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Chapter 12 Financial Statement Analysis - Bobadilla
Chapter 12 Financial Statement Analysis - Bobadilla
THEORIES:
A. Financial analysis will show how a company is guaranteed to perform in the future.
B. Financial analysis should not be relied upon as an indicator of future performance.
C. Financial analysis should be performed only by managers and creditors.
D. Financial analysis provides supplemental information not provided directly by
the financial statements.
4. Suppose you are comparing two firms in the steel industry. One firm is large and other is
small. Which type of numbers would be most meaningful for statement analysis?
A. Absolute numbers would be most meaningful for both large and small firm.
B. Absolute number would be most meaningful in the large firm; relative numbers
would be most meaningful in small firm
C. Relative numbers would be most meaningful for large firm; Absolute number for
small firms
D. Relative number would be most meaningful for both large and small firm,
especially for interim comparisons.
6. Biloxi Inc. is a retailer with annual sales of less than 10 million. At the end of 2010, ratio
analysis is performed on Biloxi’s financial statements by various stakeholders. Biloxi’s 2010
ratios are not likely compared to:
7. Management is a user of financial analysis. Which of the following comments does not
represent a fair statement as to management perspective?
9. Analyzing financial statement account balances over time for the same company is called:
A. Vertical analysis
B. Horizontal analysis
C. Common-type analysis
D. Price analysis
10. The percentage analysis of increases and decreases in individual items in comparative
financial statements is called:
A. Vertical analysis
B. Solvency analysis
C. Profitability analysis
D. Horizontal analysis
11. Which of the following regarding horizontal analysis is false?
12. Which of the following generally is the most useful in analyzing companies of different
sizes?
A. Comparative statements
B. Common-size financial statements
C. Price level accounting
D. Profitability index
13. Statements in which all items are expressed only in relative terms are termed:
A. Vertical statements
B. Horizontal statements
C. Funds statements
D. Common-size statements
A. Items on the balance sheet need to be restated to their fair market values.
B. Items on the balance sheet need to be indexed for inflation
C. Common sizes financial statements need to be prepared
D. Horizontal analysis should have been done already
A. The trend of the amounts is decreasing but all amounts are positive
B. There is no amount in the bases year
C. There is a negative amount both in the base year and in the subsequent year
D. Negative in the base year; positive in the subsequent year
16. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time
17. Vertical analysis is a technique that expresses each item in a financial statement
A. In pesos and centavos
B. As a percent of the item in the previous year
C. As a percent of a base amount
D. Starting with the highest value down to the lowest value
19. In the near term, the important ratios that provide the information critical to the short run
operation of the firm are:
20. The primary concern of the short term creditors when assessing the strength of a firm is the
entity’s
22. The ratios that are used to determine a company’s short term debt paying ability iare
A. Asset turnover, times interest earned, current ratio and receivables turnover
B. Times interest earned, inventory turnover, current ratio and receivables turnover
C. Times interest earned, acid test ratio, current ratio, and inventory turnover
D. Current ratio, acid test ratio, receivables turnover, and inventory turnover
A. Is used to quickly determine a company’s solvency and long term debt paying ability
B. Relates cash, short term investments and net receivables to current liability
C. Is calculated by taking one item from the income statement and one item from the
balance sheet
D. Is the same as the current ratio except it is rounded to the nearest whole percent
26. Typically, which of the following would be considered to be the most indicative of a firm’s
short term paying ability
A. Working capital
B. Current ratio
C. Acid test ratio
D. Days in sales receivables
27. Which of the following does not bear on the quality of receivables?
28. Which of the ff reasons should not be considered in order to explain why the receivables
appear to be abnormally high?
30. Present and prospective shareholders are mainly concerned with a firm's
A. Profitability
B. Liquidity
C. Leverage
D. Risk and return
31. Which of the ff ratios is rated to be a primary measure of liquidity and considered of highest
significance rating of the liquidity ratios a bank analyst?
