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02 Fs Analysis
02 Fs Analysis
Financial statement analysis involves the assessment and evaluation of the firm's past performance, its
present condition, and future business potentials. The analysis serves to provide information about the
following:
1. Profitability of the business firm;
2. The firm's ability to meet its obligations;
3. Safety of the investment in the business;
4. Effectiveness of management in running the firm; and
5. Over-all company marketability
HORIZONTAL ANALYSIS- involves comparing figures shown in the financial statements of two or
more consecutive periods.
Formula:
Percentage Most recent value - Base period value
Change = -------------------------------------
Base period value
VERTICAL ANALYSIS- the process of comparing figures in the financial statements of a single period.
It involves converting the figures in the statements to a common base i.e. ratios, percentages.
Converted financial statements are called Common Size Financial Statements.
RATIO ANALYSIS- involves the development of mathematical relationships between accounts in the
financial statements.
A. TESTS OF LIQUIDITY (Liquidity refers to the company's ability to pay its short-term current
liabilities as they fall due).
b. Inventory Turnover:
Merchandising Firms
e. Current Assets Turnover = Cost of Sales + Operating Expenses (excluding depreciation and
amortization) / Average Current Assets
o Measures the movement and utilization of current assets to meet operating
requirements.
B. TESTS OF SOLVENCY (solvency refers to the company's ability to pay all its debts,
whether such liabilities are current or non-current)
1. Times Interest Earned =Income before tax + Interest expense / Interest Expense
- Determines the extent to which operations cover interest expense
8. Sales to fixed assets (plant turnover) = Net Sales / Fixed Assets (Net)
- Test roughly the efficiency of management in keeping plant properties employed.
9. Book value per share on common stock = Common stock equity / # of outstanding common
stock
- Measures recoverable amount in the event of liquidation if assets are realized at their book
values.
10. Times Preferred Dividend requirements = Net income After Taxes / Preferred Dividend
Requirements
- Indicates ability to provide dividends to preferred stockholders.
11. Times Fixed Charges Earned
= Net income before taxes and fixed charges /
Fixed charges (rent + interest + Sinking fund payment before taxes)
- Measures ability to meet fixed charges.
12. Sinking fund payments bef. Tax = Sinking fund payment after taxes / 1 - Tax Rate
C. TESTS OF PROFITABILITY
2. Return of Total Assets (ROA) = Income before Interest but after taxes / Average total assets
- Efficiency with which managers use total assets to operate the business.
4. Earnings Per Share = Earnings After Tax - Preferred Dividends (in any) /
Weighted Ave. Number of Common Shares
- Measures the amount of net income earned buy each common share.
5. Rate of Return on Current Assets = Earnings After Tax / Average Current Assets
- Measures the profitability of current assets invested.
D. MARKET TESTS:
REVIEW QUESTIONS
8. Zack Company has a current ratio of 2.5. What will be the effect of a
purchase of inventory with cash on the acid-test ratio and on working
capital?
Acid-test Inventory
(quick) ratio turnover rate
A) Numerator Numerator
B) Numerator Denominator
C) Not used Denominator
D) Not used Numerator
12. Bernadette Company has an acid-test (quick) ratio of 2.0. This ratio
would decrease if:
A) previously declared common stock dividends were paid.
B) the company collected an account receivable.
C) the company sold merchandise on open account that earned a normal
gross margin.
D) the company purchased inventory on open account.
13. Sand Company has an acid-test ratio of 0.8. Which of the following
actions would improve the acid-test ratio?
A) Collect some accounts receivable.
B) Acquire some inventory on account.
C) Sell some equipment for cash.
D) Use cash to pay off some accounts payable.
16. Stern Company has 100,000 shares of common stock and 20,000 shares of
preferred stock outstanding. There was no change in the number of
common or preferred shares outstanding during the year. Preferred
stockholders received dividends totaling P140,000 during the year.
