UST - ALFREDO M.

VELAYO COLLEGE OF ACCOUNTANCY

Office of the Dean

SECOND TERM, ACADEMIC YEAR 2022-2023

ACC51112 – INTEGRATED REVIEW IN STRATEGIC COST
AND FINANCIAL MANAGEMENT

MAS-12 FINANCIAL STATEMENT ANALYSIS

Exercise 1. Horizontal Analysis. TIEMPO Company had net income of P2million in 2021. Using
the 2021 financial elements as the base data, net income decreases by 70% in 2022 and increased
by 175% in 2023. The respective net income reported by TIEMPO for 2022 and 2023 are:
1. For 2022:
2. For 2023:

Exercise 2. Vertical Analysis - BS. The following balance sheets of TY Corporation and
VALENCIA Incorporated are shown below:
TY Corporation VALENCIA Corporation
Balance Sheet Balance Sheet
Dec 31, 2022 Dec 31, 2022

Cash 10 000 Cash 20 000

AR 20 000 AR 70 000
Inventory 15 000 Inventory 45 000
Current Assets 45 000 Current Assets 135 000
Noncurrent Assets 55 000 Noncurrent Assets 365 000
Total Assets 100 000 Total Assets 500 000

Perform vertical analysis

Exercise 3. Vertical Analysis – IS. ALEXANDRIA Cooperative and HANNZ & Partners has
shown the following financial performance for the year:
ALEXANDRIA COOP HANNZ and Partners
Income statement Income statement
Dec 31, 2022 Dec 31, 2022

Sales 300 000 Sales 30 000

Cost of goods sold (90 000) Cost of goods sold (7 200)
Gross profit 210 000 Gross profit 22 800
Operating expenses (45 000) Operating expenses (12 000)
Operating income 165 000 Operating income 10 800

Prepare common size income statements for ALEXANDRIA Coop and HANNZ & Partners.
Exercise 4. Liquidity ratios. PADO Enterprise showed the following items in its balance sheet
for 31 December 2022:
Cash P 40 000 Accounts payable P 14 000
Marketable securities 15 000 Accrued liabilities 11 000
Accounts receivable 30 000 Income tax payable 18 000
Prepaid expenses 20 000 Short term notes payable 21 000
Inventories 25 000

Determine the following for 31 December 2022:

1. Working capital 3. Current ratio
2. Acid-test ratio 4. Cash ratio

Exercise 5. Solvency ratios. PALMA Oil Corp processes palm oils. The following information
pertains to its financial position as of 31 December 2022:
Short term debt P 30 000
Long term debt 40 000
Equity 70 000
Total Assets 140 000

PALMA also showed the following income statement for the year just ended:
Sales P 60 000
Cost of sales (36 000)
Gross profit 24 000
Other operating expenses (9 000)
Net operating income 15 000
Interest expenses (6 000)
Net income before taxes 9 000
Income tax (30%) (2 700)
Net income 6 300

Determine the following:

1. Debt ratio 2. Debt to equity ratio 3. Times interest earned

Exercise 6. Profitability and Efficiency ratios. LOVELY Corporation has the following
financial statements presented in its annual report:
Balance Sheet
31 December 2022
2022 2021
Cash 12 000 15 000 2022 2021
AR 10 000 10 000 AP 21 000 23 000
Inventory 14 000 10 000 Bank loan 39 000 33 000
Current assets 36 000 35 000 Total liabilities 60 000 56 000

PPE 84 000 105 000 Equity 60 000 84 000

Total Assets 120 000 140 000 Liab. &Equity 120 000 140 000
 Income statement
For the period ended 31 December 2022
Sales revenues P 191 250
CGS 153 000
GP P 38 250
Other operating expenses 13 250
Net operating income P 25 000
Interest expenses 5 875
Net income before taxes P 19 125
Income tax (40%) 7 650
Net income P 11 475

The owner of LOVELY wants to determine the profitability and efficiency of her company.
Determine the following:
1. Total asset turnover
2. Fixed asset turnover
3. AR Turnover
4. Inventory Turnover
5. AP Turnover
6. Days – AR (Days sales outstanding)
7. Days – Inventory
8. Days – AP
9. Operating cycle (days)
10. Cash conversion cycle (days)
11. Profit margin / Sales margin
12. Gross profit percentage
13. Return on Assets
14. Return on Equity

