MANAGEMENT SERVICES

FINANCIAL STATEMENT
ANALYSIS
HELLO
March 26, 2023
1
Comparative analysis may be made on a number of different bases.
a. Intracompany basis—current
year prior years.
b. Industry averages— company with industry averages.
c. Intercompany basis— company with competing companies.

3. There are three basic tools of analysis:

a. Horizontal analysis
- trend analysis
- data over a period of time
- increase or decrease amount or percentage
- Base on a base year
 b. Vertical analysis –
- common size analysis
- percent of a base amount
- the base amount is total assets balance sheet
- net sales the income statement.

c. Ratio analysis -
- ratios for balance sheet and income statement.
A.Liquidity ratios — measures of the short-term debt-paying
ability.
Ratio Formula Purpose Or Use
1 Current Current Assets ÷ Measures the short-term
ratio Current Liabilities debt-paying ability
Acid Test Cash + Marketable Measures the immediate
or Quick Securities + Accounts short-term liquidity.
ratio Receivable ÷
Current Liabilities
B. Activity ratios — measures the efficiency of the conduct of business activity.
Ratio Formula Purpose Or Use
1 Accounts Net Credit Sales ÷ Measures the number of times in a
Receivable Average Net Accounts year that receivables were
Turnover Receivable collected
2 Average 365 days ÷ Accounts Measures the average number of
collection receivable turnover days that receivables were
period OR collected
Accounts receivable Net ÷
Net Credit Sales ÷ 365 days
3 Inventory Cost of Goods Sold ÷ Measures the number of times in a
Turnover Average Inventory year that inventories were sold
4 Average 365 days ÷ Inventory Measures the average number of
sales period turnover days that inventories were sold
OR
Accounts Payable ÷
Cost of Goods Sold ÷ 365
days
C. Profitability ratios—measures of the income or operating success of an enterprise
for a given period of time.C
Ratio Formula Purpose Or Use
1 Profit margin Net Income ÷ Sales Measures the net income
generated by each peso sales
2 Asset Net Sales ÷ Average Total Measures how assets are
Turnover Assets efficiently used to generate sales
3 Return On Net Income ÷ Total Assets Measures overall profitability of
Assets assets
4 Return On Net Income ÷ Average Measures profitability of owner’s
Equity Common Stockholder’s Equity investment
5 Earnings Per (Accounting Net Income Or Measures net income per common
Share Earnings after tax − share outstanding
Preferred Dividends) ÷
Average number of common
shares outstanding
Or
Earnings available to
common stockholder ÷
Average number of common
shares outstanding
C. Profitability ratios—measures of the income or operating success of an enterprise
for a given period of time.C
Ratio Formula Purpose Or Use
6 Price Earnings Market Value of common Measures the value investors are
Ratio Stock ÷ Earnings Per Share willing to give up for every peso
earnings they earn
7 Payout Ratio Common Cash Dividends ÷ Measures the percentage of
Earnings Available To earnings distributed as cash
Common Stockholders dividends
8 Dividend Yield Common Cash Dividends ÷ Measures the percentage of cash
Market Value of common dividends received over the cash
Stock investment per share of common
stockholders
9 Book value per Common stockholders' equity Book value per common share
share ÷
Number of common shares
outstanding
10 Book value to Book value per share ÷ Measures the book value per share
Market Market Value of common against perceived market value of
Stock common stock
A.Solvency ratios— measures of the ability of the enterprise to
survive over a long period of time.
Ratio Formula Purpose Or Use
1 Times Operating income ÷ Measures the ability to
interest Interest expense meets interest payments as
earned they become due
ratio
2 Debt-to- Liabilities ÷ Measures size of total debt
equity Stockholders' equity to total capital
ratio
3 Debt Liabilities ÷ Total Measures the percentage of
ratio Assets total assets provided by
creditors
4 Equity Total Equity ÷ Total Measures the percentage of
ratio Assets total assets provided by
owners
 DOBSON COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash P 35,000 P 40,000
Short-term investments 15,000 60,000
Accounts receivable (net) 50,000 30,000
Inventory 50,000 70,000
Property, plant and equipment (net) 250,000 300,000
Total assets P400,000 P500,000

