FINANCIAL STATEMENT ANALYSIS THEORIES:

1. Which of the following ratios best measures short-termsolvency?

A. Earnings per share
B. Acid test ratio
C. Return on asset
D. Return on equity

2. In a single-period common-sized income statement, the base amount is

normally the?
A. Gross Sales
B. Net Credit Sales
C. Net Cash Sales
D. Net Sales

3. In a financial statement analysis, expressing all financial statement items as a

percentage of base year amounts is called?
A. Vertical Common sized analysis
B. Horizontal common sized analysis
C. Trend Analysis
D. Ratio Analysis

4. Return on Asset and Return on Equity are measuresof

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

5. If the ratio of total liabilities as to total shareholder’s equity decreases, the

ratio that must also decrease is the?
A. Current Ratio
B. Return on Equity
C. Debt Ratio
D. Net Working Capital to Total Asset Ratio
6. A debt to equity ratio is
A. About the same as the debt to asset ratio
B. Lower than the debt to asset ratio
C. Higher than the debt to asset ratio
D. No correlation with debt to asset ratio

7. The financial ratio that assess the profitability of a company, include all of
the following except:
A. Gross Profit Margin
B. Earnings Per Share
C. Return on Sales
D. Dividend Yield

8. A measure of long-term debt paying ability of a company is?

A. Return on Sales
B. Inventory turnover ratio
C. Times interest earned ratio
D. Dividend yield

9. Bear-gill Corporation had a current ratio of 2.0 at the end of 2010. Current
assets and current liabilities increased by equal amount during 2011. The
effects on networking capital and on the current ratio, respectively, were:
A. No effect; increase
B. no effect ; decrease
C. Increase; increase
D. decrease ; decrease

10. Which of the following ratios are relevant in evaluating profitability?

A. Current ratio, Acid Test Ratio, Cash Ratio
B. Debt to Equity Ratio, Equity Ratio, Debt Ratio
C. Asset Turnover Operating cycle, Inventory Turn
over
D. Net Profit Margin, Return on Equity, Return on Asset
 11. Stockholders are most interested in evaluating which of the following?
A. Liquidity
B. Solvency
C. Marketability
D. Profitability

12. The ability of the company to pay its debt as it comes due and to earn a
reasonable amount of income is referred to as:
A. Leverage and Liquidity
B. Profitability and Leverage
C. Solvency and Leverage
D. Solvency and Profitability

13. Statement 1: In a single-period common sized income statement, the base

amount is normally the net sales statement 2: in a common sized balance
sheet, the base amount is normally total asset.
A. True, True
B. True False
C. False, True
D. False, False

14. The percentage analysis of increases and decreases in individual items in

comparative financial statements is?
A. Vertical Analysis
B. Financial Ratio
C. Horizontal Analysis
D. DuPont Technique

15. The ability of the company to pay its Short term debt as it comes due and to
earn a reasonable amount of income is referred to as:
A. Leverage and Liquidity
B. Liquidity and Profitability
C. Profitability and Leverage
D. Solvency and Profitability
16. Which of the following ratios are relevant to evaluating activity ratio?
A. Current ratio, Acid Test Ratio, Cash Ratio
B. Debt to Equity Ratio, Equity Ratio, Debt Ratio
C. Asset Turnover, Operating cycle, Inventory Turn
over
D. Net Profit Margin, Return on Equity, ReturnonAsset

17. Statement 1. Horizontal Analysis is analyzing the financial statements of

current year versus prior year. Statement 2. Return on sales can be calculated
by dividing Net Sales by Net Income.
A. True, True
B. False, True
C. True, False
D. False, False

18. Statement 1. Gross Profit Margin is calculated by dividing the difference

of Net Sales and Cost of Salesbythe amount of Net Sales.
Statement 2. Times Interest Earned Ratio is calculated by dividing the
amount of Operating Income from the amount of Interest Expense.
A. True, True
B. True, False
C. False, True
D. False, False

