FINANCIAL MANAGEMENENT 6

FINANCIAL STATEMENT ANALYSIS

1. The Cash and Accounts Receivable for a company are provided below:

2008 2007
Cash P65,000 P50,000
Accounts receivable (net) P75,200 P80,000
Based on this information, what is the amount and percentage of increase or decrease that would be shown in a
balance sheet with horizontal analysis?

2. The Cash and Accounts Receivable for a company are provided below:

2008 2007
Cash P64,800 P60,000
Accounts receivable (net) P46,000 P50,000
Based on this information, what is the amount and percentage of increase or decrease that would be shown in a
balance sheet with horizontal analysis?

3. Income statement information for Sims Company is provided below:

Sales P120,000
Cost of goods sold 84,000
Gross profit P 36,000

Prepare a common sized income statement for Sims Company.

6. The following items are reported on a company’s balance sheet:

Cash P250,000
Marketable securities 100,000
Accounts receivable 200,000
Inventory 200,000
Accounts payable 300,000

Determine the (a) current ratio, and (b) quick ratio? Round your answer to one digit after the decimal place.

7. The following items are reported on a company’s balance sheet:

Cash P250,000
Marketable securities 100,000
Accounts receivable 200,000
Inventory 200,000
Accounts payable 250,000

Determine the (a) current ratio, and (b) quick ratio? Round your answer to one digit after the decimal place.

8. A Company reports the following:

Net sales P720,000

Average accounts receivable (net) P 48,000

Determine the (a) accounts receivable turnover, and (b) number of days’ sales in

9. A Company reports the following:

Net sales P900,000
Average accounts receivable (net) P 45,000

Determine the (a) accounts receivable turnover, and (b) number of days’ sales in receivables? Round your answer to
one digit after the decimal place.

10. A company reports the following:

Cost of goods sold P575,000

Average inventory P115,000

Determine the (a) inventory turnover, and (b) number of days’ sales in inventory? Round your answer to one digit
after the decimal place.
11. The following information was taken from Sloan Company’s balance sheet:

Fixed assets (net) P1,750,000

Long-term liabilities P500,000
Total liabilities P375,000
Total stockholders’ equity P1,500,000

Determine the company’s (a) Ratio of fixed assets to long-term liabilities, and (b) ratio of liabilities to stockholders’
equity? Round your answer to one digit after the decimal place.

12. A company reports the following:

Income before income tax P300,000

Interest expense P150,000

Determine the number of times interest charges are earned. Round your answer to one digit after the decimal place.

13. A company reports the following income statement and balance sheet information for the current year:

Net income P 150,000

Interest expense P 25,000
Average total assets P2,000,000

Determine the rate earned on total assets. Round your answer to one digit after the decimal place.

14. A company reports the following:

Net income P150,000

Preferred dividends P10,000
Average stockholders’ equity P1,000,000
Average common stockholders’ equity P800,000

Determine the (a) rate earned on stockholders’ equity, and (b) rate earned on common stockholders’ equity? Round
your answer to one digit after the decimal place.

15. A company reports the following:

Net income P240,000

Preferred dividends P 10,000
Shares of common stock outstanding 20,000
Market price per share of common stock P35.00

Determine the company’s earnings per share on common stock.

16. A company reports the following:

Net income P240,000

Preferred dividends P 10,000
Shares of common stock outstanding 20,000
Market price per share of common stock P35.00

Determine the company’s price-earnings ratio. Round your answer to one digit after the decimal place.

17. A company reports the following:

Net sales P2,700,000

Average total assets P1,500,000
Determine the ratio of net sales to total assets. Round your answer to one digit after the decimal place.

18. A company reports the following:

Net sales P2,660,000

Average total assets P1,400,000

Determine the ratio of net sales to total assets. Round your answer to one digit after the decimal place.
 HUERTO COMPANY
Comparative Balance Sheet
December 31, 2007
Assets 2007 2006
Current assets P 340 P280
Plant assets 675 520
Total assets P1,015 P800

Liabilities and stockholders' equity

Current liabilities P 180 P120
Long-term debt 250 160
Common stock 325 320
Retained earnings 260 200
Total liabilities and stockholders' equity P1,015 P800

Instructions
(a) Using horizontal analysis, show the percentage change for each balance sheet item
using 2006 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.