Common stockholders received dividends totaling P210,000. If the
dividend payout ratio was 70%, then the net income was:
A) P200,000
B) P300,000
C) P500,000
D) P440,000
17. The market price per share of Farren Co. stock at the beginning of the
year was P60.00 and at the end of the year was P72.00. Net income for
the year was P48,000. Dividends to the preferred stockholders for the
year totaled P12,000, and dividends of P2.50 per share were paid on
the 6,000 shares of common stock outstanding during the year. The
price-earnings ratio at year end was:
A) 10
B) 6
C) 11
D) 12
18. Fackrell Company has provided the following data:
Common stock:
Shares outstanding........................... 20,000
Market value, December 31.......... P150,000
Book value, December 31............... P80,000
Dividends paid..................................... P40,000
Preferred stock, 8%, 100 par....... P100,000
Net income.................................................. P100,000
Interest on long-term debt........... P10,000
Common stock:
Shares outstanding........................... 30,000
Market value, December 31.......... P165,000
Book value, December 31............... P90,000
Dividends paid..................................... P50,000
Preferred stock, 10%, P100 par.. P100,000
Net income.................................................. P150,000
Interest on long-term debt........... P15,000
20. Cammer Company has 40,000 shares of common stock outstanding. The
following data pertain to these shares for the most recent year:
21. Cameron Company has 40,000 shares of common stock outstanding that it
originally issued for P30 per share. The following data pertains to
these shares for the most recent year:
The total dividend on common stock was P360,000. The dividend yield
ratio for the year was:
A) 11.25%
B) 12.00%
C) 15.00%
D) 30.00%
22. Tribble Company has provided the following data:
Sales.............................................................. P5,000,000
Interest expense................................... P30,000
Total assets, beginning of year P185,000
Total assets, end of year.............. P215,000
Tax rate....................................................... 30%
Return on total assets..................... 15.5%
24. If a company can borrow at an interest rate of 8%, the tax rate is 30%,
and the company's assets are generating an after-tax return of 7%,
then financial leverage is:
A) positive.
B) negative.
C) neither positive nor negative.
D) impossible to determine without knowing the return on common
stockholders' equity.
25. The following account balances have been provided for the end of the
most recent year:
30. The Seabury Company has a current ratio of 3.5 and an acid-test ratio
of 2.8. Inventory equals P49,000 and there are no prepaid expenses.
Seabury Company's current liabilities must be:
A) P70,000
B) P100,000
C) P49,000
D) P125,000
33. Windham Company has current assets of P400,000 and current liabilities
of P500,000. Windham Company's current ratio would be increased by:
A) the purchase of P100,000 of inventory on account.
B) the payment of P100,000 of accounts payable.
C) the collection of P100,000 of accounts receivable.
D) refinancing a P100,000 long-term loan with short-term debt.
34. The Carney, Inc. has sales of P5 million per year (all credit) and an
average collection period of 35 days. What is its average amount of
accounts receivable outstanding?
A) P479,452
B) P142,857
C) P150,000
D) P500,000
36. The accounts receivable for Note Company was P240,000 at the beginning
of the year and P260,000 at the end of the year. If the accounts
receivable turnover for the year was 8 and 20% of the total sales were
cash sales, the total sales for the year were:
A) P2,600,000
B) P2,000,000
C) P2,400,000
D) P2,500,000
37. The accounts receivable for Allegro Company was P140,000 at the
beginning of the year and P180,000 at the end of the year. The
