FINANCIAL STATEMENT ANALYSIS EXERCISE

Problem 1

Horizontal and vertical analysis. The financial position of Twig Company at the end of 2006 and 2007 is
as follows:

(in thousands)
2007 2006
Assets
Cash P 3,000 P 5,000
Accounts receivable 40,000 25,000
Inventory 27,000 30,000
Long-term investments 15,000 0
Land, buildings and equipment (net) 100,000 75,000
Intangible assets 10,000 10,000
Other assets 5,000 20,000
Total Assets P200,000 P165,000
Liabilities
Current liabilities P30,000 P47,000
Long-term liabilities 88,000 74,000
Total liabilities 118,000 121,000
Stockholder’s Equity
8% Preferred stock 10,000 9,000
Common stock 54,000 42,000
Additional paid-in capital 5,000 5,000
Retained earnings 13,000 (12,000)
Total stockholder’s equity 82,000 44,000
Total liabilities ad stockholder’s equity P200,00 P165,000
Sales and cost of goods sold insignificantly change in 2007 in relation with 2006.

Required:

1. Prepare a comparative balance sheet showing peso and percentage changes for 2007 as
compared with 2006.
2. Prepare a common0size balance sheet as of December 31, 2006 and 2007.
3. Based on your data derived in requirements 1 and 2, comment on the financial position of Twig
Company as of December 31, 2007.

Problem 2

Financial mix ratios. The data given below were obtained from the financial records of Dennis V.
Corporation for the year ended December 31, 2007:

Dennis V. Corporation
Balance Sheet
December 31, 2007
(000s omitted)
Assets
Cash P85,000
Marketable Securities 25,000
Trade receivables, net 245,000
Inventory, at cost 220,000
Prepaid Expenses 10,000
Equipment, net 320,000
Other assets 15,000
Total assets P920,000
Equities
Trade payables P165,000
Accrued expenses 25,000
Other current liabilities 10,000
Mortgage payable 120,000
 Capital stock, P100 par 300,000
Additional paid in capital 30,000
Retained earnings - appropriated 80,000
Retained earnings - unappropriated 190,000
Total equities P920,000

Dennis V. Corporation
Income Statement
Year Ended December 31, 2007
(000s omitted)
Net sales P 1,000,000
Cost of goods sold:
Inventory, December 31, 2004 P250,000
Purchases 720,000
Inventory, December 31, 2005 (220,000) 750,000
Gross profit 250,000
Selling, administrative, and other expenses 125,000
Income before taxes 125,000
Provision for income taxes 35,000
Net income for the year 90,000
Retained earnings, beginning 130,000
Total 220,000
Dividends paid 30,000
Retained earnings, end P190,000
Required: Compute the following for 2006:
1. Net working capital
2. Current ratio
3. Acid-test ratio
4. Accounts receivable turnover and average collection period
5. Inventory turnover and average days to sell inventory
6. Gross profit rate on sales
7. Book value per common share
8. Rate of return on sales
9. Earnings per share
10. Rate of return on invested capital
11. Debt-to-equity ratio
12. Debt ratio
Problem 3
Trend ratios. Uptown Girl Corporation’s sales, current assets, and current liabilities have been reported
as follows over the last five years (amounts in thousands):
2007 2006 2005 2007 2006
Sales P8,775 P7,800 P7,475 P7,020 P6,500
Current assets:
Cash 96 108 132 138 120
Accounts receivable 425 440 450 475 500
Inventory 488 464 440 420 400
Total current assets 1009 1,012 1,022 1,033 1,020
Current liabilities 475 450 350 325 250
Required: Express all the sales, current assets, and current liabilities on trend index. Round your
decimals up to two (2) places.
1. Use 2006 as the base year
2. Use 2007 as the base year
Problem 4
Financing Ratios. The data were taken from the financial records of East Company and West Company
on December 31, 2007 (in thousands):
East Company West Company
Debt P200,000 P300,000
Stockholder’s equity 300,000 200,000
Total equity P500,000 P500,000
Preferred dividends P1,000 P3,000
 Common stockholder’s equity P200,000 P150,000
Earnings before interest and tax P10,000 P12,000
Interest expense 2,000 6,000
Income before income tax 8,000 6,000
Income tax (40%) 3,200 2,400
Income tax P4,800 P3,600

Required: calculate the following ratios for East Company and West Company for 2006:

1. Debt ratio
2. Equity ratio
3. Debt-equity ratio
4. Equity multiplier
5. Times interest earned
6. Financial leverage

Problem 5

Profitability ratios. Horizons, Inc. provided the following selected financial information relative to the
2007 operations (in thousands):

Contribution margin P40,000

Fixed costs and expenses (28,000)
Earnings before interest and tax 12,000
Interest expense (2,000)
Income before income tax 10,000
Tax (30%) (3,000)
Net income 7,000
Preferred dividends (10% x 60% x 20,000 shares) (120)
Earnings available to common shareholders P6,880
Average total assets P20,000
Average stockholder’s equity 8,400
Liquidation of value of preferred stock 80 per share
Net sales (after sales returns of P500,000 P350,000
Required:

1. Calculate the following ratios for horizons inc., for the year ended December 31, 2007:
a. Return on sales
b. Return on assets
c. Return on stockholder’s equity
d. Return on common stockholders’ equity
e. Times preferred dividend earned
f. Earnings per share
g. Degree of operating leverage
2. The management wants to double its return on assets in 2004 by increasing its net returns on
sales to 5%. What should Horizon’s assets turnover in 2004?
3. Disregarding your answers in question 1 above, what would be the estimated debt ratio in 2004
assuming management wants to double its return on total equity last year by increasing its
return on sales to 6% and its assets turnover to 20 times?

Problem 6

Growth ratios. The following comparative data were taken from the records of Mindoro Corporation and
Tarlac Corporation on December 31, 2006:

Mindoro Corporation Tarlac Corporation

Earnings per share P 50 P 30
Market price per share 200 90
Dividend per share 20 25
Net stockholder’s equity 10,000,000 12,000,000
Preferred stock at par 4,200,000 4,000,000
Preferred shares outstanding 40,000 40,000 shares
The preferred shares have a liquidation value of P120 and P150 for Mindoro Corporation and Tarlac
Corporation, respectively.
Required: Calculate the following ratios for Mindoro Corporation and Tarlac Corporation for 2006:

1. Pric-erarnings ratio
2. Payout ratio
3. Yield ratio
4. Book value per preferred share
5. Book value per common share

Problem 7

Liquidity ratios. The records of JS Corporation and DV Corporation revealed the following data in relation
to its operating activities in 2006 (in thousands):

JS Corporation DV Corporation
Net cash sales P10,000 P45,000
Net credit sales 190,000 240,000
Cost of goods sold 110,000 180,000
Net cash purchases 5,000 20,000
Net credit purchases 96,000 112,000
Average trade receivables 9,500 16,000
Average inventories 2,750 7,200
Average trade payables 2,400 3,500
Cash operating expenses 18,000 17,600
Average cash 600 800
Average total assets 80,000 95,000
Suppliers’ credit terms 2/10, n/30 2/10, n/30
Required:

1. Calculate the following ratios for JS Corporation and DV Corporation in 2006 (use a 360-day
year):
a. Inventory turnover and inventory days
b. Receivables turnover and collection period
c. Payables turnover and payment period
d. Operating cycle
e. Net cash cycle
f. Net working capital
g. Working capital turnover
h. Cash turnover and days/ in operating expenses
i. Assets turnover.
2. Comment on the corporation’s ability to meet their suppliers’ credit terms

Problem 8

Liquidity ratios. The President of DTS Corporation is reviewing the financial data of his company for
years ended December 31, 2006 and 2007 as shown below, in thousands:

2006 2007
Cash P 500 P 400
Marketable securities 1,200 1,600
Accounts receivable 3,400 2,800
Materials inventory 1,000 1,200
Work0in-process inventory 800 1,400
Finished goods inventory 2,200 2,500
Prepaid expenses 100 200
Current liabilities 2,100 2,525
Cash operating expenses 4,320 3,240
Depreciation and amortization 1,200 1,200
expenses
Net sales 56,400 53,720
Materials used 10,000 10,800
Cost of goods manufactured 26,000 42,000
Cost of goods sold 30,800 40,000
The company uses a 360-day work year.
Required: Calculate the following financial ratios for DTS Corporation for 2006 and 2007:

1. Materials inventory turnover and materials inventory days

2. Work-in-process inventory turnover and WIP inventory days
3. Finished goods inventory turnover and FG inventory days
4. Cash turnover and days in cash operating expenses
5. Current assets turnover
6. Quick-assets ratio
7. Defensive-interval ratio