A. Debt
B. Current ratio
C. Financial leverage
D. AR turnover in days
32. As the company’s AR turnover ratio increases from one year to the next, they will find that
the number of days sales in receivables
A. Decreases
B. Increases
C. Stays the same
D. Cannot be determined
33. An acceleration in the collection of receivables will tend to cause the accounts receivable
turnover to:
A. Decrease
B. Remain the same
C. Either increase or decrease
D. Increase
34. Primera Inc. has recently calculated the accounts receivable turnover for the current year to
be 15. In prior years, the same ratio was always higher. Which of the following statements would
be the best interpretation for the reason for the ratio’s change?
A. The company had less sales in the current year than the past year
B. The company had more sales in the current year than the past year
C. The company had fewer AR in the current year than in prior years
D. The company took longer to collect in the current year than in the prior years
35. Toledo Inc. has recently calculated the inventory turnover for the current year to be 30. In
prior years, the same ratio was always lower. Which of the following statements would be the
best interpretation for the reason for the ratio’s change
A. The company had less sales in the current year than the past year
B. The company had purchased less inventory in the current year than the past year
C. The company had fewer days to sell its inventory in the current year than in
prior years
D. The company took longer days to sell its inventory in the current year than in the
prior years
36. Which of the following would best indicate that the firm is carrying excess inventory?
37. As a company’s inventory turnover ratio decreases from one year to the next, they will find
that the number of day’s inventory is held before sale:
A. Decreases
B. Increases
C. Remains the same
D. Can’t be determined
38. Which of the following would be most detrimental to a firm’s current ratio if the current ratio
is 2.0?
40. The 2 categories of ratios that should be utilized to assess a firm’s true liquidity are the
42. If a company has an acid test ratio of 1:2:1, what respective effects will the borrowing of
cash in short term debt and collection of accounts receivable have on the ratio?
A. Increase No effect
B. Increase Increase
C. Decrease No effect
D. Decrease Decrease
44. Which of the following ratios would not be the best measure of solvency?
46. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
A. Improve its collection practices, thereby increasing cash and it current and quick
ratios
B. Improve its collection practices and pay AP, thereby decreasing current liabilities and
increasing the current and quick ratios
C. Decrease current liabilities by utilizing more long term debt, thereby increasing
the current and quick ratios
D. Increase inventory, thereby increasing current assets and the current and quick ratios
50. The ratio that indicates a company’s degree of financial leverage is the
A. Profitability
B. Debt
C. Asset utilization
D. Liquidity
52. Retant Inc. has determined that it needs to increase its current ratio in order to comply with a
creditor’s loan agreement. All else being equal, which of the following ways would be best for
increasing their current ratio?
53. The set of ratios that are most useful in measuring profitability is
A. Return on assets
B. Debt ratio
C. Days’ purchases in AP
D. Dividend yield
A. Liquidity
B. Marketability
C. Profitability
D. Solvency
A. Liquidity
B. Solvency
C. Profitability
D. Marketability
57. Which ratio is most helpful in appraising the liquidity of current assets?
A. Current ratio
B. Debt ratio
C. Acid test ratio
D. Accounts receivable ratio
59. Which of the following statements would be the best interpretation of a company’s low debt-
to-equity ratio?
A. The company chooses to pay cash for the most of its major purchases
B. The company is not liquid
C. The company prefers to pay stock holders high dividends out if their RE
D. The company prefers to raise funds by issuing capital stock than long term
borrowing
60. Using financial leverage is good financial strategy from the viewpoint of stockholders of
companies that have:
62. Which of the following ratios represents dividends per common shares in relation to market
price per common share?
A. Dividend payout
B. Dividend yield
C. Price/earnings
D. Book value per share
63. Which of the following ratios usually reflects investor’s opinions of the future prospects for
the firm?
A. Dividend yield
B. Price/earnings ratio
C. Book value per share
D. Earnings per share
64. Which ratio would be best for measuring company’s ability to repay both principal and
interest on outstanding loans from cash generated from operating activities?
A. Current ratio
B. Times-interest earned ratio
C. Debt service coverage ratio
D. Debt to equity ratio
65. Which ratio gives an indication of how investors believe a company’s stock will perform in
the future compared to other companies?
