Financial Ratios – 2021

For Nos. 1 – 5: MJ Co. is calculating its ratios relating to debt-paying ability for the year ended December 31,
2021. Below is the relevant information:

Sales revenue 325,000

Cost of goods sold and operating expenses 75,000
Interest expense 20,000
Income tax expense 6,000
Profit 9,000

Sales 325,000
Cost of Sales 75,000
Gross Profit 250,000
Expenses 215,000
Net Income before Interest 35,000
Interest expense 20,000
Net Income before taxes 15,000
Tax 6,000
Net Income (Profit) 9,000

December, 2021 January, 2021

Cash 10,000 16,000
Accounts receivable 25,000 15,000
Inventory 45,000 60,000
Accounts payable 24,000 28,000
Taxes payable 11,000 13,000

1. What is MJ’s current ratio at December 31, 2021? (a) 2.220 to 1 (b) 2.286 to 1 (c) 3.250 to 1 (d) 3.420
to 1
Current Ratio = Current Assets / Current Liabilities

= 80,000 / 35,000

= 2.286 to 1 (b)

Indicator: The business has P2.286 current assets to meet a P1.00 maturing obligations
within one year

Current Assets includes cash and other assets which could converted or realized into
cash within a short period of time normally one (1) year: Cash (Cash on Hand, Cash in
Bank, Petty Cash Fund as Cash Equivalents); Trading Securities (temporary investments
in the form Securities of other Corporation) which will be sold when the price is right;
Receivables (Collectibles = OPEN ACCOUNT (Accounts Receivable) NOTES Receivable
(supported with a promissory from customers on account) ACCRUED INCOME (income
earned but not yet collected) Inventories (Merchandise, Raw Materials, Finished Goods
Inventory, or Goods in Process Inventories. Prepaid Expenses (Expenses paid in
advance = Cellphone Load)

Current liabilities – liabilities which will be due within a short period normally in one year.
(Accounts Payable, Wages Payable, and other _________ payable).

At December 31, 2021

Current Assets Cash 10,000

Accounts Receivable 25,000
Inventory 45,000
Total Current Assets 80,000
Current Liabilities Accounts Payable 24,000
Taxes Payable 11,000
Total Current Liabilities 35,000
Working Capital 40,000

2. What is MJ’s acid test ratio at December 31, 2021? (a) 0.672 to 1 (b) 0.756 to 1 (c) 1.000 to 1 (d) 1.767
to 1
Acid Test Ratio (Quick Ratio, Banker’s Ratio) = Quick Assets / Current Liabilities

= Cash, 10,000 + Accounts Receivable, P25,000 / 35,000

= 35,000 / 35,000
 = 1.1 (c)

3. What is MJ’s average collection period for accounts receivable in 2021? (a) 58.40 days (b) 73.00 days
(c) 91.25 days (d) 24.26 days

No. of days sales in Receivable = No. of days in a year / Receivable Turnover

365 / 16.25
= 22.46

Receivable Turnover = Credit Sales / Average Receivable

= 325,000 / (15,000 + 25,000)/2
= 325,000 / (40,000)/2
= 325000 / 20,000
= 16,25

4. What is MJ’s inventory turnover in 2021? (a) 1.143 times (b) 1.250 times (c) 1.429 times (d) 1.667 times

Inventory Turnover = Cost of Sales / Average Inventory

1.143 = COS / (45,000 + 60,000)/2
1.143 = COS / (52,,500)/2
1.143 = COS / 26,250
COS = 26,250 x 1.143
= 30,003.75
5. What is MJ’s times interest earned? (a) 12.5 (b) 0.750 (c) 1.000 (d) 1.750

No. of times interest is earned = Net Income before Interest / Interest expense
= 35,000 / 20,000
= 1.75 (d)

For Nos. 6 – 9. Selected data taken from the financial statements of J Co. for the year indicated:

2019 2020 2021

Accounts receivable, net 40,000 42,500 45,000
Inventory 40,000 50,000 45,000
Current assets 120,000 140,000 130,000
Total assets, net 700,000 750,000 725,000
Current liabilities 70,000 80,000 50,000
Cash sales 400,000 420,000 450,000
Credit sales 120,000 125,000 131,250
Cost of Sales 310,000 324,000 345,000
(Use 360 days in a year)

6. What should be the age of receivables for 2020? (a) 110 days 9b) 120 days (c) 130 days (d) 140 days

Age of Receivable = No. of days in a year / Receivable Turnover

= 360 days / 3
= 120 days (No of days receivable will be converted into cash)

Receivable Turnover = Credit Sales / Average Receivable Simple Ave = (Beg + End) / 2
= 125,000 / (40,000 + 42,500) / 2
= 125,000 / (82,500)/2
= 125,000 / 41,250
= 3
7. What is the estimate number of days in inventory for 2019? (a) 50 days (b) 60 days (c) 70 days (d) 80
days

No. of days inventory for 2019 = No of days in a year / Inventory Turnover

= 360 days / 15.5
= 23.23

Inventory Turnover = Cost of sales / Average Inventory

= 310,000 / (beg 0 + end 40,00)/2
= 310,000 / (40,000)/2
= 310,000 / 20,000
= 15.5
 8. What is the working capital turnover for 2020? (a) 7.15 (b) 8.3 (c) 9.9 (d) 9.0

Working Capital Turnover = Sales / Average Working Capital

(420,000 + 125,000) / 55,000
= 545,000 / 55,000
= 9.9 times ©

Sales in 2020 Cash Sales 125,000

Credit Sales 420,000
Total Sales 545,000

Working Capital 2019 2020

Current assets 120,000 140,000
Current liabilities 70,000 80,000
Working capital 50,000 60,000
Average Working Capital = (50,000 + 60,000)/ 2
= 110,000 / 2
= 55,000

9. At December 31, 2020, J’s current ratio was (a) 1.50 to 1 (b) 1.75 to 1 (c) 2.06 to 1 (d) 3.10 to 1

2020 Current Ratio = Current Assets / Current Liabilities

= 140,000 / 80,000
= 1.75

For Nos. 10 -13. P Co. asked you to interpret the following ratios provided by its accountant.

