CHAPTER 12

FINANCIAL STATEMENT ANALYSIS

THEORIES:

1. Which of the following statements regarding financial analysis is true?

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.

2. Which of the following is not a limitation of financial statement analysis?

A. The costs basis

B. The use of estimates
C. The diversification of firms
D. The availability of information

3. Which of the following statements is true regarding ration analysis

A. A ratio for a particular company is often compared to industry standards using

various publication.
B. A ratio for a particular company is unique and, therefore, should not be compared to
other publications.
C. Ratio analysis should be kept as simple as possible, often accomplished by using just
one ratio to measure a company’s performance.
D. Ratio analysis will not be affected by different accounting methods or assumptions.

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.

5. Which of the following statements is false?

A. Many companies will not clearly fit into one industry?

B. A financial service uses its best judgment as to which industry the firm best fits.
 C. The analysis of the entity’s financial statements can be more meaningful if the results
are compared with industries averages and with results of competitors.
D. A company comparison should not be made with industry averages if the
company does not clearly fit into one industry.

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:

A. Biloxi’s 2009 ratio

B. Biloxi’s 2010 budgeted ratio
C. Other retailers with annual sales of less than 10 million
D. A manufacturer with annual sales of less than 10 million

7. Management is a user of financial analysis. Which of the following comments does not
represent a fair statement as to management perspective?

A. Management is always interested in maximum profitability

B. Management is interested in the view of investors
C. Management is interested in the financial structure of the entity
D. Management is interested in the asset structure of the entity

8. Ratios are used as tools in financial analysis

A. Instead of horizontal and vertical analysis

B. Because the can provide information that may not be apparent from inspection
of the individual components if a particular ratio
C. Because even single ratio by itself is quite meaningful
D. Because they are prescribe by PFRS

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?

A. HA can include more than 2 years of financial data

B. HA is facilitated by computing peso and % changes in financial statement items
C. HA analyzes ratio differences occurring between 2 companies
D. HA can include the statement of cash flows

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

14. To perform vertical analysis

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

15. In which of the following cases may a percentage change be computed?

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

A. That has been arranged from highest to lowest number

B. That has been arranged from lowest to highest number
C. To determine which items are in error
D. To determine the amount and or percentage increase or decrease that has taken
place

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

18. Trend analysis allows firms to compare its performance to

A. Other firms in the industry

B. Other time periods within the company
C. Other industries
D. None of the above

19. In the near term, the important ratios that provide the information critical to the short run
operation of the firm are:

A. Liquidity, activity, and profitability

B. Liquidity, activity and debt
C. Liquidity, activity, and equity
D. Activity, debt and profitability

20. The primary concern of the short term creditors when assessing the strength of a firm is the
entity’s

A. Short term liquidity

B. Profitability
C. Market price of a stock
D. Leverage

21. Which of the following is a measure of liquidity position of a company?

A. Earnings per share

B. Inventory turnover
C. Current ratio
D. Number of times interest charges earned

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

23. The current ratio is

A. Calculated by dividing current liabilities by current assets

 B. Used to evaluate a company’s liquidity and short term solvency
C. Used to evaluate a company’s solvency and long term liquidity
D. Calculated by subtracting current liabilities from current asset

24. Which of the following ratios is the best measures of liquidity

A. Debt to equity ratio

B. Time interest earned ratio
C. Return on assets ratio
D. Acid test ratio

25. The acid test ratio:

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?

A. Shortening the credit terms

B. Lengthening the credit terms
C. Lengthening the outstanding period
D. All of the given choice 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?

A. Sales volume decreases materially late in the year

B. Receivables have collectively problems and possibly some should have been written
off.
C. Material amount of receivables are on the installment basis
D. Sales volume expanded materially late in the year

29. A general rule to use in assessing the average collection period is

A. That is should not exceed 30 days

 B. It can be any length
C. That is should not exceed discount period
D. That is should not exceed the credit term period

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?

A. A decline in the current ratio

B. Stable current ratio with declining quick ratios
C. A decline in days’ sales in inventory
D. A rise in total asset turnover

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?

A. Buy raw materials on credit

B. Sell marketable securities at cost
C. Pay off AP with cash
D. Pay off a portion of long-term debt with cash

39. The set of ratios that is most useful in evaluating solvency is

A. Debt ratio, current ratio, times interest earned

B. Debt ratio, times interest earned, return on assets
C. Debt ratio, times interest earned, quick ratio
D. Debt ratio, times interest earned, cash flow to debt

40. The 2 categories of ratios that should be utilized to assess a firm’s true liquidity are the

A. Quick and current ratios

B. Liquidity and debt ratios
C. Liquidity and profitability ratios
D. Liquidity and activity ratios
41. Which of the following ratios would not likely be used by a short-term creditor in evaluating
whether to sell on credit to a company?
A. Current ratios
B. Acid test ratio
C. Asset turnover
D. Receivable turnover

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?