Liabilities and stockholders' equity

Accounts payable P 10,000 P 30,000
Short-term notes payable 40,000 90,000
Bonds payable 88,000 160,000
Common stock 160,000 145,000
Retained earnings 102,000 75,000
Total Liabilities&Stockholders’ equity P400,000 P500,000
 DOBSON COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash P 35,000 P 40,000
Short-term investments 15,000 60,000
Accounts receivable (net) 50,000 30,000
Inventory 50,000 70,000
Prepayments ________ _______
Current assets P150.000 P200,000
Property, plant and equipment (net) P 250,000 P300,000
Total assets P400,000 P500,000

Liabilities and stockholders' equity

Accounts payable P 10,000 P 30,000
Short-term notes payable 40,000 90,000
Current liabilities P 50,000 P120,000
Bonds payable P 88,000 P160,000
Common stock 160,000 145,000
Retained earnings 102,000 75,000
Stockholders’ equity P262,000 P220,000
Total Liabilities Stockholders’ equity P400,000 P500,000
 DOBSON COMPANY
Income Statement
For the Year Ended December 31, 2009

Net sales P360,000

Cost of goods sold 198,000
Gross profit 162,000
Expenses
Administrative expenses P59,000
Selling expense 40,000
Interest expense 12,000
Total expenses 111,000
Income before income taxes 51,000
Income tax expense 15,000
Net income P 36,000

Additional information:
a. Cash dividends of P9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during 2009
was 30,000 shares.
c. Market value of common stock on December 31, 2009, was P21 per share.
 DOBSON COMPANY
Income Statement
For the Year Ended December 31, 2009

Net sales P360,000

Cost of goods sold 198,000
Gross profit 162,000
Operating Expenses
Administrative expenses P59,000
Selling expense 40,000
Total Operating Expenses 99,000
Operating Income or EBIT 63,000
Interest expense 12,000
Income before income taxes 51,000
Income tax expense 15,000
Accounting net income 36,000
Preferred dividends -
Income available to common stockholders P 36,000
Additional information:
a. Cash dividends of P9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during 2009
was 30,000 shares.
c. Market value of common stock on December 31, 2009, was P21 per share.
1. Current ratio________ .
2. Return on common stockholders' equity
3. Price-earnings ratio _________.
4. Acid-test ratio _________.
5. Receivables turnover _________.
6. Times interest earned _________
7. Profit margin _________.
8. Days in inventory _________.
9. Payout ratio _________.
10.Return on assets _________.
A. Liquidity ratios — measures of the short-term debt-paying ability.

Ratio Formula Purpose Or Use

1 Current ratio P35,000+P15,000+P50,000 Measures the short-term debt-
3 times + paying ability
300% P50,000/P10,000+P40,000
P3:P1 CA=C+MS+AR-NET+INV-NET+P
P150,000/P50,000

4 Acid Test or P35,000+P15,000+P50,000/ Measures the immediate short-

Quick ratio P10,000+P40,000 term liquidity.
2 times
200% P100,000/P50,000 QA=CA-INV-PREPAYMENTS
P2:P1
B. Activity ratios — measures the efficiency of the conduct of business activity.
Ratio Formula Purpose Or Use
5 Accounts P360,000/ Measures the number of times in a
Receivable P30,000+P50,000/2 year that receivables were
Turnover collected
9 TIMES P360,000/40,0002
5 Average 365 days ÷ 9 Measures the average number of
collection days that receivables were
period collected
40.56 OR 41
DAYS
8 Inventory P198,000/ Measures the number of times in a
Turnover P70,000+P50,000/2 year that inventories were sold

3.3 TIMES P198,000/P60,000

8 Average 365 days ÷ 3.3 Measures the average number of

sales period days that inventories were sold
110.61 or
111 DAYS
Operating 41 DAYS+111 DAYS Time it takes to receive cash from
Cycle inventory acquisition date
152 DAYS
5 Accounts P360,000/ Measures the number of times in a
Receivable P30,000+P50,000/2 year that receivables were
Turnover collected
9 TIMES P360,000/40,0002
5 Average 365 days ÷ 9 Measures the average number of
collection days that receivables were
period collected
40.56 OR 41
DAYS

2008 360,000 2009

30,000 40,000 50,000
 8 Inventory P198,000/ Measures the number of times in a
Turnover P70,000+P50,000/2 year that inventories were sold

3.3 TIMES P198,000/P60,000

8 Average 365 days ÷ 3.3 Measures the average number of

sales period days that inventories were sold
110.61 or
111 DAYS

2008 198,000 2009

70,000 60,000 50,000
 Operating 41 DAYS+111 DAYS Time it takes to receive cash from
Cycle inventory acquisition date
152 DAYS