accounts receivable turnover for the year was 8.5 and 15% of total
sales were cash sales. The total sales for the year were:
A) P1,400,000
B) P1,360,000
C) P1,600,000
D) P1,800,000
38. Last year Chatham Company purchased P500,000 of inventory. The cost of
goods sold was P550,000 and the ending inventory was P100,000. The
inventory turnover for the year was:
A) 4.0
B) 4.4
C) 5.5
D) 11.0
39. Last year Truro Company purchased P800,000 of inventory. The cost of
goods sold was P750,000 and the ending inventory was P125,000. The
inventory turnover for the year was:
A) 6.0
B) 7.5
C) 6.4
D) 8.0
40. Last year Jungo Company purchased P550,000 of inventory. The inventory
balance at the beginning of the year was P200,000 and the cost of
goods sold was P650,000. The inventory turnover was closest to:
A) 6.50
B) 4.33
C) 3.67
D) 3.25
Year 2 Year 1
Sales................................................. P1,800,000 P1,400,000
Inventory, year-end............... P210,000 P190,000
Bad debt expense...................... P10,000 P12,000
Cost of goods sold................. P920,000 P840,000
42. Selected information from the accounting records of Kay Company for
the most recent year follow:
43. Last year James Company purchased P400,000 of inventory. The inventory
balance at the beginning of the year was P150,000 and the cost of
goods sold for the year was P425,000. The inventory turnover for the
year was:
A) 2.83
B) 2.91
C) 3.09
D) 3.40
44. Spotech Co.'s budgeted sales and budgeted cost of sales for the coming
year are P212,000,000 and P132,500,000 respectively. Short-term
interest rates are expected to be 5%. Assume that all inventory must
be financed with short-term debt. If Spotech could increase inventory
turnover from its current 8 times per year to 10 times per year, its
expected interest cost savings in the current year would be:
A) P165,625
B) P0
C) P331,250
D) P81,812
46. K.T. Company has sales of P400,000, interest expense of P12,000, a tax
rate of 40%, and after-tax net income of P50,400. K.T. Company's times
interest earned ratio is closest to:
A) 4.2
B) 11.5
C) 5.2
D) 8.0
47. Whitney Company has a times interest earned ratio of 3.0. The
company's tax rate is 40% and its interest expense is P21,000. The
company's after-tax net income is closest to:
A) P63,000
B) P25,200
C) P21,000
D) P42,000
48. KMT Company has sales of P200,000, interest expense of P6,000, a tax
rate of 40%, and after-tax net income of P30,000. KMT Company's times
interest earned ratio is closest to:
A) 5.0
B) 6.0
C) 9.3
D) 13.5
49. Houston Company has a times interest earned ratio of 2.5. The
company's tax rate is 40% and its interest expense is P20,000. The
company's after-tax net income is:
A) P50,000
B) P20,000
C) P30,000
D) P18,000
Drills
1. The Wilson Corporation has the following relationships: Sales/Total assets = 6; Return on assets
(ROA) = 10%; Return on equity (ROE) = 21%. What is Wilson’s net profit margin?
a. 2.39% b. 3.50% c. 1.67% d. 2.96% e. 1.55%
2. Moss Motors has P272 million in assets, and its tax rate is 40%. The company’s basic earning power
(BEP) ratio is 41%, and its return on assets (ROA) is 11%. What is Moss’ times-interest-earned (TIE)
ratio?
a. 2.03 b. 0.49 c. 0.81 d. 1.81 e. 0.38
3. AAA's inventory turnover ratio is 11.09 based on sales of P15,200,000. The firm's current ratio
equals 3.22 with current liabilities equal to P970,000. What is the firm's quick ratio?
a. 1.81 b. 3.22 c. 2.63 d. 1.02 e. 3.97
4. Last year YYY Company had a 9.00% net profit margin based on P22,000,000 in sales and
P15,000,000 of total assets. During the coming year, the president has set a goal of attaining a 14%
return on total assets. How much must firm sales equal, other things being the same, for the goal to be
achieved?
a. P23,333,333 b. P22,000,000 c. P26,722,967 d. P25,603,667
Net Credit sales for year 20x9 amounted to P7,600,000 and P6,660,000 for 20x8. Assuming
there are 300 business days in a year.
