AAA NOTES MAS 14

BY ABRAHM A. APEPE

Financial Statement Analysis

Exercise 1. Horizontal analysis. If year one equals Php500,000, year two equals Php525,000, and year three
equals Php560,000, the percentage to be assigned for year three in a trend analysis, assuming that year 1 is the
base year, is
A. 12% B. 9% C 105% D. 112%

Exercise 2. Horizontal analysis. Assume the following sales data for a company:

Year Sales Year Sales

2016 Php800,000 2014 Php625,000
2015 750,000 2013 400,000

What is the percentage increase in sales from 2013 to 2014, assuming that 2013 is the base year?
A. 50.00% B. 56.25% C. 60.00% D. 62.50%

Financial Ratios
Ratio Computations
1. Profitability ratios – relate to the company’s performance in the current period. It shows the company’s
ability to generate income.

2. Liquidity ratios – relate to the company’s short term survival. It shows the company’s ability to use
current assets to repay liabilities as they become due. It measures the short-term ability of the enterprise to
pay its obligations and to meet unexpected needs for cash.

3. Solvency ratios – relate to the company’s long-run survival. It shows the company’s ability to repay
lenders when debt matures and to make the required interest payments prior to the date of maturity.

Profitability ratios

Exercise 3. Profit margin and ROA. The financial statements for ABC Company for the current year are as
follows:
Balance Sheet Statement of Income and RE
Cash Php100 Sale Php3,000
Accounts receivable 200 Cost of goods sold (1,600)
Inventory 50 Gross profit 1,400
Net fixed assets 600 Operating expenses (970)
Total Php950 Operating income 430
Interest expense (30)
Accounts payables Php140 Income before tax 400
Long-term debt 300 Income tax (200)
Capital stock 260 Net income 200
Retained earnings 250 Add: Jan. 1 RE 150
Total Php950 Less: Dividends (100)
Dec. 31 RE Php250

Required:
1. What is ABC Company’s profit margin? 6.67%.
2. What is ABC Company’s return on assets? 21.1%

Exercise 4. ROE. ABC Company had Php15 million in sales, while total fixed costs were held to Php6 million. The
firm’s total assets averaged Php20 million and the debt-to-equity ratio was calculated at 0.60. If the firm’s EBIT
is Php3 million, the interest on all debt is 9%, and the tax rate is 40%, what is the firm’s return on
equity?11.16%

Side Note: You can also get the return on equity using the DuPont model which depicts return on equity as the
profit margin (net income divided by sales) times total asset turnover (sales divided by average total assets)
times the equity multiplier (average total assets divided by average total equity).

Exercise 5. DuPont model. Selected financial data for ABC Company for the year is shown below:
Beginning of Year End of Year
Assets Php9,600,000 Php10,000,000
Liabilities 6,200,000 6,800,000
Shares outstanding 1,400,000 1,500,000
Market price per share Php2.40 Php2.50

Sales Php22,000,000
Earnings before interest and taxes Php1,700,000
Interest expense Php500,000

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MAS-14 FINANCIAL STATEMENT ANALYSIS
AAA NOTES MAS 14
BY ABRAHM A. APEPE

Tax rate 40%

Required: Using the above data, the firm’s return on equity using the DuPont model is? 21.82%

Exercise 6. Asset turnover. The selected data pertain to a company at December 31:

Quick assets Php208,000

Acid test ratio 2.6 to 1
Current ratio 3.5 to 1
Net sales for the year Php1,800,000
Cost of sales for the year Php990,000
Average total assets for the year Php1,200,000

Required: What is the company’s asset turnover ratio for the year? 1.50

Exercise 7. FA turnover. On its year-end financial statements, ABC Corporation showed sales of Php3,000,000, net
fixed assets of Php1,300,00, and total assets of Php2,000,000.

Required: What is the company’s fixed asset turnover? 2.3 times.