Cash ______ 200 Average Sales Period 111 days

Accounts Receivable _______ 200 Average Collection Period 41 days
Operating Cycle 152 days
Average Collection Period 41 days Average Payment Period 30 days
Accounts Receivable Turnover 9 times Cash conversion cycle 122 days

Accounts Receivable______200 Inventory______100

Sales______________200 Accounts payable____ 100

Average Sales Period 111 days Average Payment Period 30 days assume
Inventory Turnover 3.3 times
Profit 1100 Accounts payable ______ 100
Cost of Sales ________ ______ 100 Cash _______________ 100
Inventory _______________ 100
 Operating 41 DAYS+111 DAYS Time it takes to receive cash from
Cycle inventory acquisition date
152 DAYS
Accounts Receivable______200
Inventory______100 Sales______________200 Cash ______ 200
Profit 1100 Accounts Receivable 200
Accounts payable____ 100
Cost of Sales ________ ______ 100
Inventory _______________ 100
Average Sales Period 111 Average Collection Period OC
Aveg Payt Period 30 41 cycle
Cash conversion 122 152

Accounts payable ______ 100

Cash _______________ 100
C. Profitability ratios—measures of the income or operating success of an enterprise
for a given period of time
Ratio Formula Purpose Or Use
7 Profit margin P36,000/P 360,000 Measures the net income
10% generated by each peso sales
Asset P360,000/ Measures how assets are
Turnover P500,000+P400,000/2 efficiently used to generate sales
0.80 TIMES
P0.80:P1 P360,000/P 450,000
10 Return On 36,000/ 450,000 Measures overall profitability of
Assets assets
8%
P0.08:P1
2 Return On P36,000/ Measures profitability of owner’s
Equity P220,000+P262,000/2 investment
14.94% P36,000/P 241,000
P0.1494:P1
3 Earnings Per P36,000-0/30,000 common Measures net income per common
Share shares outstanding share outstanding
P1.20
7 Profit margin P36,000/P 360,000 Measures the net income generated
10% by each peso sales
3 Earnings Per P36,000-0/30,000 common Measures net income per common
ShareP1.20 shares outstanding share outstanding
Asset P360,000/ Measures how assets are
Turnover P500,000+P400,000/2 efficiently used to generate sales
0.80 TIMES P360,000/P 450,000
P0.80:P1
 Asset Turnover P360,000/ Measures how assets are efficiently
0.80 TIMES P500,000+P400,000/2 used to generate sales
P0.80:P1 P360,000/P 450,000

2008 360,000 2009

500,000 450,000 400,000
10 Return On 36,000/ 450,000 Measures overall profitability of
Assets assets
8%
P0.08:P1
10 Return On 36,000/ 450,000 Measures overall profitability of
Assets assets
8%
P0.08:P1

2008 36,000 2009

500,000 450,000 400,000
2 Return On P36,000/ Measures profitability of owner’s
Equity P220,000+P262,000/2 investment
14.94% P36,000/P 241,000
P0.1494:P1
2 Return On P36,000/ Measures profitability of owner’s
Equity P220,000+P262,000/2 investment
14.94% P36,000/P 241,000
P0.1494:P1

2008 36,000 2009

220,000 241.000 262,000
C. Profitability ratios—measures of the income or operating success of an enterprise
for a given period of time.
Ratio Formula Purpose Or Use
3 Price Earnings P21.00÷ P1.20 Measures the value investors are
Ratio willing to give up for every peso
17.5 TIMES earnings they earn
9 Payout Ratio P9,000 ÷ P36,000 Measures the percentage of
.25 OR 25% earnings distributed as cash
dividends
Retention Ratio .75 OR 75%
P27,000 ÷ P36,000
Dividend Yield P0.30÷ P21.00 Measures the percentage of cash
14.29% Or dividends received over the cash
investment per share of common
P9,000 ÷ P630,000
stockholders

Book value per P262,000/30,000 common Book value per common share
share share
P8.73
Book value to P8.73 /P21.00 Measures the book value per share
Market against perceived market value of
.4157 OR common stock
41.57%
9 Payout Ratio P9,000 ÷ P36,000 Measures the percentage of
.25 OR 25% earnings distributed as cash
dividends
Retention Ratio .75 OR 75%
P27,000 ÷ P36,000