19. Statement 1. Days Sales Outstanding is also known as accounts Receivable

Period which is calculated by dividing 360 days by asset turnover.
Statement 2. Inventory Period is the same as Days Sales Inventory
which is added to the Accounts Receivable period in order to
compute the normal operating cycle.
A. True, True
B. True, False
C. False, True
D. False, False
20. Statement 1. Current Ratio is calculated by dividing total current liability
from total current asset.
Statement2. Quick Ratio is also known as Acid Test
Ratio which is calculated by dividing quick assets by total current
assets.
A. True, True
B. True, False
C. False, True
D. False, False

21. Statement 1. Inventory Turnover is calculated by dividing the amount of Cost

of Sales by the average
amount of Inventories.
Statement 2. Average collection period is also known as Day’s Sales
Receivable which is calculated by dividing 360 days by Accounts
ReceivableTurnover.
A. True, True
B. True, False
C. False True
D. False, False

22. Statement 1. Liquidity Ratio measures the ability of the company to pay its
long term obligation, one of which is the so called Cash Ratio. Statement 2.
SolvencyRatiomeasures the ability of the company to pay its short term
obligation one of which is the so calledTimesInterest Earned ratio.
A. True, True
B. True, False
C. False, True
D. False, False
23. Which of the following statements regarding the financial ratios as a tool
and technique in analyzing the financial statement is incorrect:
A. Activity ratios are also known as efficiency ratios which
measures how company efficiently use its assets
B. One of the Activity ratios is the so called asset turnover ratio
C. Asset Turnover ratio is calculated using Net Sales, beginning balance of
Asset and ending balanceof Asset.
D. All of the above statements are wrong.

24. Statement 1. Return on Equity is calculated by dividing net Income from

Average Equity.
Statement 2. Return on Equity is calculated by dividing Return on asset by
Equity Ratio.
A. True, True
B. True, False
C. False, True
D. False, False

25. Statement 1. Normal Operating Cycle is the summation of Accounts

Receivable Period and Inventory turnover.
Statement 2.Cash Conversion Cycle is the Normal Operating Cycle after
deducting Accounts payable period.
A. True, True
B. True, False
C. False, True
D. False, False
 26. This is a tool of financial analysis which reveals the manner in which profit
margins on sales and activity ratios interact to determine the profitability of
assets?
A. Trending Technique
B. Horizontal Analysis
C. Vertical Analysis
D. DuPont Technique

27. This measures the efficiency in collection of accounts receivable?

A. Accounts receivable turnover
B. Cash ratio
C. Day’s sales outstanding
D. Cash conversion cycle

28. It measures the rate of return on stockholder’sinvestment?

A. Return on assets
B. Net profit margin
C. Return on Sales
D. Return on equity

29. In calculating this ratio, the amount of inventory is deducted because

inventories are the least liquid in all current assets and their liquidation
usually results in loss?
A. Net working capital to total asset ratio
B. Cash ratio
C. Quick ratio
D. Earnings per share
30. Statement 1: The ratio that measures the overall utilization of assets is called
Asset turnover.
Statement2: Trend analysis involves the calculation of ratios of a firm for
several years then comparing the said ratios to determine the improvements
in the firm.
A. True, True
B. False, True
C. True, False
D. False, False

31. Financial ratios are used as tools and techniques in analyzing the
Financial Statements
A. Because every single ratios developedare meaningful for the investors
B. Because they are required by the PFRS
C. Because they are prescribed by GAAP
D. Because they can provide information that may not be apparent from
inspection of the individual components of a particular ratio.

32. Short term creditors are interested in evaluating which kind of

Financial Ratio?
A. Profitability
B. Activity
C. Liquidity
D. Solvency

33. One of the activity ratios is the so called Asset turnover which measures?
A. The rate of return on employment of assets
B. The portion of total assets which are financed by debt
C. How often a company replaces its assets
D. How efficiently a company uses its assets to generate sales

34. Which of the following circumstances would affect the increase in the net
 profit margin?
A. Decrease in the preferred dividend payments
B. Increase in Sales revenue
C. Decrease in the interest expense
D. Increase in Cost of Sales

35. In order to improve the rate of return on equity:

A. There must be a decrease in the return on assets
B. The leverage ratio must also be reduced
C. There must be a decrease in the equity ratio
D. The debt ratio must also be reduced