Exercise 8. EPS. For the year ended May 31, 2017, ABC Company had per-share earnings of Php4.80. ABC’s
outstanding stock for 2016-2017 fiscal year consisted of Php2,000,000 of 10% preferred with Php100 par value
and 1,000,000 shares of common. On June 1, 2017, the common stock split 3 for 1, and the company redeemed
one-half of the preferred stock at par value. ABC’s net income for the year ended May 31, 2018, was 10% higher
than in 2017.

Required: What is the earnings per share in 2018 on ABC’s common stock? Php1.80.

Exercise 9. P/E ratio. Information concerning ABC Company’s commons stock is presented below for the fiscal
year ended May 31, 2017:
Common stock outstanding 750,000
Stated value per share Php15.00
Market price per share 45.00
2016 dividends paid per share 4.50
2017 dividends paid per share 7.50
Basic earnings per share 11.25
Diluted earnings per share 9.00

Required: What is the price-earnings ratio for ABC Company’s common stock? 4.0 times.

Exercise 10. Dividend yield. ABC Company computed the following items from its financial records for the year:

Price-earnings ratio 12.00

Payout ratio 0.60
Asset turnover ratio 0.90

Required: What is the dividend yield on ABC’s common stock? 5.0%

Exercise 11. Dividend yield. ABC Company paid a regular quarterly dividend of Php0.20 per share and had
earnings of Php3.20 per share. The market price of ABC stock at the end of the period was Php40.00 per share.

Required: What was ABC’s dividend yield? 2.00%

Exercise 12. Dividend pay-out. The financial statements for ABC Company for the current year are as follows:

Balance Sheet Statement of Income and RE

Cash Php100 Sales Php3,000
Accounts receivable 200 Cost of goods sold (1,600)
Inventory 50 Gross profit 1,400
Net fixed assets 600 Operating expenses (970)
Total Php950 Operating income 430
Interest expense (30)
Accounts payables Php140 Income before tax 400
Long-term debt 300 Income tax (200)
Capital stock 260 Net income 200
Retained earnings 250 Add: Jan. 1 RE 150
Total Php950 Less: Dividends (100)
Dec. 31 RE Php250

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MAS-14 FINANCIAL STATEMENT ANALYSIS
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BY ABRAHM A. APEPE

Required: What was ABC Company’s dividend-payout ratio? 50.0%

Exercise 13. Dividend pay-out. ABC Company paid out one-half of last year’s earnings in dividends. ABC’s
earnings increased by 20%, and the amount of its dividends increased by 15% in the current year. What was
ABC’s dividend payout ratio for the current year? 47.9%

Liquidity ratios
Exercise 14. Current ratio and Quick ratio. ABC Company reported the following account information:

Accounts receivable Php400,000

Accounts payable 260,000
Bonds payable, due in 10 years 600,000
Cash 200,000
Interest payable, due in 3 months 20,000
Inventory 800,000
Land 500,000
Short-term prepaid expense 80,000

Required:
1. What is ABC Company’s current ratio? 5.29
2. What is ABC Company’s quick (acid test) ratio? 2.14
3. What is ABC Company’s amount of working capital? Php1,200,000
4. What will happen to the current ratio if the Company uses cash to pay 25% of the accounts payable?
Increase.
5. What will happen to the quick ratio if the Company uses cash to pay 25% of the accounts payable?
Increase.

Exercise 15. Cash Ratio. A financial analyst has obtained the following data from ABC Company’s financial
statements:

Cash Php200,000 Accounts payable Php250,000

Marketable securities 100,000 Income taxes 50,000
Accounts receivable, net 300,000 Accrued liabilities 100,000
Inventories, net 480,000 Current portion of long-term debt 200,000
Prepaid expenses 120,000 Total current liabilities Php600,000
Total current assets Php1,200,000

Required: In order to determine ABC’s ability to pay current obligations, the financial analyst would calculate ABC’s
cash ratio as what amount? 0.50

Exercise 16. Receivable turnover. The year-end financial statements for ABC Company reflect the data presented
as follows. 10% of ABC’s net sales are in cash.