ASSETS = LIABILITIES + EQUITIES

27,000 RETAINED 75% RETENTION

EARNINGS RATIO
9.000 DIVIDENDS 25% PAYOUT
RATIO
3 Price Earnings P21.00÷ P1.20 Measures the value investors are
Ratio willing to give up for every peso
17.5 TIMES earnings they earn
Dividend Yield P0.30÷ P21.00 Measures the percentage of cash
14.29% Or dividends received over the cash
investment per share of common
P9,000 ÷ P630,000
stockholders
 Book value per P262,000/30,000 common Book value per common share
share share
P8.73
Book value to P8.73 /P21.00 Measures the book value per share
Market against perceived market value of
.4157 OR common stock
41.57%

ASSETS = LIABILITIES + EQUITIES

400,000 - 138,000 = 262,000
÷ 30,000 SHARES
Book value per share + 8.73
Market value = 21 X 30,000 SHARES + 630,000

768,000 = 138,000 + 630,000

(368,000) UNDERVALUATION (368,000)
Book value per P262,000/30,000 common Book value per common share
share share
P8.73
Book value to P8.73 /P21.00 Measures the book value per share
Market against perceived market value of
.4157 OR common stock
41.57%
A. Solvency ratios— measures of the ability of the enterprise to survive over a
long period of time.
Ratio Formula Purpose Or Use
1 Times P63,000/P12,000 Measures the ability to meets
interest interest payments as they
earned become due
ratio
5.25 TIMES
2 Debt-to- P138,000 ÷ P262,000 Measures size of total debt to
equity ratio total capital
.5267 OR
52.67%
3 Debt ratio P138,000÷ P400,000 Measures the percentage of total
.345 OR assets provided by creditors
34.5%
4 Equity ratio P262,000÷ P400,000 Measures the percentage of total
.655 OR assets provided by owners
65.5%
1 TIE P63,000/ Measures the
ratio P12,000 ability to meets
interest
5.25
payments as
TIMES
they become
due
2 Debt-to- P138,000 ÷ P262,000 Measures size of total debt to
equity ratio total capital
.5267 OR
52.67%
3 Debt ratio P138,000÷ P400,000 Measures the percentage of total
.345 OR assets provided by creditors
34.5%
4 Equity ratio P262,000÷ P400,000 Measures the percentage of total
.655 OR assets provided by owners
65.5%

ASSETS = LIABILITIES + EQUITIES

400,000 = 138,000 + 262,000
= 52.67% + 100%
100% = 34.5% + 65.5%
The following ratios have been computed for Pratt
Company for 2009.
Profit margin 20%
Times interest earned 15 times
Receivables turnover 5 times
Acid-test ratio 1.60 : 1
Current ratio 3:1
Debt to total assets ratio 26%
Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) ? (6) 60,000
Inventory ? (8) 50,000
Property, plant, and equipment (net) 200,000 150,000
Total assets P ? (9) P310,000
Liabilities and stockholders' equity
Accounts payable P ? (7) P 25,000
Short-term notes payable 35,000 30,000
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total liabilities and stockholders’
equity P ? (11) P310,000
Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) ? (6) 60,000
Inventory ? (8) 50,000
Total current assets ?
Property, plant, and equipment (net) 200,000 150,000
Total assets P ? (9) P310,000
Liabilities and stockholders' equity
Accounts payable P ? (7) P 25,000
Short-term notes payable 35,000 30,000
Total current liabilities ?
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total stockholders’ equity P259,000
Total liab and stockholders P ? (11) P310,000
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Interest expense 5,000
Total expenses __ ? (4)
Income before income taxes ? (2)
Income tax expense ? (3)
Net income P ? (1)
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses ? (4)
Operating income
Interest expense 5,000
Income before income taxes ?__ (2)
Income tax expense ? (3)
Net income P ? (1)
The following ratios have been computed for Pratt
Company for 2009.
Profit margin 20%
Net income
Net sales

Net income= 20%

250,000

20% X 250,000 = 50,000 Net income

Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses ? (4)
Operating income
Interest expense 5,000
Income before income taxes ?__ (2)
Income tax expense ? (3)
Net income P 50,000 (1)
The following ratios have been computed for Pratt
Company for 2009.

