreased.
c. No change in total assets.
d. None of the above.
6. Minix Co. has a high sales-to-workingcapital ratio. This could indicate
a. The firm is undercapitalized.
b. The firm is likely to have liquidity
problems.
c. Working capital is not profitably
utilized.
d. The firm is not profitable.
7. When compared to a debt-to-assets
ratio, a debt-to-equity ratio would
a. Be about the same as the debt-toassets ratio.
b. Be higher than the debt-toassets ratio.
c. Be lower than the debt-to-assets
ratio.
d. Have no relationship at all to the
debt-to-assets ratio.
8. Assume that a company's debt ratio
is currently 50%. It plans to purchase
fixed assets either by using borrowed
funds for the purchase or by entering

9. You observe that a firms profit

margin and debt ratio are below the
industry average, while its return on
10. equity exceeds the industry
average. What can you conclude?
a. Return on assets is above the
industry average.
b. Total assets turnover is above
the industry average.
c. Total assets turnover is below the
industry average.
d. Statements a and b are correct.
10. 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.
11.

In a single-period
income statement, the
(100%) is normally the
a. Gross sales
c. Net
b. Net sales
sales

common-size
base amount
cash sales
d. Net credit

12. Which of the following statements is

correct?

a. An
increase
in
a
firms
inventories
will
call
for
additional financing unless
the increase is offset by an
equal or larger decrease in
some other asset account.
b. A high quick ratio is always a
good indication of a well-managed
liquidity position.
c. A relatively low return on assets
(ROA) is always an indicator of
managerial incompetence.
d. A high degree of operating
leverage lowers the risk by
stabilizing the firms earnings
stream.
13. The ratio that measures a firm's
ability to generate earnings from its
resources is
a. Days' sales in inventory.
b. Days' sales in receivables.
c. Sales to working capital.
d. Asset turnover.
14. Planners have determined that sales
will increase by 25% next year, and
that the profit margin will remain at
15% of sales. Which of the following
statements is correct?
a. Profit will grow by 25%.
b. The profit margin will grow by
15%.
c. Profit will grow proportionately
faster than sales.
d. Ten percent of the increase in
sales will become net income.
15. Which one of the following ratios
would provide a best measure of
liquidity?
a. Sales minus returns to total debt.
b. Total assets minus goodwill to
total equity.
c. Current
assets
minus
inventories
to
current
liabilities.
d. Net profit minus dividends to
interest expense.

II.

PROBLEMS

Solution

A. The condensed balance sheet as

of December 31, 2014 of San
Matias Company is given below.
Figures shown by a question mark
(?) may be computed from the
additional information given:
ASSETS
Cash
Trade receivable-net
Inventory
Fixed assets-net

P 60,000
?
?
252,000

Total Assets
P 480,000
LIAB. & STOCKHOLDERS EQUITY
Accounts payable
P
?
Current notes payable
40,000
Long-term payable
?
Common stock
140,000
Retained earnings
?
Total L & SHE
P 480,000
Additional information:
Current ratio (as of Dec. 1.9 to
31, 2014)
1
Ratio of total liabilities to 1.4
total stockholders equity
Inventory turnover based
15
on sales and ending
times
inventory
Inventory turnover based 10
on cost of goods sold times
and ending inventory
Gross margin for 2014
P500,0
00
1. The balance of accounts payable of
San Matias as of December 31, 2014
is P80,000
2. The balance of retained earnings of
San Matias as of December 31, 2014
is P60,000
3. The balance of inventory of San
Matias as of December 31, 2014 is
P100,000

Current assets = 480,000 252,000 =

228,000
Current liabilities = 228,000/1.9 =
120,000
Accounts payable = 120,000 40,000 =
80,000
1.4 = Total liabilities/ total equity
Total liabilities = 140%
Total equity = 100%
Total liabilities & shareholders equity =
140% + 100% = 240%
Total equity = 480,000 / 240% = 200,000
Retained earnings = 200,000 140,000
= 60,000
Sales = 15/10 = 150%
COGS = 10/10 = 100%
Sales 150%
1,500,000
COGS 100%
1,000,000
Gross margin 50%
500,000
Ending inventory = 1.5M/15 = 100,000
Ending inventory = 1M/10 = 100,000
B. You are requested to reconstruct the
accounts of Angela Trading for
analysis.
The following data were
made available to you:
Gross margin for 2014
P472,5
00
Ending
balance
of
P300,0
merchandise inventory
00
Total stockholders equity
P750,0
as of December 31, 2014
00
Gross margin ratio
35%
Debt to equity ratio
0.8:
1
Times interest earned
10
Quick ratio
1.3:
1
Ratio of operating expenses
18%
to sales
Long-term
liabilities
20%
consisted of bonds payable
with interest rate of

Based on the above information,

1. What was the operating income for
2014? P229,500
2. How much was the bonds payable?
P114,750
3. Total current liabilities would amount
to P485,250
4. Total current assets would amount to
P930,825
Solution
Sales
100% 1,350,00
0
COGS
65%
877,500
GM
35%
472,500
Operating expenses
18%
243,000
Operating income /
17% 229,500
EBIT
Interest expense
1.7%
22,950
Earnings before tax
25.3
206,550
%
Times interest earned = EBIT/interest
expense
Interest expense = 229,500 / 10 =
22,950
Bonds payable = 22,950 / 20%
=114,750
Debt or total liabilities = 750,000 * .8 =
600,000
Total liabilities = current liabilities + long
term liabilities
Current liabilities = 600,000 114,750 =
485,250
Total assets = 750,000 + 600,000 =
1,350,000
Quick assets = 485,250 * 1.3 = 630,825
Total current assets = 630,825 + 300,000
= 930,825
C. Selected data from the year-end
financial statements of World Cup
Corp. are presented below.
The

difference between average and

ending inventories is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P600,00
0
Inventory turnover (based 8 times
on cost of sales)
Gross profit margin
40%
Worlds net sales for the year were?
P4.0 million
Solution
Current assets = 600,000 * 2.0 =
1,200,000
Quick assets = 600,000 * 1.5 = 900,000
Inventory = 1,200,000 900,000 =
300,000
COGS = 300,000 * 8 = 2,400,000
Sales 100% 4,000,000
COGS 60%
2,400,000
GM 40%
1,600,000
D. For the year 2014, Drey Companys
income statement shows operating
expenses of P20,480. The following
information is also available:
Prepaid expenses, January P1,100
1, 2014
Accrued expenses payable,
3,680
January 1, 2014
Operating
Prepaid expensesexpenses, 20,480
1,200
Prepaid
expenses,
1/1
(1,100
December
31, 2014
)
Accrued expenses payable,
2,500
Accrued
expenses,
3,680
December
31, 20141/1
Prepaid expenses, 12/31
1,200
Accrued expenses,
(2,500
12/31
)
Cash payment for
21,760
operating expenses
How much was the cash paid for
operating expenses? 21,760
E. In 2014, Audrey

Companys land

account
decreased
by
P90,000
because of a cash sale for the same
amount. Its equipment account
increased by P40,000 as a result of a
cash purchase, and its bonds payable
increased by P35,000 due to an
issuance for cash at face value. How
much is the net cash provided/used
by investing activities? 50,000
Sale of equipment
90,000
Acquisition of equipment
(40,000)
Net cash provided in investing
50,000