PROBLEM SOLVING:
1. Given the quick ratio of 2.0, current asset of P5,000.00and inventory of P
2,000.00. The current liabilities amount to:
A. P15000
B. P1500
C. P25000
D. P2500

QR= (CA-Inv)/ CL
2 = (5,000 - 2,000) / x
2 = 3,000 / x
X = 1,500

PROBLEM B. The following information is excerpts from the financial

Statements of ABC Corporation:
 2015 2016 2017
Accounts Receivable P 90,00.00 85,000.00 80,000.00
Inventory 90,000.00 100,000.00 80,000.00
Current Assets 260,000.00 280,000.00 240,000.00
Total Assets 1,450,000.00 1,500,000.00 1,400,000.00
Current Liabilities 100,000.00 160,000.00 140,000.00
Cash Sales 900,000.00 840,000.00 800,000.00
Credit Sales 2,620,500.00 2,500,000.00 2,400,000.00
Cost of Sales 690,000.00 648,000.00 620,000.00

2. What is Current Ratio for the year 2017?

A. 1.62 : 1
B. 1.71 : 1
C. 1.75 : 1
D. 2.60 : 1

CR = CA / CL
CR = 240,000 / 140,000
CR = 1.71
3. What is the Acid Test Ratio for the 2016?
A. 1.700 : 1
B. 1.142: 1
C. 1.125 : 1
D. 2.601 : 1

ATR = (CA - Inv)/ CL

ATR = (280,00 - 100,000)/ 160,000
ATR = 1.125

4. What is the Cash Ratio for the year 2015?

A. 0.57 : 1
B. 0.59 : 1
C. 0.78 : 1
 D. 0.80 : 1

CaR = (Cash + MS) / TCL

Car = (260,000 -90,000 - 90,000) / 100,000
CaR = 0.80

5. What is the Net Working Capital to total asset ratio for the year 2017?
A. 0.07 : 1
B. 0.08 : 1
C. 0.10 : 1
D. 0.11 : 1

NWC = (CA - CL) / TA

NWC = (240,000 - 140,000) / 1,400,000
NWC = 0.07

6. What is the Asset Turn over for the year 2017?

A. 2.21 times
B. 2.26 times
C. 2.29 times
D. 3.23 times

ATR = SR/Ave Asset

ATR = 3,20,000 / [1,500,00 +1,400,000)/2]
ATR = 2.21

7. What is the AR turnover for the year 2017?

A. 27.09 times
B. 28.09 times
C. 29.09 times
D. 30.09 times

ArTO = CS/ Ave AR

ArTO = 2,400,000 / [(85,000+ 80,000)/2]
 ArTO = 29.09

8. What is the Inventory Turnover for the year 2017?

A. 6.88 times
B. 7.88 times
C. 8.88 times
D. 9.88 times

InTO = Cost of Sales / Ave Inv

InTO = 620,000 / [(100,000 + 80,000)/2]
InTO = 6.88

9. What are the Day’s sales Outstanding for the year 2017?
A. 12 days
B. 15 days
C. 18 days
D. 21 days

DSO = 360 days / ArTO

DSO = 360 / 29.09
DSO = 12

10. What are the Day’s sales Inventory for the year 2017?
A. 52 days
B. 55 days
C. 58 days
D. 61 days

DSI = 360 days / InTO

DSI = 360/6.88
DSI = 52

11. What is the Normal Operating Cycle for the year 2017?
A. 64 days
B. 66 days
 C. 70 days
D. 72 days

NOC = ArP + InP

NOC = 12 + 52
NOC = 64

(For Items Number 12 – 15):

On December 31, 2017 and 2018, Blue-Wind Manufacturing, Inc. had 100,000 shares
of common stock and 50,000sharesof noncumulative and nonconvertible preferred
stock issued and outstanding. Additional information is as follows:
Market price per share of common stock P72Stockholders’ equity at
12/31/18 P4,500,000
Net income for year ended 12/31/18 P 1,200,000
Dividends on preferred stock for 12/31/18 P 300,000
Dividend per share at 12/31/18 P 0.90