12/31/20x9 12/31/20x8
Cash P 340,000 P 180,000
Accounts receivable, net 900,000 1,000,000
Merchandise inventory 1,080,000 840,000
Short-term investments 160,000 80,000
Plant and equipment, net 2,000,000 2,000,000
Prepaid expenses 60,000 50,000
Serial Bonds payable-currently due 500,000 500,000
Accounts Payable and accrued expenses 480,000 440,000
Bank note payable-current 290,000 280,000
The following items are based on the following pertaining to AXE Company’s selected data for
year 20x9:
Operating income P 1,100,000
Interest expense 100,000
Income before income tax P 1,000,000
Income tax expense 330,000
Net income P 670,000
Common stock dividends P 200,000
Preferred stock dividends 200,000
10. MM Company uses the allowance method for bad debts. During the year, MM charged P60,000 to
bad debts expense, and wrote-off P50,400 of un-collectible accounts receivable. These transactions
resulted in a decrease in working capital of
a. None b. P9,600 c. P50,400 d. P60,000
11. GC Company declared cash dividends of P20,000 on October 14. This dividends is payable to
stockholders to record on November 10, and payment was made on December 2. As result of this
cash dividends, working capital will increase (decrease) on
October 14 November 10 October 14 November 10
a. None None c. P(20,000) None
b. P20,000 None d. P(20,000) P20,000
The following items are based on the following information for AP Company:
20x9 20x8
Cash sales P 3,600,000 P 3,200,000
Credit sales 1,000,000 1,600,000
Cost of goods sold 2,000,000 2,800,000
PEC Company registered accelerated increases in its net income, earning P875,000 in 20x8 to
P2,520,000 in year 20x9. Rate of return on current assets increased from 25% in 20x8 to 30% in year
20x9. Current asset turnover on the other hand, went up to 2.67 times in year 20x9 from 2.45 times in
20x8.
16. The average investment in current assets for PEC Company in year 20x9 is
a. P3,215,000 b. P3,500,000 c. P8,400,000 d. P10,080,000
17. The cost of goods sold and operating expenses excluding depreciation in 20x8 amounted to
a. P8,575,000 b. P10,045,000 c. P12,045,000 d. P10,575,000
The CSC Company for the prior year that has maintained the following relationships among the
data on its financial statements.
Accounts receivable turnover 8 times
Inventory turnover 6 times
Gross margin on sales 40%
Net income to net sales 10%
Current ratio 3 to 1
Quick ratio 2 to 1
Quick assets: Cash – 8%; Marketable securities – 32%; Accounts receivable – 60%
Asset turnover 2 times
Ratio of total assets to intangible assets 20 to 1
Ratio of accumulated depreciation to cost of fixed assets 1 to 2
Net income for the year P240,000
Accounts were reconstructed based on the above information.
19. What is the balance of the cash account?
a. P50,000 b. P40,000 c. P70,000 d. P60,000
22. VENUS Co.'s net accounts receivable were P500,000 at Dec. 31. 20x8 and P600,000 at Dec. 31,
20x9. Net cash sales for 20x9 were P200,000. The accounts receivable turn- over for 20x9 was 5. What
were VENUS's total net sales for 20x9?
a. P2,950,000 b. P3,000,000 c. P3,200,000 d. P5,500,000
The December 31, 20x9 balance sheet of EARTH INC. is presented below. This are the only
accounts in EARTH's balance sheet. Amounts indicated by a question mark (?) can be calculated from
the additional information given
ASSETS:
Cash P25,000
Accounts receivable (net) ?
Inventory ?
Property, plant and equipment net 294,000
432,000
LIABILITIES & STOCKHOLDERS'
EQUITY:
Accounts payable P ?
Income taxes payable (current) 25,000
Long- term debts ?
Common stock 300,000
Retained earnings P ?
P ?
ADDITIONAL INFORMATION:
Current ratio at year end 1.5 to 1
Total liabilities divided by total stock holders' equity .8
Inventory turnover based on sales & ending inventory 15 times
Inventory turnover based on CGS and ending inventory 10.5 times
Gross margin for 20x9 P315,000
23. What was EARTH's Dec. 31, 20x9, balance in trade accounts payable?
a. P67,000 b. P92,000 c. P 182,000 d. P207,000
24. What was EARTH's Dec. 31, 20x9 balance of retained earnings?
a. (P60,000) b. P60,000 c. (P132,000) d. P132,000
25. What was EARTH's Dec. 31, 20x9 balance in inventory accounts?
a. P21,000 b. P30,000 c. P70,000 d. P135,000