67. Return on assets cannot fall under which of the following circumstances?
68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?
A. Common stockholders
B. General creditors
C. Preferred stockholders
D. Bondholders
70. Which of the following could cause ROA to decline when net profit margin is increasing?
73. The ability of a business to pay its debts as they become due and to earn a reasonable amount
of income is referred to as solvency and
A. Leverage
B. Profitability
C. Liquidity
D. Equity
74. A firm with a lower new profit margin can improve its return on total assets by
75. A firm with total asset turnover lower than the industry standard and a current ratio which
meets industry standard might have excessive
A. Accts. Receivable
B. Fixed assets
C. Debt
D. Inventory
76. Which of the following ratios appears most frequently in annual reports?
77. Companies A and B are in the same industry and have similar characteristics
Except that Co. A is more leveraged than Co. B. Both companies have the same income before
interests and taxes and the same total assets. Based on this information we can conclude that
A. Company A has higher net income than Company B
B. Company A has lower return on assets than Company B
C. Company A is more risky than Company B
D. Company A has lower debt ratio than Company B
78. Tyner Company had P250, 000 of current assets and P90, 000 of current liabilities before
borrowing P60, 000 from the bank with a 3-month note payable. What effect did the borrowing
transaction have on Tyner Company’s current ratio?
79. Which of the following actions will increase a firm’s a current ratio if it is now less than 1.0?
80. The tendency of the rate earned on stockholder’s equity to vary disproportionately from the
rate earned o total assets is sometimes referred to as
A. Leverage
B. Solvency
C. Yield
D. Quick assets
PROBLEMS:
1. Cave Corporation had net income of P2 million in 2009. Using the 2009 financial elements as
the base data, net income decreased by 70 percent in 2010 and increased by 175 percent in 2011.
The respective net income reported by Cave Corporation for 2010 and 2011 are:
A. P 600,000 and P5,500,000
B. P5,500,000 and P 600,000
C. P1,400,000 and P3,500,000
D. P1,400,000 and P5,500,000
2. Assume that Clone Inc. reported a net loss of P50,000 in 2009and net income of P250,000 in
2010. The increase in net income of P300,000:
A. can be stated as 0%
B. can be stated as 100% increase
C. cannot be stated as a percentage
D. can be stated as 200% increase
3. The following financial data have been taken from the records of Common Company:
Accounts receivable P200,000
Accounts payable 80,000
Bonds payable, due in 10 years 500,000
Cash 100,000
Interest payable, due in three months 25,000
Inventory 440,000
Land 800,000
Notes payable, due in six months 250,000
What will happen to the ratios below if Common Company uses cash to pay 50 percent of its
accounts payable?
Current Ratio Acid-test Ratio
A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase
Question Nos. 4 through 6 are based on the data taken from the balance sheet of Circle Company
at the end of the current year:
Accounts payable P 145,000
Accounts receivable 110,000
Accrued liabilities 4,000
Cash 80,000
Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
Notes payable, short term 85,000
Prepaid expenses 15,000
7. Clover Hardware Store had net credit sales of P 6,500,000 and cost of goods sold of P
5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year
were P 600,000 and P 700,000, respectively. The receivables turnover was
A. 7.7 times
B. 10.8 times
C. 9.3 times
D. 10.0 times
8. Centrum Corporation’s books disclosed the following information for the year ended
December 31, 2010:
Net credit sales P 1,500,000
Net cash sales 240,000
Accounts receivable at beginning of year 200,000
Accounts receivable at end of year 400,000
9. Cleff Company had sales of P 30,000, increase in accounts payable of P 5,000, decrease in
accounts receivable of P 1,000, increase in inventories of P 4,000, and depreciation expense of P
4,000. What was the cash collected from customers?
A. P 31,000
B. P 35,000
C. P 34,000
D. P 25,000
10. Crown Clothing Store had a balance in the Accounts Receivable account of P 390,000 at the
beginning of the year and a balance of P 410,000 at the end of the year. The net credit sales
during the year amounted to P 4,000,000. Using 360-day year, what is the average collection
period of the receivables?