12. The earnings per share at December 31, 2018 was

A. P 8
B. P 9
C. P 10
D. P 11

EPS = NI - PD / WANSO
EPS = 1,200,000 - 300,000 / 100,000 sh
EPS = 9

13. The price-earnings ratio on common stock at December31, 2018 was

A. 9 : 1
B. 8 : 1
C. 7.2 : 1
D. 6.5 : 1

PER = MPS/EPS
 PER = 72/9
PER = 8

14. The pay-out ratio at December 31, 2018 was

A. 0.11 : 1
B. 0.10 : 1
C. 0.09 : 1
D. 0.08 : 1
POR = DPS/EPS
POR = 0.90/9
POR = 0.10

15. The dividend yield at December 31, 2018 was

A. 1.25 percent
B. 1.50 percent
C. 1.75 percent
D. 2.00 percent

DY = DPS/MPS
DY = 0.90/72
DY = 1.25%

(For Items Number 16 – 20):

Black-Duck Company has information pertaining toits total assets. However, only
Cash and Equipment has a determinedamount of P 80,000.00 and P 750,000.00
respectively, otherassets were Account Receivables and Inventories. Moreso,
thecompany has net sales amounting to P800,000.00. If Operatingprofit margin
(OPM) was 8%, Gross profit rate (GPR) basedoncost was 25%, Current ratio was
4:1,Turnovers basedonyearend balances were 5 times and 4 times for Accounts
Receivableand Inventory respectively.

16. What is the ending balance of Accounts Receivableof Black-Duck Company?

A. P 100,000
B. P 130,000
 C. P 160,000
D. P 190,000
ArTO = NS/Total AR
5 = 800,000/X
X = 800,000 / 5
X = 160,000

17. What is the ending balance of Inventories of Black-DuckCompany?

A. P 120,000
B. P 140,000
C. P 160,000
D. P 180,000

InTo = COGS / Total Inv

4 = 640, 000 / X
X = 160,000

Net Sales 125% 800,000 100%

(COGS) 100% (640,000) 80%
GP 25% 160,000 20%

GP based on cost = 25%

GP based on sales = 25%/125% = 20%

GPR = GP/NS
0.2 = X/800,000
X = 160,000

18. How much is the Total Liability and Equity of Black-Duck Company?
A. P 1,100,000
B. P 1,150,000
C. P 1,200,000
D. P 1,250,000

Asset = Liabilities + Equity

 Cash 80,000
AR 160,000 (#16)
Inv 160,000 (#17)
Equipment 750,000
Total Assets 1,150,000

19. How much is the Operating Expense of Black-DuckCompany?

A. P 80,000
B. P 86,000
C. P 96,000
D. P 106,000

OPM = OPINC/NS
0.08 = X/800,000
X = 64,000

GP 160,000 (0.2 x 800,000)

(OPEX) 96,000
OPINC 64,000

20. What is the ending balance of Total Current Liabilities of Black-Duck

Company?
A. P 80,000
B. P 85,000
C. P 95,000
D. P 100,000

CR = CA/CL
4 = 80,000 +160,000 + 160,000 / X
X = 100, 000

(For Items Number 21 – 23):

Green-Mind, Inc. has the following data:
Total Assets P100,000 Net Profit margin 6.0%
Tax rate 40%
Equity ratio 60.0%
Interest rate 8.0%
Total assets turnover 3.0 X

21. What is Green-Mind’s Earnings Before Interest and tax(EBIT)?

A. P 18,000
B. P 24,000
C. P 30,000
D. P 54,000

ATO = NS/TA
3 = X / 100,000
X = 300,000

Net Profit Margin = NIAT/NS

0.06 = X/300,000
X = 180,000

EBIT 54,000
(Int Exp) 24,000 (NS x Int Rate = 300,000 x 0.08)
EBT 30,000
(Tax) 40% (12,000)
NIAT 180,000

22. What is Green-Mind’s Return on Equity (ROE)?

A. 25 percent
B. 30 percent
C. 50 percent
D. 52.5 percent

ROE = NI/Ave Eq or NI/Total EQ

 ROE = 18,000/60,000
ROE = 30%

ER = EQ/Asset
Total EQ = EQ Ratio x TA
Total EQ = 60% x 100,000
Total EQ = 60,000