Acid-test ratio 1.2

Times interest earned 8
` Gross margin ratio 40%
Inventory turnover 6
Deb-to-equity ratio 0.9 to 1
Ratio of operating expenses to sales 15%

Total shareholders’ equity on December 31, 2021 was P900,000. Gross margin for 2021
amounted to P600,000. Beginning balance of merchandise inventory was P200,000. The company’s
long-term liabilities consisted of bonds payable with interest at 15%. You decided to reconstruct the
company’s financial statements based on the limited information given to serve as a basis for further
analysis.

10. P’s operating income in 2021 is (a) 525,000 9b) 300,000 (c) 375,000 (d) not given

Sales 1,500,000 100%

Cost of Sales
Beginning mdse inventory 200,000
Purchases
Mdse available for sale
Ending Inventory
Cost of Sales (100% - 40%) 900,000 60%
Gross Profit 600,000 40%
Operating expenses (1,500,000 x 15%) 225,000 15%
Net Income 375,000 25%

Ratio of Operating expenses to Sales = Operating Expenses / Sales

40%

Gross Margin Ratio = Sales / Gross Margin

40% = S / 600,000
S = 600,000 / 40%
S = 1,500,000

Cost of Sales = Sales X COS% = 1,500,000 x 60% = 900,000

11. P’s bonds payable balance at December 31, 2021 is (a) 312,500 (b) 350,000 (c) 400,000 (d) not
given

Bonds Payable is a non-current Liabilities

 Debt to Equity Ratio = Total Liabilities / Total Capital (Equity)
0.9 = Total Liabilities / 900,000
Total Liabilities = 900,000 x 0.9
= 810,000

Total Liabilities 810,000

Total Capital 900,000
Total Liabilities and Capital 1,710,000
Total Assets 1,710,000

Inventory Turnover = Cost of Sales / Average Inventory

6 = 900,000 / Ave. Inv.
Ave Inv = 900,000 / 6
= 150,000

Ave Inventory = (Beginning + Ending) / 2

150,000 = (200,000 + Ending) /2
150,000 x 2 = 200,000 + Ending
300,,000 = 200,000 + Ending
Ending = 300,000 – 200,000
= 100,000

Acid Test Ratio = Quick Assets / Current Liabilities

1.2 = QA 497,,500
QA = 497,500 X 1.2 = 597,000

Total Liabilities
12. The current liabilities balance at Dec. 31, 2021 is (a) 462,500 (b) 497,500 (c) 504,500 (d) not given

13. The company’s current assets amount to (a) 317,000 (b) 597,000 9c) 697,000 (d) not given
Quick Assets 597,500
Inventory ending 100,000
Current Assets 697,500

14. AMK Inc. has the following data as at year ending December 31, 2021:
Total assets 5,000,000
Ordinary shares outstanding 2,500,000
Preference shares outstanding 1,000,000
Net Income 750,000
Depreciation expense 500,000
There were no changes in number of shares outstanding during the year, AMK’s rate of cash flow to
total liabilities is a) 30% (b) 50% (c) 120% (d) 167%

15. Selected data from the year-end financial statements of W are presented below. The difference between
average and ending inventories is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities 600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
W’s net sales for the year were (a) 2.4 million (b) 4.0 million (c) 1.2 million (d) 6.0 million

16. For the year ending 31 August 2021, S Inc. reported the following statistics
August 31, 2021` August 31, 2020
Net credit sales 2,482,000
Gross receivable 140,000 128,000
Inventory 384,000 312,000
Cost of goods sold 1,752,000
For the current year, using a 365-day year, the average number of days to convert inventory to sales is (a0
65.00 days (b) 51.18 days (c) 72.56 days (d) 71.51 days

17. O Corp has current assets totaling P15 million and a current ratio of 2.5 to 1. What is O’s current ratio
immediately after it has paid P2 million of its accounts payable? (a) 3.75 to 1 (b) 2.75 to 1 (c) 3.25 to 1 (d) 4.75
to 1

18. S Corp has an acid test ratio 1.5 to 1.0 which of the following will cause the ratio to deteriorate?
(a) Payment of cash dividends previously declared
 (b) Borrowing short term loan from a bank
(c) Sale of inventory on account
(d) Sale of equipment at a loss

19. G Inc. has a current ratio of 4:1. Which of the following transactions would normally increase its current ratio
(a) Purchasing inventory on account
(b) Purchasing inventory for cash
(c) Selling inventory on account
(d) Collecting on accounts receivable

20. R has shareholders’ equity equal to 60% of total liabilities and stockholders’ equity of P120 million. If the
return on total assets invested registers at 9% what is the return on shareholders’ equity? (a) 10.00% (b) 6.00%
© 15.00% (d) 12.00%