Year 1 Year 2 Year 3

Net sales 1,500 units at Php100 1,200 units at Php100 1,200 units at Php125
Ending inventory 100 units at Php50 100 units at Php50 100 units at Php50
Average receivables Php12,500 Php12,000 Php14,400
Net income Php18,750 Php9,400 Php26,350

Required: What are ABC’s receivables turnover ratios for Year 2 and Year 3? 9.0 and 9.375, respectively.

Exercise 17. DSO. ABC Company grants credit terms of 1/15, net 30 and projects gross sales for next year of
Php2,000,000. The credit manager estimates that 40% of their customer pay on the discount date, 40% on the
net due date, and 20% pay 15 days after the net due date.

Required: Assuming uniform sales and a 360-day year, what is the projected days’ sales outstanding (rounded to
the nearest whole day)? 27 days

Exercise 18. DSO and AR Balance. A company sells 10,000 units a year at Php66 each. All sales are on credit
with terms of 3/10, net 30; otherwise, full payment is due at the end of 30 days. One half of the customers are
expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30.
Sales are expected to be uniform throughout the year for both types of customers.

Required:
1. What is the expected average collection period for the company? 20 days.
2. Assume that the average collection period is 25 days. After the credit policy is well established, what is the
expected average accounts receivable balance for the company at any point in time, assuming a 365-day
year? Php45,205.48

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MAS-14 FINANCIAL STATEMENT ANALYSIS
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BY ABRAHM A. APEPE

Exercise 19. DSO. The following inventory and sales data are available for the current year for ABC Company. ABC
uses a 365-day year when computing ratios.

December 30, 2017 December 30, 2016

Net credit sales Php6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000

Required: What is the average number of days to collect accounts receivable in 2017? 19.71 days.

Exercise 20. Receivable turnover. The year-end financial statements for ABC Company reflect the data presented
as follows. 10% of ABC’s net sales are in cash.

Year 1 Year 2 Year 3

Net sales 1,500 units at Php100 1,200 units at Php100 1,200 units at Php125
Ending inventory 100 units at Php50 100 units at Php50 100 units at Php50
Average receivables Php12,500 Php12,000 Php14,400
Net income Php18,750 Php9,400 Php26,350

Required: What are ABC’s inventory turnover ratios for Year 2 and Year 3? 12 and 12, respectively.

Exercise 21. Days in inventory. The following inventory and sales data are available for the current year for ABC
Company. ABC uses a 365-day year when computing ratios.

November 30, 2017 November 30, 2016

Net credit sales Php6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000

Required: What is the average number of days to sell inventory in 2017? 72.50 days.

Exercise 22. Operating cycle. ABC Company computed the following items from its financial records for the
current year:

Current ratio 2 to 1
Days’ sales in inventory 54 days
Days’ sales in receivables 24 days
Days’ purchases in accounts payable 36 days

Required: What was the number of days in ABC Company’s operating cycle? 78 days.

Exercise 23. Operating cycle. The following inventory and sales data are available for the current year for ABC
Company. ABC uses a 365-day year when computing ratios.

November 30, 2017 November 30, 2016

Net credit sales Php6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000

Required: What is the Company’s operating cycle for 2017? 92.21 days.

Exercise 24. AP Turnover. The controller of ABC Company has gathered the following information:
Beginning of Year End of Year
Inventory Php6,400 Php7,600
Accounts receivable 2,140 3,060
Accounts payable 3,320 3,680

Total sales for the year were Php85,900, of which Php62,400 were credit sales. The cost of goods sold was
Php24,500.

Required: What was ABC Company’s payables turnover ratio for the year? 7.3 times.

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MAS-14 FINANCIAL STATEMENT ANALYSIS
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BY ABRAHM A. APEPE

Solvency ratios
Exercise 25. Times interest earned. A company has interest expense of Php4 million, sales revenue of Php50
million, earnings before interest and taxes of Php20 million, and an income tax rate of 35%.

Required: What is the times-interest-earned ratio of the company? 5.0

Exercise 26. Times interest earned. The interest expense for a company is equal to its earnings before interest
and taxes (EBIT). The Company’s tax rate is 40%.