Exercise 7. Other ratios. ABEGAIL Plant, Inc. earned a net income of P5 000 000 this year. It
declared a total of P3 500 000 of dividends in the same year. ABEGAIL has 200 000 shares
outstanding throughout the year with a share price of P250 each. Determine the following:
1. Plowback ratio
2. Payout ratio
3. Earnings per share
4. Dividends per share
5. Price to earnings ratio

QUIZZER
THEORY
Basic concepts
1. When a balance sheet amount is related to an income statement amount in computing a ratio,
A. Comparisons with industry ratios are not meaningful.
B. The balance sheet amount should be converted to an average for the year.
C. The income statement amount should be converted to an average for the year.
D. The ratio loses its historical perspective because a beginning-of-the-year amount is
combined with an end-of-the-year amount.

2. How are financial ratios used in decision making?

A. They remove the uncertainty of the business environment.
B. They aren’t useful because decision making is too complex.
C. They give clear signals about the appropriate action to take.
D. They can help identify the reasons for success and failure in business, but decision making
requires information beyond the ratios.

Vertical analysis
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. Ascertain the relative potential of companies of similar size in different industries.
B. Evaluate financial statements of companies within a given industry of approximately the
same value.
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 C. Determine which companies in the same industry are at approximately the same stage of
development.
D. 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.

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. In a set of comparative financial statements, you observed a gradual decline in the net of gross
ratio, i.e., between net sales and gross sales. This indicates that:
A. Sales volume is decreasing.
B. The discount period is being lengthened.
C. There is adherence to the collection policies of the company.
D. There is a stiffening in the grant of discounts to the customers.

Horizontal analysis
6. Last year, a business had no long-term investments; this year long term investments amount to
P100,000. In a horizontal analysis the change in long-term investments should be expressed as
A. An absolute value of P100,000, and an increase of 100%
B. An absolute value of P100,000 and an increase of 1,000%
C. An absolute value of P100,000 and no value for a percentage change
D. No change in any terms because there was no investment in the previous year.

Liquidity ratios
7. 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. Net profit minus dividends to interest expense.
D. Current assets minus inventories to current liabilities.

8. Which ratio is most helpful in appraising the liquidity of current assets?

A. Accounts receivable turnover. C. Current ratio.
B. Acid-test ratio. D. Debt ratio.

Activity ratios
9. The ratio that measures a firm's ability to generate earnings from its resources is
A. Asset turnover. C. Days' sales in receivables.
B. Days' sales in inventory. D. Sales to working capital.

Profitability ratios
10. Which of these ratios are measures of a company’s profitability?
1. Earnings per share 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Return on sales 7. Receivables turnover
4. Debt-equity ratio 8. Price-earnings ratio
A. 1, 3, and 5 only C. 1, 3, 5, 6, 7, and 8 only.
B. 1, 3, 5, and 8 only. D. All eight ratios.

11. The ratio of analytical measurements which measures the productivity of assets regardless of
capital structure is
A. Current ratio. C. Quick (acid test) ratio.
B. Debt ratio. D. Return on total assets.

12. How are the following used in the calculation of the dividend-pay-out ratio for a company with
only common stock outstanding?
A. B. C. D.
Dividends per share Denominator Denominator Numerator Numerator
Earnings per share Numerator Not used Denominator Not used
Book value per share Not used Numerator Not used Denominator
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Integrated ratios
13. An investor has been given several financial ratios for an enterprise but none of the financial
reports. Which combination of ratios can be used to derive return on equity?
A. Price-to-earnings ratio and return-on-assets ratio.
B. Net profit margin, total assets turnover, and equity multiplier.
C. Market-to-book-value ratio and total-debt-to-total-assets ratio.
D. Price-to-earnings ratio, earnings per share, and net profit margin.

Ratio analysis
14. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit.
Belle’s quick ratio is significantly better than the industry average. Which of the following
factors should North consider as possible limitation of using this ratio when evaluating Belle’s
creditworthiness?
A. Belle may need to liquidate its inventory to meet its long-term obligations.
B. Increasing market prices for Belle’s inventory may adversely affect the ratio.
C. Fluctuating market prices of short-term investments may adversely affect the ratio.
D. Belle may need to sell its available-for-sale investments to meet its current obligations.