23. What is Green-Mind’s Return on Assets (ROA)?

A. 15 percent
B. 17 percent
C. 18 percent
D. 20 percent

ROA = NI/TA
ROA = 18,000/100,000
ROA = 18%

(For Items Number 24 – 28):

PACCIOLI, INC. has P3.2 million of accounts receivable on its balance sheet. The
company’s DSO is 60 days, its current assets are P5 million, and its current ratio
is 1.5. The company plans to reduce its DSO from 60 to the industry average of
45without causing a decline in sales. The resulting decrease in accounts
receivable will free up cash that will be used to purchase additional fixed assets

24. Before the change in policy, how much Sales Revenue was generated by
PACCIOLI, INC?
A. P 18,000,000
B. P 18,200,000
C. P 19,000,000
D. P 19,200,000

DSO = 360/ArTO
60 = 360/X
 X=6

ArTO = Net Credit Sales/Ave AR

6 = X/3,200,000
X = 19,200,000

25. After the change in policy, what is the new Account Receivable
Turnover of PACCIOLI, INC?
A. 6 Times
B. 7 Times
C. 8 Times
D. 9 Times

DSO = 360/ArTO
45 = 360/X
X=8

26. How much cash was collected from accounts Receivabledue to the
change in the policy?
A. 600,000
B. 700,000
C. 800,000
D. 900,000

Cash free up/collected

AR Bal bef change in policy 3,200,000
*AR Bal Aft change in policy (2,400,000)
Cash Collected 800,000

ArTO = NCR Sales/ Ave AR

8 = 19,200,000 /X
X = 2,400,000
 27. After the change in policy, what will be the Company’s new balance of
Current Assets?
A. 5,000,000
B. 4,800,000
C. 4,400,000
D. 4,200,000

Cash Collected
Cash 800,000
AR 800,000 (NO effect in CA)

Equipment 800,000
Cash 800,000 (Dec CA by 800,000)

Current Asset Bal = 4,200,000

28. After the change in policy, what will be the Company’snew Current Ratio?
A. 1.50 : 1
B. 1.32 : 1
C. 1.26: 1
D. 1.12 : 1

Old CR = CA/CL
1.5 = 5,000,000/X
X = 3,333

New CR
New CR = 5,000,000 - 800,000 / 3,333.33
New CR = 1.26

(For Items Number 29 – 30):

Given are the following ratios of REDD FINANCIAL CORP. for the year ended
December 31, 2018:
 ROE 15%
Debt Ratio 60%
Total Asset Turnover 3x
Sales P18,000,000
No. of outstanding shares 120,000shares
Market Price of shares P72

29. How much is the Net Income of REDD FINANCIALCORP. for the year 2018?
A. P 300,000
B. P 320,000
C. P 360,000
D. P 400,000

Asset TO = NS/TA
3 = 1,800,000/X
X = 6,000,000

Equity Ratio = 1 - Debt Ratio

Equity Ratio = 1- 0.06
Equity Ratio = 0.4

Total Equity = EQ Ratio x TA

Total Equity = 0.4 x 6,000,000
Total Equity = 2,400,000

ROE = NI/ Total Equity

NI = ROE x Total Equity
NI = 15% x 2,400,000
NI= 360,000

30. How much is the Price/Earnings Ratio?

A. 28.8 : 1
B. 27.0 : 1
C. 25.0 : 1
D. 24.0 : 1
 PER = MPS/EPS
PER = 72/3
PER = 24

EPS = NI - PD/WANOSO
EPS = 360,000/120,000
EPS = 3

(For Items Number 31– 32):

Given are the profitability ratios of Purple-Beetle Corp. for the year ended
December 31, 2018:
∙ Return on Sales 5%
∙ Return on Asset 10%
∙ Return on Equity 25%

31. What is the Equity Ratio of Purple-Beetle Corp.?

A. 20 percent
B. 30 percent
C. 40 percent
D. 50 percent

ROE = Equity Multiplier x ROA

ROE = ROA/Eq Ratio
EqR = ROA/ROE
EqR = 10%/25%
EqR = 40%

32. What is the Debt-to-Equity Ratio of Purple-BeetleCorp.?

A. 1.5 : 1
B. 2.0 : 1
C. 2.5 : 1
D. 3.0 : 1
 Debt to Equity Ratio (D - ER)
1 - DR = EqR
1 - 60% = 40%

D - ER = DR/ER
D - ER = 60%/40%
D - ER = 1.5%

(For Items Number 32 – 35):

You have the task of piecing together information in order to release a financial
report. You have found the ReturnonAssetsto be 9.68 percent. If sales were
P4,000,000, the debt ratio was s0.4, and total liabilities were P2,000,000.