HUERTO COMPANY
Comparative Balance Sheet
December 31, 2007
2007 2006____
(b) (b) (a)
Percentage
Assets Amount Percent Amount Percent Change
Current assets P 340 P280
Plant assets 675 520
Total assets P1,015 P800
Liabilities and stockholders' equity
Current liabilities P 180 P120
Long-term debt 250 160
Common stock 325 320
Retained earnings 260 200
Total liabilities and
stockholders' equity P1,015 P800

1. Condensed data taken from the ledger of Jefferson Company at December 31, 2006 and 2005, are as follows:

2006 2005
Current assets P150,000 P130,000
Property, plant, and equipment 450,000 400,000
Intangible assets 20,700 30,000
Current liabilities 70,000 80,000
Long-term liabilities 200,000 250,000
Common stock 225,000 150,000
Retained earnings 125,700 80,000

Prepare a comparative balance sheet, with horizontal analysis, for December 31, 2006 and 2005. (Round percents to
one decimal point.)

2. The following data are taken from the balance sheet at the end of the current year. Determine the (a) working
capital, (b) current ratio, and (c) acid-test ratio. Present figures used in your computations. Round ratios to the nearest
tenth.

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
3. The following data are taken from the financial statements:

Current Preceding
Year Year
Net sales P3,600,000 P4,000,000
Cost of goods sold 2,000,000 2,700,000
Average monthly inventory 332,000 328,000
Inventory, end of year 372,000 347,000

(a) Determine for each year (1) the inventory turnover and (2) the number of days' sales in
inventory.
(b) Comment on the favorable and unfavorable trends revealed by the data.

4. The following data are taken from the financial statements:

Current Preceding
Year Year
Average accounts receivable (net) P123,000 P 95,000
Accounts receivable (net), end of year 129,012 87,516
Net sales on account 950,000 825,000

(a) Assuming that credit terms on all sales are n/45, determine for each year (1) the accounts
receivable turnover and (2) the number of days' sales in receivables.

5. From the following data, determine for the current year the (a) rate earned on total assets, (b) rate earned on
stockholders' equity, (c) rate earned on common stockholders' equity, (d) earnings per share on common stock, (e)
price-earnings ratio on common stock, and (f) dividend yield on common stock. Assume that the current market price
per share of common stock is P27. (Present key figures used in your computations.)

Current Preceding
Year Year
Current assets P 735,000 P 820,000
Property, plant, and equipment 1,500,000 1,400,000
Current liabilities
(non-interest-bearing) 150,000 140,000
Long-term liabilities, 12% 400,000 400,000
Preferred 10% stock 250,000 250,000
Common stock, P25 par 1,200,000 1,200,000
Retained earnings:
Beginning of year 230,000 160,000
Net income for year 85,000 155,000
Preferred dividends declared (25,000) (25,000)

6. A company reports the following:

Net income P125,000

Preferred dividends P5,000
Average stockholders’ equity P1,000,000
Average common stockholders’ equity P700,000

Determine the (a) rate earned on stockholders’ equity, and (b) rate earned on common stockholders’ equity? Round
your answer to one digit after the decimal place.

7. Selected data from the Conner Company are presented below:

Total assets P1,500,000
Average assets 1,700,000
Net income 250,000
Net sales 1,400,000
Average common stockholders' equity 1,000,000
Net cash provided by operating activities 275,000
Shares of common stock outstanding 10,000

Calculate the profitability ratios that can be computed from the above information.
 FINANCIAL MANAGEMENENT 6
STATEMENT OF CASH FLOW ANALYSIS

1. Which of the following is not one of the four basic financial statements?
a. balance sheet
b. statement of cash flows
c. statement of changes in financial position
d. income statement

2. Which of the following concepts of cash is not appropriate to use in preparing the statement of cash flows?
a. cash
b. cash and money market funds
c. cash and cash equivalents
d. cash and U.S. treasury bonds

3. The statement of cash flows reports

a. cash flows from operating activities
b. total assets
c. total changes in stockholders' equity
d. changes in retained earnings

4. On the statement of cash flows, the cash flows from operating activities section would include
a. receipts from the issuance of capital stock
b. receipts from the sale of investments
c. payments for the acquisition of investments
d. cash receipts from sales activities

5. Preferred stock issued in exchange for land would be reported in the statement of cash flows in
a. the cash flows from financing activities section
b. the cash flows from investing activities section
c. a separate schedule
d. the cash flows from operating activities section

6. Cash paid to purchase long-term investments would be reported in the statement of cash flows in
a. the cash flows from operating activities section
b. the cash flows from financing activities section
c. the cash flows from investing activities section
d. a separate schedule

7. A statement of cash flows would not disclose the effects of which of the following transactions?
a. stock dividends declared
b. bonds payable exchanged for capital stock
c. purchase of treasury stock
d. capital stock issued to acquire fixed assets

8. Which of the following does not represent an outflow of cash and therefore would not be reported on the statement
of cash flows as a use of cash?
a. purchase of noncurrent assets
b. purchase of treasury stock
c. discarding an asset that had been fully depreciated
d. payment of cash dividends

9. Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows?
a. appropriation of retained earnings
b. acquisition of treasury stock
c. declaration of stock dividends
d. issuance of long-term debt

