Name: Date:

Quiz on Financial Statement Analysis

1. Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the
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.

2. Statements in which all items are expressed only in relative terms (percentages of a base) are termed:
A. Vertical statements C. Funds Statements
B. Horizontal Statements D. Common-Size Statements

3. The percentage analysis of increases and decreases in individual items in comparative financial statements is called:
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis

4. Trend analysis allows a firm to compare its performance to:

A. other firms in the industry C. other industries
B. other time periods within the firm D. none of the above

5. Ratios are used as tools in financial analysis

A. instead of horizontal and vertical analysis.
B. because they can provide information that may not be apparent from inspection of the individual components of a particular
ratio.
C. because even single ratios by themselves are quite meaningful.
D. because they are prescribed by GAAP.

6. Short-term creditors are usually most interested in assessing

A. solvency. C. marketability.
B. liquidity. D. profitability.

7. Which of the following is a measure of the liquidity position of a corporation?

A. earnings per share
B. inventory turnover
C. current ratio
D. number of times interest charges earned

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

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

9.Stockholders are most interested in evaluating

A. liquidity. C. profitability.
B. solvency. D. marketability.

10. The debt ratio indicates:

A. a comparison of liabilities with total assets
B. the ability of the firm to pay its current obligations
C. the efficiency of the use of total assets
D. the magnification of earnings caused by leverage

11. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as the base data, net income decreased
by 70 percent in 2007 and increased by 175 percent in 2008. The respective net income reported by Kline Corporation for 2007 and
2008 are:
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000

Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
 12. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007. The increase in net income
of P300,000:
A. can be stated as 0% C. cannot be stated as a percentage
B. can be stated as 100% increase D. can be stated as 200% increase

Question Nos. 13 through 15 are based on the data taken from the balance sheet of Nomad Company at the end of the current year:
Accounts payable P145,000
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

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

A. P351,000 C. P211,000
B. P361,000 D. P336,000
1:1, the equal change in current assets and current liabilities brings direct effect on the ratio, that is, equal increase in current
assets and current liabilities causes the ratio to rise.
Answer: A
Working capital equals the difference between the total current assets and total current liabilities.
Current Assets:
Cash P 80,000
Marketable securities 250,000

14. The company’s current ratio as of the balance sheet date is:
A. 2.67:1 C. 2.02:1
B. 2.44:1 D. 1.95:1

Answer: B
Current Ratio: Current Assets ÷ Current Liabilities
(P595,000 ÷ P244,000) = 2.44:1.00

15. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1
B. 2.40:1 D. 1.76:1
Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00

16. Selected information from the accounting records of Petals Company is as follows:
Net sales for 2007 P900,000
Cost of goods sold for 2007 600,000
Inventory at December 31, 2006 180,000
Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is
A. 5.77 times C. 3.67 times
B. 3.85 times D. 3.57 times
Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times

17. The Moss Company presents the following data for 2007.
Net Sales, 2007 P3,007,124
Net Sales, 2006 P 930,247
Cost of Goods Sold, 2007 P2,000,326
Cost of Goods Sold, 2007 P1,000,120
Inventory, beginning of 2007 P 341,169
 Inventory, end of 2007 P 376,526
The merchandise inventory turnover for 2007 is:
A. 5.6 C. 7.5
B. 15.6 D. 7.7
Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times

18.Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the ending total asset
balance?
A. P2,000,000. C. P2,800,000.
B. P1,200,000. D. P1,600,000.
Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000

Net sales: (P950,000 x 5) P4,750,000

19. Jordan Manufacturing reports the following capital structure:

Current liabilities P100,000
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 C. 0.93
B. 0.49 D. 0.96

Answer: B
Current liabilities P 100,000
Long-term debt 400,000
Deferred income tax 10,000
Total Liabilities 510,000
Stockholders’ Equity
Preferred stock P 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000 530,000
Total Assets P1,040,000

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

20. House of Fashion Company had the following financial statistics for 2006:
Long-term debt (average rate of interest is 8%) P400,000
Interest expense 35,000
Net income 48,000
Income tax 46,000
Operating income 107,000
What is the times interest earned for 2006?
A. 11.4 times C. 3.1 times
B. 3.3 times D. 3.7 times

Answer: D
Times interest earned: Earnings before interest ÷ Interest
Income before tax (P48,000 + P46,000) P 94,000
Add Interest expense 35,000
Income before Interest expense P129,000

TIE: P129,000 ÷ P35,000 3.7 times

21. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock and 50,000 shares of
noncumulative and nonconvertible preferred stock issued and outstanding.
Additional information:
Stockholders’ equity at 12/31/07 P4,500,000
Net income year ended 12/31/07 1,200,000
Dividends on preferred stock year ended 12/31/07 300,000
Market price per share of common stock at 12/31/07 144
The price-earnings ratio on common stock at December 31, 2007, was
A. 10 to 1 C. 14 to 1
B. 12 to 1 D. 16 to 1
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16

The balance sheets of Magdangal Company at the end of each of the first two years of operations indicate the following:
2007 2006
Total current assets P600,000 P560,000
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 P115,000 and interest expense is P30,000 for 2007.
22. What is the rate earned on total assets for 2007 (round percent to one decimal point)?
A. 9.3 percent C. 8.9 percent
B. 10.1 percent D. 7.4 percent

23. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
A. 10.6 percent C. 12.4 percent
B. 11.2 percent D. 15.6 percent

24. What is the earnings per share on common stock for 2007, (round to two decimal places)?
A. P1.92 C. P1.77
B. P1.89 D. P1.42

25. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to one decimal point)?
A. 17.0 C. 12.4
B. 12.1 D. 15.9

Earnings before tax 1,000,000

Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Earnings per share 400,000/25,000 16.00
Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40

Dividend yield 6.4 ÷ (16 x 5) 8.0%

Answer: B
ROA: Operating income ÷ Average Total Assets
P145,000 ÷ P1,430,000 = 10.1%

. Answer: B
Return on stockholders’ equity: Net income ÷ Average stockholders’ equity
P115,000 ÷ P1,027,500 = 11.2%

Answer: C
Net income P115,000
Deduct Preferred Dividends 9,000
Income available to common shares P106,000
 EPS: (P106,000 ÷ 60,000) P1.77

Answer: A
P/E Ratio: P30 ÷ 1.766 = 17.0 times