Times interest earned 15 times

Operating income
Interest expense

Operating income = 15
5,000

15X 5,000 = 75,000 Operating income

Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses ? (4)
Operating income 75,000
Interest expense 5,000
Income before income taxes ?__ (2)
Income tax expense ? (3)
Net income P 50,000 (1)
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses ? (4)
Operating income 75,000
Interest expense 5,000
Income before income taxes 70,0000_ (2)(75,000-5,000)
Income tax expense ? (3)
Net income P 50,000 (1)
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses ? (4)
Operating income 75,000
Interest expense 5,000
Income before income taxes 70,0000_ (2)(75,000-5,000)
Income tax expense 20,0000 (3)(70,000-50,000)
Net income P 50,000 (1)
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P ?(5)
Administrative expenses 15,000
Selling expenses 10,000
Total operating expenses 50,000 (4) )(125,000-75,000)
Operating income 75,000
Interest expense 5,000
Income before income taxes 70,0000_ (2)(75,000-5,000)
Income tax expense 20,0000 (3)(70,000-50,000)
Net income P 50,000 (1)
Net sales P250,000
Cost of goods sold 125,000
Gross profit 125,000
Operating expenses:
Depreciation expense P75,000 (5) (50,000+10,000+15,000)

Administrative expenses 15,000

Selling expenses 10,000
Total operating expenses 50,000 (4) (125,000-75,000)
Operating income 75,000
Interest expense 5,000
Income before income taxes 70,0000_ (2)(75,000-5,000)
Income tax expense 20,0000 (3)(70,000-50,000)
Net income P 50,000 (1)
The following ratios have been computed for Pratt Company for
2009.
Receivables turnover 5 times
Net sales = 5 times
Average accounts receivable

250,000 =5
Average accounts receivable

250,000 = 5 Average accounts receivable

250,000/5 = Average accounts receivable

50,000 = Average accounts receivable

50,000 = Average accounts receivable

Average accounts receivable = Beg. accounts receivable + End.

accounts receivable /2

50,000 = 60,000+ End. accounts receivable /2

50,000 x 2 = 60,000+ End. accounts receivable

100,000- 60,000 = End. accounts receivable

40,000 = End. accounts receivable

Accounts receivable (net) = P40,000.

Let X = Average receivables.

P250,000
———— = 5 times
X
5X = P250,000.
X = P50,000.

Let Y = Accounts receivable at 12/31/09.

P60,000
—————— + Y = P50,000
2
P60,000 + Y = P100,000
Y = P40,000
Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) 40,000 (6) 60,000
Inventory ? (8) 50,000
Total current assets ?
Property, plant, and equipment (net) 200,000 150,000
Total assets P ? (9) P310,000
Liabilities and stockholders' equity
Accounts payable P ? (7) P 25,000
Short-term notes payable 35,000 30,000
Total current liabilities ?
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total stockholders’ equity P259,000
Total liab and stockholders P ? (11) P310,000
The following ratios have been computed for Pratt
Company for 2009.
Acid-test ratio 1.60 : 1
Cash+Short-term Investments+Accounts receivable (net) = 1.60
Current liabilities

25,000+15,000+40,000 = 1.60
Current liabilities

80,000/1.60= Current liabilities

50,000 = Current liabilities

Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) 40,000 (6) 60,000
Inventory ? (8) 50,000
Total current assets ?
Property, plant, and equipment (net) 200,000 150,000
Total assets P ? (9) P310,000
Liabilities and stockholders' equity
Accounts payable (50,000-35,000) P 15,000 (7) P 25,000
Short-term notes payable 35,000 30,000
Total current liabilities P50,000
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total stockholders’ equity P259,000
Total liab and stockholders P ? (11) P310,000
The following ratios have been computed for Pratt
Company for 2009.
Current ratio 3:1
Current assets =3
Current liabilities

Current assets =3
50,000

50,000 x 3 = Current assets

150,000 = Current assets

Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) 40,000 (6) 60,000
Inventory ? (8) 50,000
Total current assets P150,000
Property, plant, and equipment (net) 200,000 150,000
Total assets(150,000+200,000) P350,000 (9) P310,000
Liabilities and stockholders' equity
Accounts payable (50,000-35,000) P 15,000(7) P 25,000
Short-term notes payable 35,000 30,000
Total current liabilities P50,000
Bonds payable ? (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total stockholders’ equity P259,000
Total liab and stockholders P350,000(11) P310,000
The following ratios have been computed for Pratt
Company for 2009.
Debt to total assets ratio 26%