15. In comparing the current ratios of two companies, why is it invalid to assume that the company
with the higher current ratio is the better company?
A. The current ratio includes assets other than cash.
B. A high current ratio may indicate inadequate inventory on hand.
C. The two companies may define working capital in different terms.
D. A high current ratio may indicate inefficient use of various assets and liabilities.

16. A company’s current ratio is 2.2 to 1 and the quick 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 a quick ratio of 0.8 to
0.1. 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 year.
B. An increase in credit sales in relationship to sales
C. An increase in the use of payables during the current year.
D. An increase in the use of payables during the current year.

17. If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. Return on equity. C. Times interest earned.
B. The current ratio. D. Total liabilities to total assets.

18. The market value of a firm's outstanding common shares will be higher, everything else equal,
if
A. Investors expect lower dividend growth.
B. Investors have longer expected holding periods.
C. Investors have a lower required return on equity.
D. Investors have shorter expected holding periods.

19. In a comparison of 2022 to 2021, Neir Co.’s inventory turnover ratio increased substantially
although sales and inventory amounts were essentially unchanged. Which of the following
statements explains the increased inventory turnover ratio?
A. Cost of goods sold decreased.
B. Total asset turnover increased.
C. Gross profit percentage decreased.
D. Accounts receivable turnover increased.

20. Minix Co. has a high sales-to-working-capital ratio. This could indicate
A. The firm is not profitable.
B. The firm is undercapitalized.
C. Working capital is not profitably utilized.
D. The firm is likely to have liquidity problems.

21. When compared to a debt-to-assets ratio, a debt-to-equity ratio would

A. Be lower than the debt-to-assets ratio.
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 B. Be higher than the debt-to-assets ratio.
C. Be about the same as the debt-to-assets ratio.
D. Have no relationship at all to the debt-to-assets ratio.

22. You observe that a firm’s profit margin and debt ratio are below the industry average, while
its return on equity exceeds the industry average. What can you conclude?
A. Return on assets is above the industry average.
B. Total assets turnover is below the industry average.
C. Total assets turnover is above the industry average.
D. Statements A and C are correct.

23. The following situations are descriptive of SBD Corporation. Which would be considered as
the most favorable for the common stockholders.
A. Equity ratio is low; return on assets exceeds the cost of borrowing.
B. Equity ratio is high; return on assets exceeds the cost of borrowing.
C. SBD stops paying dividends on its cumulative preferred stock; the price-earnings ratio of
common stock is low.
D. Book value per share of common stock is substantially higher than market value per share;
return on common stockholders’ equity is less than the rate of interest paid to creditors.

24. The company issued new common shares in a three-for-one stock split. Identify the statements
that indicate the correct effect(s) of this transaction.
A. It reduced equity per share of common stock.
B. The peso amount of capital stock is increased.
C. Share of each common stockholder is reduced.
D. Working capital and current ratio are increased.

Sensitivity analysis
25. 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 decreased. C. No change in total assets.
B. Assets will be increased. D. None of the above.

26. Which of the following actions will increase a company’s quick ratio?
A. Issue equity and use the proceeds to purchase inventory.
B. Issue short-term debt and use the proceeds to purchase inventory.
C. Reduce inventories and use the proceeds to reduce long-term debt.
D. Issue long-term debt and use the proceeds to purchase fixed assets.
E. Reduce inventories and use the proceeds to reduce current liabilities.

27. On December 31, 2022, Northpark Co. collected a receivable due from a major customer.
Which of the following ratios would be increased by this transaction?
A. Current ratio. C. Quick ratio.
B. Inventory turnover ratio. D. Receivable turnover ratio.

28. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less than 2
to 1 if the company
A. Paid an account payable.
B. Collected an account receivable.
C. Purchased inventory on open account.
D. Sold merchandise on open account that earned a normal gross margin.

29. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of
the following transactions would improve Mabuhay’s current ratio?
A. Paying P40,000 of short-term accounts payable.
B. Collecting P20,000 of short-term accounts receivable.
C. Refinancing a P60,000 long-term mortgage with a short-term note.
D. Purchasing P100,000 of merchandise inventory with a short-term accounts payable.