Short term borrowing Collection of receivable

A. Increase No effect
B. Increase Increase
C. Decrease No effect
D. Decrease Decrease

43. Solvency measures a company’s ability:

A. To meet long term obligation as they become due

B. To meet short term obligations as they become due
C. To make profit in the short run
D. To make profit in the long ru

44. Which of the following ratios would not be the best measure of solvency?

A. Return on assets ratio

B. Debt to equity ratio
C. Profit margin ratio
D. Times interest earned ratio

45. The return on assets ratio is affected by the

A. Asset turnover ratio

B. Debt to total assets ratio
C. Profit margin ratio
D. Asset turnover and profit margin ratios

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

47. A weakness of current ratio is

A. Difficulty of the calculation

B. That is does not take into account the composition of the current assets
C. That is rarely used sophisticated analysts
D. That it can be expressed as a percentage, as a rate, or as a proportion

48. Trading on equity (leverage) refers to the

A. Amount of working capital

B. Amount of capital provided by owners
C. Use of borrowed money to increase the return to owners
D. Earnings per share

49. Which of the following ratios would be best measure of solvency

A. Return on assets ratio

B. Price earnings ratio
C. Current ratio
D. Times interest earned ratio

50. The ratio that indicates a company’s degree of financial leverage is the

A. Cash debt coverage ratio

B. Debt to total assets
C. Free cash flows
D. Times interest earned ratio

51. Which of the following is the most of interest to a firm’s suppliers

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?

A. Increasing long term assets

B. Decreasing current assets
C. Decreasing current liabilities
 D. Increasing long term liabilities

53. The set of ratios that are most useful in measuring profitability is

A. ROA, ROE, and debt to equity ratio

B. ROA, ROE, and dividend yield
C. ROA, ROE and acid test ratio
D. ROA, ROE and cash flow to debt

54. Which of the following ratios is most relevant to evaluating solvency?

A. Return on assets
B. Debt ratio
C. Days’ purchases in AP
D. Dividend yield

55. Long term creditors are usually most interested in evaluation

A. Liquidity
B. Marketability
C. Profitability
D. Solvency

56. Stockholders are most interested in evaluating

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

58. The following groups of ratios primarily measure risk:

A. Liquidity, activity and common equity

B. Liquidity, activity and profitability
C. Liquidity, activity and debt
D. Activity, debt and profitability

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:

A. A high debt ratio

B. Steady or rising profits
C. A steadily declining current ratio
D. Cyclical highs and lows

61. The price ratio

A. Measures the past earning ability of the firm

B. Is a gauge of future earning power as seen by investors
C. Relates the price to dividends
D. Relates to yield on dividends

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?

A. Return of stockholders equity

B. Earnings per share
C. Price earnings (P/E)
D. Return on assets

66. Return on assets

A. Can be determined by looking at a balance sheet

B. Should be smaller than return on sales
C. Can be affected by company’s choice of a depreciation method
D. Should be larger than return on equity

67. Return on assets cannot fall under which of the following circumstances?

Net profit margin Total Asset turnover

A. Decline Rise
B. Rise Decline
C. Rise Rise
D. Decline Decline

68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?

A. A labor intensive industry

B. The use units of production depreciation
C. A highly mechanized facility
D. High direct labor costs from a new union contract

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?

A. Sale of investment @ year end

B. Increased turnover of operating assets
C. Purchase of a new building @ year end
D. A stock split

71. Return of investment measures return to

 A. All suppliers of funds
B. All long term creditors
C. All long term suppliers of funds
D. Stockholders

72. A times interest earned ratio of 0.90 to 1 means that the:

A. The firm will default on its interest payment

B. Net income is less than the interest expense
C. Cash flow is less than the net income
D. Cash flow exceeds the net income

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

A. Increasing its debt ratio

B. Decreasing its fixed asset turnover
C. Increasing its total asset turnover
D. Decreasing its total asset turnover

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?

A. Earnings per share

B. Return on equity
C. Profit margin
D. Debt/equity

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?