33. How much is the ending balance of Total Assets?

A. P 3,000,000
B. P 4,000,000
C. P 4,500,000
D. P 5,000,000

DR = TD/TA
TA = TD/DR
TA = 2,000,000 / 0.4
TA = 5,000,000

34. How much is the Net Income?

A. P 440,000
B. P 444,000
C. P 484,000
D. P 488,000

ROA = NI/TA
NI = ROA x TA
NI = 9.68% x 5,000,000
NI = 484,000
35. What would be the Return on Equity (ROE)?
A. 15.31 percent
B. 16.13 percent
C. 17.31 percent
D. 18.13 percent

ROE = NI/TE
ROE = 484,000/3,000,000
ROE = 16.13%

TE = TA x EqR
TE = 5,000,000 x (1- 04)
TE = 3,000,000

The Income Statement of Shakeme Company shows operating expenses of P

530,000. The following information is available:
▪ Prepaid Expense Beginning P 28,000
▪ Prepaid Expense End P42,000
▪ Accrued Expense Beginning P 80,000
▪ Accrued Expense End P 72,000

36. What is the cash paid for operating expenses?

A. P 448,500
B. P 524,000
C. P 552,000
D. P 576,000

Cash paid for OPEX

Operating Ex 530,000
(Beg prep Ex) (28,000)
(End Accrued Ex) (72,000)
End prep Ex 42,000
Beg Accrued Ex 80,000
Cash paid for OPEX 552,000
(For Items Number 37 – 40):

Selected data from Jollivee’s 2016 Statements are presentedbelow. Turnover is

based on year end balances. Current Assetsare comprised mainly of cash,
receivables and inventories.
▪ Current ratio 4.0 ▪ Acid Test Ratio 3.0
▪ Current Liabilities P 600,000
▪ Return on Assets 10 %▪ Gross Profit Margin 40 %
▪ Net Profit Margin 18 %
▪ Inventory Turnover 6 times *The Inventory turnover is based on sales.

37. What is Jollivee’s Cost of Sales for the year 2016?

A. P 1,440,000
B. P 2,160,000
C. P 3,600,000
D. P 4,200,000

Current Ratio 4
(Quick Rato/Acid Test) (3)
Inventory Ratio 1

IR = Inc/CL
1 = X/600,000
X = 600,000

InTO = NS/Inv
NS = InTO x Inv
NS = 6 x 600,00
NS = 3,600,000

Cost of Sales = [(1-GRP) x NS]

Cost of Sales = [)1 - 0.4) x 3,600,000]
Cost of Sales = 2,160,000
38. What is Jollivee’s Inventory turnover if it is based on Cost of Sales?
A. 7.5 times
B. 6.0 times
C. 3.6 times
D. 2.4 times

InTO if based on COS:

InTO= COS/Inv
InTO = 2,160,000/600,000
InTO = 3.6

39. What is Jollivee’s Net Income for the year 2016??

A. P 624,000
B. P 648,000
C. P 662,000
D. P 724,500

NPM = NI/NS
NI = NPM x NS
NI = 0.18 x 3,600,000
NI = 648,000

40. What is the balance of Non- Current Assets as of 2016?

A. P 3,840,000
B. P 4,080,000
C. P 4,220,000
D. P 4,845,000

ROA = NI/TA

TA = NI/ROA
TA = 648,000/10%
TA = 6,480,00
 CR = CA/CL
CA = CR x CL
CA = 4 x 600,000
CA = 2,400,000

TA 6,480,000
(CA) (2,400,000)
NCA 4,080,000

“That in all persons and things, GOD may be glorified”