A. 30 days
B. 65 days
C. 73 days
D. 36 days
11. During 2010, Central Company purchased P 960,000 of inventory. The cost of goods sold for
2010 was P 900,000, and the ending inventory at December 31, 2010 was P 180,000. What was
the inventory turnover for 2010?
A. 6.4
B. 6.0
C. 5.3
D. 5.0
12. Selected information from the accounting records of Corolla Company is as follows:
Net sales for 2010 P 900,000
Cost of goods sold for 2010 600,000
Inventory at December 31, 2009 180,000
Inventory at December 31, 2010 156,000
13. The Camel Company presents the following data for 2010.
Net Sales, 2010 P 3,007,124
Net Sales, 2009 P 930,247
Cost of Goods Sold, 2010 P 2,000,326
Cost of Goods Sold, 2009 P 1,000,120
Inventory, beginning of 2010 P 341,169
Inventory, end of 2010 P 376,526
14. Based on the following data for the current year, what is the inventory turnover?
Net sales on account during year P 500,000
Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000
Inventory, end of year 110,000
A. 3.3
B. 8.3
C. 3.7
D. 3.0
15. The current assets of Canon Enterprise consists of cash, accounts receivable, and inventory.
The following information is available:
16. Selected data from Claudine Company’s year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P 120,000
Inventory turnover (based on cost of sales) 8 times
Gross Profit margin 40%
17. The following data were obtained from the records of Cape Company for the year ended and
as of December 31, 2010:
Current ratio (at year end) 1.5 to 1
Inventory turnover based on
sales and ending inventory 15 times
Inventory turnover based on
cost of goods sold and ending inventory 10.5 times
Gross margin for 2010 P 360,000
What was Cape Company’s December 31, 2010 balance in the inventory account?
A. P 120,000
B. P 54,000
C. P 80,000
D. P 95,000
18. Selected information from the accounting records of the Cruise Company is as follows:
Net A/R at December 31, 2009 P 900,000
Net A/R at December 31, 2010 P 1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2009 P 1,100,000
Inventories at December 31, 2010 P 1,200,000
Inventory turnover 4 to 1
19. Net sales are P 6,000,000, beginning total assets are P 2,800,000, and the asset turnover is
3.0. What is the ending total asset balance?
A. P 2,000,000
B. P 1,200,000
C. P 2,800,000
D. P 1,600,000
20. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a
book value of equity of P 3,000,000, and a market/book ratio of 3.5?
A. P 8.57
B. P 30.00
C. P 85.70
D. P 105.00
21. Assume you are given the following relationships for the Camp Company:
Sales/ total assets 1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
22. Crayon Co. has a price earnings ratio of 10, earnings pershare of P 2.20, and a payout ratio of
75%. The dividend yield is
A. 25.0%
B. 22.0%
C. 7.5%
D. 10.0%
23. The times interest earned ratio of Creek Company is 4.5 times. The interest expense for the
year was P 20,000, and the company’s tax rate is 40%. The company’s net income is:
A. P 22,000
B. P 42,000
C. P 54,000
D. P 66,000
24. The following were reflected from the records of Centennial Company:
Earnings before interest and taxes P 1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2010
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
25. CEE Corporation’s stockholders’ equity at December 31, 2010 consists of the following:
6% cumulative preferred stock, P100 par, liquidating
value was P110 per share; issued and outstanding
50,000 shares P 5,000,000
Common stock, par, P5 per share; issued and
outstanding, 400,000 shares 2,000,000
Retained Earnings 1,000,000
Total P 8,000,000
Dividends on preferred stock have been paid through 2009
At December 31, 2010, CEE Corporation ‘s book value per share was
A. P 5.50
B. P 6.25
C. P 6.75
D. P 7.50
26. House of Contratista Company had the following financial statistics for 2010:
Long-term debt (average rate of interest is 8%) P 400,000
Interest expense 35,000
Net income 48,000
Income tax 46,000
Operating income 107,000
29. The following data were gathered from the annual report of Calendar Products.
Market price per share P 30.00
Number of common shares 10,000
Preferred stock, 5% P100 par P 10,000
Common equity P 140,000
The book value per share is:
A. P 30.00
B. P 15.00
C. P 14.00
D. P 13.75
33. The balance sheet and income statement data for Candle Factory indicate the following:
Bonds payable, 10% (issued 1998 due 2022) P 1,000,000
Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Income before income tax for year 350,000
Income tax for year 80,000
Common dividends paid 50,000
Preferred dividends paid 15,000
Based on the data presented above, what is the number of times bond interest charges were
earned?