A. The ration remained unchanged

B. The change in current ratio cannot be determined
C. Decreased
D. Increased

79. Which of the following actions will increase a firm’s a current ratio if it is now less than 1.0?

A. Convert marketable securities to cash

B. Pay accounts payable with cash
C. Buy inventory with short term credit
D. Sell inventory on cost

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

4. The amount of working capital for the company is:

A. P 351,000
B. P 361,000
C. P 211,000
D. P 336,000

5. The company’s current ratio as of the balance sheet date is:

A. 2.67:1
B. 2.44:1
C. 2.02:1
D. 1.95:1

6. The company’s acid-test ratio as of the balance sheet date is:

A. 1.80:1
B. 2.40:1
C. 2.02:1
D. 1.76:1

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

Centrum’s accounts receivable turnover is

A. 3.75 times
B. 4.35 times
C. 5.00 times
D. 5.80 times

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

Petals’ inventory turnover for 2010 is

A. 5.77 times
B. 3.85 times
C. 3.67 times
D. 3.57 times

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

The merchandise inventory turnover for 2010 is:

A. 5.6
B. 15.6
C. 7.5
D. 7.7

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:

Credit sales 75% of total sales

Inventory turnover 5 times
Working capital P 1,120,000
 Current ratio 2.00 to 1
Quick ratio 1.25 to 1
Average Collection period 42 days
Working days 360

The estimated inventory account is:

A. 840,000
B. 600,000
C. 720,000
D. 550,000

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%

Mildred’s net sales for the year were

A. P 800,000
B. P 672,000
C. P 480,000
D. P 1,200,000

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

What was the gross margin for 2010?

A. P 150,000
B. P 200,000
C. P 300,000
D. P 400,000

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%

The Camp Company’s debt ratio is

A. 40%
B. 60%
C. 35%
D. 65%

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

The dividend yield ratio is

A. 0.50
B. 0.12
C. 0.40
D. 0.08

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

What was the times-interest earned for 2010?

A. 11.4 times
B. 3.3 times
C. 3.1 times
D. 3.7 times
27. Club Manufacturing reports the following capital structure:
Current liabilities P 100,000
Long-term debt 400,000
Deferred income taxes 10,000
Preferred stock 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000

What is the debt ratio?

A. 0.48
B. 0.49
C. 0.93
D. 0.96

28. A summarized income statement for Colt Company is presented below.

Sales P 1,000,000
Cost of Sales 600,000
Gross Profit P 400,000
Operating Expenses 250,000
Operating Income P 150,000
Interest Expense 30,000
Earnings before Tax P 120,000
Income Tax 40,000
Net Income P 80,000
The degree of financial leverage is:
A. P 150,000 / P 30,000
B. P 150,000 / P 120,000
C. P 1,000,000 / P 400,000
D. P 150,000 / P 80,000

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

Use the following information for question Nos. 30 and 31:

Cherry Corporation had net income of P200,000 and paid dividends to common stockholders of
P40,000 in 2010. The weighted-average number of shares outstanding in 2010 was 50,000
shares. Cherry Corporation’s common stock is selling for P 60 per share in the local stock
exchange.

30. Cherry Corporation’s price-earnings ratio is

A. 3.8 times
B. 15 times
C. 18.8 times
D. 6 times

31. Cherry Corporation’s payout ratio for 2010 is

A. P4 per share
B. 12.5 percent
C. 20.0 percent
D. 25.0 percent

32. Creed Company reported the following on its income statement:

Income before taxes P 400,000
Income tax expense 100,000
Net income P 300,000
An analysis of the income statement revealed that interest expense was P 100,000. Creed
Company’s times interest earned (TIE) was
A. 5 times
B. 4 times
C. 3.5 times
D. 3 times

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

35. Selected information for Creeme Company as of December 31 is as follows:

2009 2010
Preferred stock, 8%, par P100,
nonconvertible, noncumulative P 250,000 P 250,000
Common stock 600,000 800,000
Retained earnings 150,000 370,000
Dividends paid on preferred stock
for the year 20,000 20,000
Net income for the year 120,000 240,000
Creeme’s return on stockholder’s equity, rounded to the nearest percentage point, for 2010 is
A. 17%
B. 19%
C. 21%
D. 23%

36. Chard Company’s capital stock at December 31 consisted of the following:

Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.
10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares authorized,
issued, and outstanding

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

Net income is P 115,000 and interest expense is P 30,000 for 2010.

What is the rate earned on total assets for 2010?

A. 9.3 percent
B. 10.1 percent
C. 8.9 percent
D. 7.4 percent

40. What is the rate earned on stockholder’s equity for 2010?

A. 10.6 percent
B. 11.3 percent
C. 12.4 percent
D. 15.6 percent

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:

Dividends per share of common stock P 1.40

Market price per share of common stock 17.50
Which of the following statements is correct?
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market
price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to investors seeking current
returns on their investments.
C. The dividend yield is 12.5%, which is of interest to bondholders.
D. The dividend yield is 8.0 times the market price, which is important in solvency analysis.

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