Total Debt (26%x 350,000) 91,000

Total current liabilities 50,000
Bonds payable 41,000
Assets 2009 2008
Cash P 25,000 P 35,000
Short-term Investments 15,000 15,000
Accounts receivable (net) 40,000 (6) 60,000
Inventory(150,000-80,000) 70,000 (8) 50,000
Total current assets P150,000
Property, plant, and equipment (net) 200,000 150,000
Total assets(150,000+200,000) P350,000 (9) P310,000
Liabilities and stockholders' equity
Accounts payable (50,000-35,000) P 15,000(7) P 25,000
Short-term notes payable 35,000 30,000
Total current liabilities P50,000
Bonds payable 41,000 (10) 20,000
Common stock 200,000 200,000
Retained earnings 59,000 35,000
Total stockholders’ equity P259,000
Total liab and stockholders P350,000(11) P310,000
Items 10 through 16 are based on the following
information:
Depoole Company is a manufacturer of industrial
products and employs a calendar year for
financial reporting purposes. These questions
present several of Depoole’s transactions during
the year. Assume that total quick assets
exceeded total current liabilities both before and
after each transaction described. Further
assume that Depoole has positive profits during
the year and a credit balance throughout the
year in its retained earnings account.
10. Payment of a trade account payable of
P64,500 would
a. Increase the current ratio but the quick ratio
would not be affected.
b. Increase the quick ratio but the current ratio
would not be affected.
c. Increase both the current and quick ratios.
d. Decrease both the current and quick ratios.
10.(c) The quick ratio is equal to quick assets divided
by current liabilities and the current ratio is equal to
current assets divided by current liabilities. Since we
are told that quick assets exceed current liabilities,
both ratios are greater than one. With a ratio greater
than one if you reduce the numerator and denominator
by an equal amount, the ratio will increase.
CA200 -64.5 135.5
CL100 -64.5 35.5
2 3.8
QA150 -64.5 85.5
CL100 -64.5 35.5
1.5 2.4
11. The purchase of raw materials for P85,000 on
open account would
a. Increase the current ratio.
b. Decrease the current ratio.
c. Increase net working capital.
d. Decrease net working capital.
11.(b) the current ratio is greater than one, an
increase in the numerator and the denominator
by an equal amount will decrease the ratio.
Answers (c) and (d) are incorrect because
working capital will not change.

CA200 +85 285

CL100 +85 185
2 1.5
12. The collection of a current accounts
receivable of P29,000 would
a. Increase the current ratio.
b. Decrease the current ratio and the quick
ratio.
c. Increase the quick ratio.
d. Not affect the current or quick ratios.
12.(d) Collection of accounts receivable has no
effect on the quick or current ratio because both
cash and accounts receivable are part of the
numerator of both ratios.
13. Obsolete inventory of P125,000 was written
off during the year. This transaction
a. Decreased the quick ratio.
b. Increased the quick ratio.
c. Increased net working capital.
d. Decreased the current ratio.

13.(d) a write-off of inventory will decrease the

current ratio. Answers (a) and (b) are incorrect
because inventory is not used in computing the
quick ratio. Answer (c) is incorrect because
working capital will be decreased.
14. The issuance of new shares in a five-for-one split
of common stock
a. Decreases the book value per share of common
stock.
b. Increases the book value per share of common
stock.
c. Increases total shareholders’ equity.
d. Decreases total shareholders’ equity.

14.(a) a stock split increases the number of shares

outstanding and, therefore, reduces the book value per
share. Answers (c) and (d) are incorrect because the
transaction does not affect total stockholders’ equity.
15. The issuance of serial bonds in exchange for
an office building, with the first installment
of the bonds due late this year,
a. Decreases net working capital.
b. Decreases the current ratio.
c. Decreases the quick ratio.
d. Affects all of the answers as indicated.

15.(d) The the first installment is a current

liability which affects the quick ratio, the
current ratio, and working capital.
16. The early liquidation of a long-term note with
cash affects the
a. Current ratio to a greater degree than the
quick ratio.
b. Quick ratio to a greater degree than the
current ratio.
c. Current and quick ratio to the same degree.
d. Current ratio but not the quick ratio?
16.(b) Cash is included in the numerator of both
the quick and current ratios. Reduction in cash
affects the quick ratio more than the current
ratio because it is smaller.