30. A company has a current ratio of 2 to 1. The ratio will decrease if the company
A. Borrow cash on a six-month note.
B. Pays a large account payable which had been a current liability.
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 C. Receives a 5% stock dividend on one of its marketable securities.
D. Sells merchandise for more than cost and records the sale using the perpetual inventory
method.

31. Recording cash dividend payment when declaration was recorded earlier would
A. Increase both current ratio and working capital
B. Decreases both current ratio and working capital
C. Have no effect on current ratio or earnings per share
D. Increase current ratio but no effect on working capital.

32. ABC Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A
transaction that would change Bond's quick ratio but not its current ratio is the
A. payment of accounts payable.
B. collection of accounts receivable.
C. sale of inventory on account at cost.
D. sale of short-term marketable securities for cash that results in a profit.

33. If, just prior to the period of rising prices, a company changed its inventory measurement
from FIFO to LIFO, the effect in the next period would be to
A. B. C. D.
Current ratio Increase Increase Decrease Decrease
Inventory turnover Increase Decrease Increase Decrease

34. 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 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. Remain unchanged whether the assets are purchased or leased.
C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Increase if the assets are purchased, and remain unchanged if the assets are leased.

35. What would be the effect on book value per share and earnings per share if the corporation
purchased its own shares in the open market at a price greater than book value per share?
A. B. C. D.
Book value per share Increase No effect Decrease Decrease
Earnings per share Increase Increase Increase Decrease

36. Which of the following statements is correct?

A. A high quick ratio is always a good indication of a well-managed liquidity position.
B. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings
stream.
C. A relatively low return on assets (ROA) is always an indicator of managerial incompetence.
D. An increase in a firm’s inventories will call for additional financing unless the increase is
offset by an equal or larger decrease in some other asset account.

37. A company issued long-term bonds and used the proceeds to repurchase 40% of the
outstanding shares of its stock. This financial transaction will likely cause the
A. Current ratio to decrease. C. Times-interest-earned ratio to
decrease.
B. Fixed charge coverage ratio to increase. D. Total assets turnover ratio to increase.

38. All of the following statements are valid except

A. The inventory turnover is computed by dividing sales by average inventory.
B. The results of financial statements analysis are of value only when viewed in comparison
with the results of other periods or other firms.
C. If the return on total assets is higher than the after-tax cost of long-term debt, then leverage
is positive, and the common stockholders will benefit.
D. The short-term creditor is more interested in cash flows and in working capital management
that he is in how much accounting net income is reported.

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PROBLEMS
1. A service company's working capital at the beginning of January of the current year was
P70,000. The following transactions occurred during January:
Performed services on account P30,000
Purchased supplies on account 5,000
Consumed supplies 4,000
Purchased office equipment for cash 2,000
Paid short-term bank loan 6,500
Paid salaries 10,000
Accrued salaries 3,500
What is the amount of working capital at the end of January?
A. P47,500 C. P80,500
B. P50,500 D. P90,000

2. The net sales of Grand Manufacturing Co. in 2022 is total, P580,600. The cost of goods
manufactured is P480,000. The beginning inventories of goods in process and finished goods
are P82,000 and P65,000, respectively. The ending inventories are, goods in process, P75,000,
finished goods, P55,000. The selling expenses is 5%, general and administrative expenses
2.5% of cost of sales, respectively. The net profit in the year 2022 is
A. P45,725 C. P83,000
B. P53,850 D. P90,000

3. If period one is P400,000, period two is P420,000, and Period 3 is P448,000, the percentage to
be assigned for period three in horizontal analysis, assuming that period one is the base year,
is
A. 100% C. 105%
B. 89% D. 112%

4. Blasso Co.’s net accounts receivable were P500,000 at December 31, 2022 and P600,000 at
December 31, 2023. Net cash sales for 2023 were P200,000. The accounts receivable turnover
for 2023 was 5.0. What were Blasso’s total net sales for 2023?
A. P2,950,000 C. P3,200,000
B. P3,000,000 D. P5,500,000

5. During 2022, Rand Co. purchased P960,000 of inventory. The cost of goods sold for 2022
was P900,000, and the ending inventory at December 31, 2022 was P180,000. What was the
inventory turnover for 2022?
A. 5.0 C. 6.0
B. 5.3 D. 6.4