A. 3.7
B. 4.4
C. 4.5
D. 3.5
34. The following data were abstracted from the records of Crimson Corporation for the year
ended June 30, 2010:
Sales P 1,800,000
Bond interest expense 60,000
Income taxes 300,000
Net income 400,000
How many times was the bond interest earned?
A. 7.67
B. 11.67
C. 12.67
D. 13.67
Chard’s common stock, which is listed on a major stock exchange, was quoted at P4 per share on
December 31. Chard’s net income for the year ended December 31 was P 60,000. The yearly
preferred dividend was declared. No capital stock transactions occurred. What was the price
earnings ratio on Chard’s common stock at December 31?
A. 6 to 1
B. 8 to 1
C. 10 to 1
D. 16 to 1
37. Selected financial data of Chiller Corporation for the year ended December 31, 2010, is
presented below:
Operating Income P 900,000
Interest expense (100,000)
Income before income taxes P 800,000
Income tax (320,000)
Net income P 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders P 280,000
Common stock dividends were P 120,000. The payout ratio is :
A. 42.9 percent
B. 66.7 percent
C. 25.0 percent
D. 71.4 percent
38. On December 31, 2009 and 2010, Chancellor Corporation had 100,000 shares of common
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
outstanding.
Additional information:
Stockholder’s equity at 12/31/10 P 4,500,000
Net income year ended 12/31/10 1,200,000
Dividends on preferred stock year ended 12/31/10 300,000
Market price per share of common stock at 12/31/10 144
The price-earnings ratio on common stock at December 31, 2010, was
A. 10 to 1
B. 12 to 1
C. 14 to 1
D. 16 to 1
39. The balance sheets of Character Company at the end of each of the first two years of
operations indicate the following:
2010 2009
Total current assets P 600,000 P 560,000
Total investments 60,000 40,000
Total property, plant and equipment 900,000 700,000
Total current liabilities 150,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock; P100 par 100,000 100,000
Common stock, P10 par 600,000 600,000
Paid-in capital in excess of par-common stock 60,000 60,000
Retained earnings 300,000 210,000
41. What is the earnings per share on common stock for 2010?
A. P 1.92
B. P 1.89
C. P 1.77
D. P 1.42
42. If the market price is P30, what is the price-earnings ratio on common stock for 2010?
A. 17.0
B. 12.1
C. 12.4
D. 15.9
43. The following information is available for Celebes Company for 2010:
44. Using the following data, prepare an analysis of changes in gross profit for Cloud Company.
2011 2010
Net Sales P 5,520,000 P 4,000,000
Cost of Goods Sold 3,795,000 3,000,000
Gross Profit P 1,725,000 P 1,000,000
The selling price increased by 20 percent effective January 1, 2011.
How much were the changes in sales due to change in unit selling price and cost of goods sold
due to change in quantity sold, respectively?
A. P 264,000 increase; P 450,000 decrease
B. P 264,000 decrease; P 450,000 increase
C. P 280,000 increase; P 345,000 increase
D. P 280,000 decrease; P 345,000 decrease
45. The gross profit of Care Company for each of the years ended December 31, 2011 and 2010
follows:
2011 2010
Sales P 1,584,000 P 1,600,000
Cost of goods sold 928,000 960,000
Gross Profit P 656,000 P 640,000
Assuming that 2011 selling prices were 10% lower, how did the amounts in sales and cost of
goods sold change due to change in unit selling price and unit cost, respectively?
A. P 176,000 decrease; P 128,000 increase
B. P 176,000 increase; P 128,000 decrease
C. P 160,000 increase; P 96,000 decrease
D. P 160,000 decrease; P 96,000 increase