1. A companys current ratio is 2.2 to 1 and quick (acid test) ratio is 1.

0 to 1 at the beginning
of the year. At the end of the year, the company has a current ratio of 2.5 to 1 and quick
ratio of .8 to 1. Which of the following could help explain the divergence in the ratios from
the beginning to the end of the year?
a. An increase in inventory levels during the current year.
b. An increase in credit sales in relation to cash sales.
c. An increase in the use of trade payables during the current year.
d. An increase in the collection rate of accounts receivable.

2. Which of the following will cause a decrease in a companys accounts receivable turnover
ratio?
a. Tighten credit standards.
b. Enforce credit terms more aggressively.
c. Ease enforcement of credit terms.
d. Factor all accounts receivable.

3. If, just prior to a period of rising prices, a company changed its inventory measurement
method from FIFO to LIFO, the effect in the next period would be to
a. Increase both the current ratio and inventory turnover.
b. Decrease both the current ratio and inventory turnover.
c. Increase the current ratio and decrease inventory turnover.
d. Decrease the current ratio and increase inventory turnover.

4. A firm that has substantial leased assets that need not to be capitalized would tend to
a. Overstate its debt ratio.
b. Overstate its earning per share.
c. Overstate its return on assets.
d. Overstate its debt to tangible net worth.

5. A measure of profitability and not short-term liquidity is the

a. Accounts receivable turnover ratio.
b. Sales to working capital ratio.
c. Total assets turnover ratio.
d. Acid-test ratio.

6. Return on Investment (ROI) is term often used to express income earned on capital
invested in a business units. A companys ROI would be increased if
a. Sales increased by the same peso amount as expenses and total assets increased.
b. Sales remained the same and expenses were reduced by the same peso
amount that total assets increased.
c. Sales decreased by the same peso amount that expenses increased.
d. Sales and expenses increased by the same percentage that the total asset
increased

7. When a balance sheet amount is related to an income statement amount in computing a

ratio,
a. The balance sheet amount should be converted to an average for the year.
b. The income statement amount should be converted to an average for the year.
c. Both amounts should be converted to market value
d. Comparisons with industry ratios are not meaningful

8. Ratios are used for many purposes in the financial statement analysis. In order to
determine the return on investment for a company, the numerator of the fraction used
should be
a. Net income.
b. Income before non-recurring items.
c. Income before non-recurring items and before income taxes.
d. Income before non-recurring items plus interest expense net of income
tax.

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 9. Ratios that measures firms ability to generate earnings is
a. Time interest earned.
b. Days sales in receivables.
c. Sales to working capital.
d. Operating asset turnover

The following data apply to items 10-12:

Listed below are selected ratios for Romeo Company and Juliet Limited, both large firms in
manufacturing pressure valves. Also listed are the industry averages for the same ratios. All of
the ratios are for the same year.
Romeo Juliet Industry
Company Limited Average

Current ratio 3.0 2.1 1.8

Quick Ratio 1.6 1.0 1.0
A.R. Turnover 5.0 6.3 6.0
Inventory turnover 4.1 6.3 5.3
Total liabilities to net worth 2.1 3.0 2.0
Sales to net worth 15.0 20.0 13.5
Sales to total assets 2.8 7.3 5.0
Net income to sales 2.4% 1.1% 1.6%
Net income to net worth 8.6% 16.5% 9.9%
Net income to net assets 6.6% 8.2% 7.8%
Time interest earned 4.3% 2.6 4.0

10.Based on the information presented, the ratios that should be used to determine which
company has a strongest liquid position are
a. Current ratio and inventory turnover.
b. Current ratio and quick ratio.
c. Quick ratio and time interest earned.
d. Total liabilities to net worth and current ratio.

11.The ratios that can be used to determine which company is more efficiently using leverage
to its advantage are
a. Time interest earned and sales to net worth.
b. Net income to sales and sales to total assets.
c. Net income to net worth and net income to total assets.
d. Net income to sales and total liabilities to net worth.

12. The operating cycle represents the average time it takes to invest cash in inventory and
eventually collect the cash from sales. If both Romeo Company and Juliet Limited makes all
sales on open account, which of the following items is most accurate?
a. Romeos operating cycle is about 45 days longer than Juliets.
b. Juliets operating cycle is about the same as the industry average.
c. Romeos and Juliets operating cycles are about equal in length.
d. Both Romeo and Juliet have operating cycles that are longer than the industry
average.

13.On December 31, 19x0 the Balance Sheet of Belle Co. disclosed total assets of P
8,000,000; current liabilities of P 15,000,000; and long term debt of P 2,400,000. Common
stock outstanding amounted to P 500,000 shares, while 100,00 shares of P 10 par value
preferred stock were outstanding. The retained earnings account indicated a deficit
balance of P 2,000,000. Belles book value per share of common stock as of December 31,
19x0 is
a. P 16.00 b. P 6.20 c. P 12.20 d. P 8.20

14. A financial analyst made up the following schedule for Health Care Products:
19x8 19x7 19x6 19x5
Net Sales 134% 116% 107% 100%
Net Income 123% 111% 110% 100%

This analytical technique is termed:

a. Percentage of change analysis c. Component Analysis
b. Trend Analysis d. Revenue and Expense Analysis

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 15.A high quality of earnings is indicated by:
a. Earnings derived largely from newly introduced products
b. Declaration of both cash dividends and stock dividends
c. Use of FIFO method of inventory during sustained inflation
d. A history of increasing earnings and conservative accounting methods

2nd semester AY 2016 2017 Page 3 of 3 K.T. Tegio