Required: What is the times interest earned ratio of the company? 1.0

Exercise 27. D/E ratio. The following information has been derived from the financial statements of ABC
Company:
Current assets Php640,000
Total assets 990,000
Long-term liabilities Php130,000
Current ratio 3.2

Required: What is the company’s debt to equity ratio? 0.50

Exercise 28. TIE and D/E ratio. Selected data from ABC Company’s financial statements for the years indicated
are presented in thousands:
December 31, December 31,
2017 Op
2017 2016
Net credit sales Php4,175 Cash Php32 Php28
Cost of goods sold 2,880 Trading securities 169 172
Interest expense Accounts receivable
50 210 204
(net)
Income tax 120 Merchandise inventory 440 420
Gain on disposal of a segment (net Tangible fixed assets
210 480 440
of tax)
Administrative expense 950 Total assets 1,397 1,320
Net income 385 Current liabilities 370 368
Total liabilities 790 750
Common stock
226 210
outstanding
Retained earnings 381 360
Required:
1. What is the total debt to equity ratio for ABC Company in2017? 1.30
2. What is the time- interest-earned ratio for ABC Company for 2017? 6.90 times.

ADDITIONAL FUNDS NEEDED (AFN) / EXTERNAL FINANCING NEEDED (EFN)

This portion deals with financial forecasting using additional funds needed. This topic is useful whenever the
Company estimates an increase its future sales level (sales forecast). In order to generate the said increase in
sales, the Company has to generate additional assets. These assets, on the other hand, need to be financed
either by debt or equity. The Company has internal sources of debt and equity. There are spontaneous liabilities
arising from the increases in assets (internal debt) and spontaneous equity arising from the increase in sales
(internal equity). If these internal sources are not enough to finance the additional assets, then the Company
needs to finance externally, hence, the topic AFN/EFN. The equation used to calculate the AFN/EFN would
depend whether the fixed assets are being utilized at full capacity or not.

If Fixed Assets (FA) are utilized at Full Capacity

The formula for the computation of AFN/EFN is presented below:
𝐴0 𝐿0
A𝐹𝑁 𝑜𝑟 𝐸𝐹𝑁 = (𝑆 − 𝑆0 ) − (𝑆1 − 𝑆0 ) − (𝑅𝑜𝑆)(𝑆1 )(𝑏)
𝑆0 1 𝑆0

Where: = Assets (at time 0) which vary directly with = Return on sales or Profit margin
A0 RoS
sales = Net income / Sales
= Liabilities (at time 0) which vary directly = Retention ratio
L0 b
with sales = Addition to RE / Net income
𝐴0
S0 = Current sales (𝑆 − 𝑆0 ) = The required increase in Assets
𝑆0 1
= Forecasted sales 𝐿0 = The spontaneous increase in
S1 (𝑆 − 𝑆0 )
= S0 * (1 + g) 𝑆0 1 Liabilities
= The forecasted growth rate =The spontaneous increase in
g (𝑅𝑜𝑆)(𝑆1 )(𝑏)
Equity

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MAS-14 FINANCIAL STATEMENT ANALYSIS
AAA NOTES MAS 14
BY ABRAHM A. APEPE

Exercise 29. The statement of financial position and statement of comprehensive income of ABC Company is
presented below:

Assets Liabilities and SHE I/S

CA Current Liabilities Sales Php1,500,000
Cash Php250,000 Accounts payable Php500,000 CGS 1,000,000
AR 500,000 Notes payable 500,000 EBIT Php500,000
Inventory 750,000 Total CL Php1,000,000 Tax 200,000
Total CA Php1,500,000 NI Php300,000
Long term Liabilities
NCA Long term Debt Php625,000
Fixed assets Php1,000,000
SHE
Total Php2,500,000 Common stock Php375,000
Assets
Retained earnings 500,000
Total SHE Php875,000
Total Liabilities and Php2,500,000
SHE

The Company declared and distributed dividends amounting to Php120,000.

Required: Determine the EFN given that the Fixed Assets are being utilized at full capacity and the forecasted
growth rate in sales is 30%. Php366,000

-END-

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MAS-14 FINANCIAL STATEMENT ANALYSIS