6. Alumbat Corporation has P800,000 of debt outstanding, and it pays an interest rate of 10
percent annually on its bank loan. Alumbat’s annual sales are P3,200,000, its average tax rate
is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain
a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.
What is Alumbat’s current TIE ratio?
A. 2.4 C. 3.6
B. 3.4 D. 5.0

7. What would be a company’s “times interest earned ratio” if interest paid on loans amount to
P9,000 and its net income after income tax is P99,000. (Assume a 25% income tax rate on
first P100,000 of income and 35% income tax rate on income in excess of P100,000.)
A. 10 times C. 13 times
B. 12 times D. 16.21 times

8. Manufacturer’s Inc. estimates that its interest charges for this year will be P700 and its net
income will be P3,000. Assuming its average tax rate is 30 percent, what is the company’s
estimated times interest earned ratio?
A. 2.40 C. 5.33
B. 4.25 D. 7.12

9. The average stockholders equity for ABC Company for 2022 was P2,000,000. Included in this
figure is P200,000 par value of 8% preferred stock, which remained unchanged during the
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 year. The return on common shareholders’ equity was 12.5% during the 2022. How much
was the net income of the company in 2022?
A. P234,000 C. P250,000
B. P241,000 D. P225,000

10. Ehrenburg Co. had net income of P5.3 million and earnings per share of common stock of
P2.50. Included in the net income was P500,000 of bond interest expense related to its long-
term debt. The income tax rate was 50%. Dividends on preferred stock were P300,000. The
dividend payout ratio on common stock was 40%. What were the dividends on common stock?
A. P1,800,000 C. P2,000,000
B. P1,900,000 D. P2,120,000

11. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount
of current assets is
A. P600,000 C. P1,200,000
B. P900,000 D. P1,800,000

12. India Oats pays dividends of P0.62 per quarter, and has annual earnings per share of P2.80.
What is India Oats's dividend yield and dividend payout ratio for 2022, respectively, if its
recent market price is P30.00 and its average market price was P28.00?
A. 8.27% and 22.1%. C. 8.86% and 22.1%.
B. 8.27% and 88.6%. D. 8.86% and 88.6%.

13. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40%
Shares outstanding throughout 2022
Preferred 20,000
Common 35,000
Income tax ratio 40%
Price earnings ratio 5 times
The dividend yield ratio is:
A. 0.08 C. 0.40
B. 0.12 D. 0.50

14. Last year, Quayle Energy had sales of P200 million and its inventory turnover ratio was 5.0.
The company’s current assets totaled P100 million and its current ratio was 1.2. What was the
company’s quick ratio?
A. 0.55 C. 1.20
B. 0.72 D. 1.39

15. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced P2
million in sales and sustains an inventory turnover of 8.0, what are the firm's current assets?
A. P500,000 C. P1,250,000
B. P1,000,000 D. P1,500,000

16. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The company
has P2 million in sales and its current liabilities are P1 million. What is the company’s
inventory turnover ratio?
A. 5.0 C. 5.5
B. 5.2 D. 6.0

17. Perry Technologies Inc. had the following financial information for the past year:
Sales P860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
A. P 61,429 C. P430,000
B. P107,500 D. P500,000
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18. Taft Technologies has the following relationships:
Annual sales P1,200,000 Inventory turnover ratio 4.8
Current liabilities P 375,000 Current ratio 1.2
Days sales outstanding (DSO) 40 (360-day year)
The company’s current assets consist of cash, inventories, and accounts receivable. How much
cash does Taft have on its balance sheet?
A. -P 8,333 C. P125,000
B. P 66,667 D. P200,000

19. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%.
If the enterprise has total debt of P1,000,000, it has a sales level of
A. P200,000.00 C. P2,450,000.00
B. P408,163.26 D. P5,000,000.00

20. The Intelinet Corporation and Comp Inc. have assets of P100,000 each and a return on common
equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half the sales of
Intelinet. If Intelinet has net income of P10,000 and a total assets turnover ratio of 3.5, what is
Comp Inc.'s profit margin?
A. 3.31% C. 10.00%
B. 7.71% D. 13.50%

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