10. A ten-year bond was issued at par for $150,000 cash. This transaction should be shown on a statement of cash flows
under
a. investing activities
b. financing activities
c. noncash investing and financing activities
d. operating activities
11. Cash paid for preferred stock dividends should be shown on the statement of cash flows under
a. investing activities
b. financing activities
c. noncash investing and financing activities
d. operating activities

12. The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities
reports
a. the increase or decrease in cash
b. cash at the end of the year
c. net cash flow from investing activities
d. net cash flow from financing activities

13. Which of the following is a noncash investing and financing activity?

a. payment of a cash dividend
b. payment of a six-month note payable
c. purchase of merchandise inventory on account
d. issuance of common stock to acquire land

14. Which of the following should be shown on a statement of cash flows under the financing activity section?
a. the purchase of a long-term investment in the common stock of another company
b. the payment of cash to retire a long-term note
c. the proceeds from the sale of a building
d. the issuance of a long-term note to acquire land

15. A company purchases equipment for $29,000 cash. This transaction should be shown on the statement of cash flows
under
a. investing activities
b. financing activities
c. noncash investing and financing activities
d. operating activities

16. Cash flow per share is

a. required to be reported on the balance sheet
b. required to be reported on the income statement
c. required to be reported on the statement of cash flows
d. not required to be reported on any statement

17. On the statement of cash flows prepared by the indirect method, the cash flows from operating activities section
would include
a. receipts from the sale of investments
b. amortization of premium on bonds payable
c. payments for cash dividends
d. receipts from the issuance of capital stock

18. The statement of cash flows may be used by management to

a. assess the liquidity of the business
b. assess the major policy decisions involving investments and financing
c. determine dividend policy
d. do all of the above

19. Cash receipts from interest and dividends are classified as

a. investing activities.
b. operating activities.
c. either financing or investing activities.
d. financing activities.

20. The order of presentation of activities on the statement of cash flows is

a. operating, investing, and financing.
b. operating, financing, and investing.
c. financing, operating, and investing.
d. financing, investing, and operating.

21. Financing activities involve

a. lending money.
b. acquiring investments.
c. issuing debt.
d. acquiring long-lived assets.
22. Investing activities include
a. collecting cash on loans made.
b. obtaining cash from creditors.
c. obtaining capital from owners.
d. repaying money previously borrowed.

23. Cash receipts from interest and dividends are classified as

a. financing activities
b. operating activities.
c. investing activities.
d. either financing or investing activities.

24. Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method
in
a. the cash flows from financing activities section
b. the cash flows from investing activities section
c. a separate schedule
d. the cash flows from operating activities section

25. Which of the following should be added to net income in calculating net cash flow from operating activities using the
indirect method?
a. an increase in inventory
b. a decrease in accounts payable
c. preferred dividends declared and paid
d. a decrease in accounts receivable

The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed assets
and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current
liability accounts at the end and at the beginning of the year are as follows:

End Beginning
Cash $ 50,000 $ 60,000
Accounts receivable 112,000 108,000
Inventories 105,000 93,000
Prepaid expenses 4,500 6,500
Accounts payable (merchandise creditors) 75,000 89,000

26. What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the
indirect method?
a. $198,000
b. $324,000
c. $352,000
d. $296,000

27. The following information is available from the current period financial statements
Net income $140,000
Depreciation expense 28,000
Increase in accounts receivable 16,000
Decrease in accounts payable 21,000

The net cash flow from operating activities using the indirect method is
a. $131,000
b. $163,000
c. $107,000
d. $205,000

28. The current period statement of cash flows includes the flowing:

Cash balance at the beginning of the period $410,000

Cash provided by operating activities 185,000
Cash used in investing activities 43,000
Cash used in financing activities 97,000

The cash balance at the end of the period is

a. $45,000
b. $735,000
c. $455,000
d. $85,000
29. The following selected account balances appeared on the financial statements of the Franklin Company:

Accounts Receivable, Jan. 1 $13,000

Accounts Receivable, Dec. 31 9,000
Accounts Payable, Jan 1 4,000
Accounts payable Dec. 31 7,000
Merchandise Inventory, Jan 1 10,000
Merchandise Inventory, Dec 31 15,000
Sales 56,000
Cost of Merchandise Sold 31,000

The Franklin Company uses the direct method to calculate net cash flow from operating activities.

30 Cash collections from customers are

a. $56,000
b. $52,000
c. $60,000
d. $45,000

31. Cash paid to suppliers is

a. $39,000
b. $33,000
c. $29,000
d. $23,000

EXERCISE/OTHER

1. For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on
the statement of cash flows under the indirect method.

(a) Receipt of dividends

(b) Payment of dividends
(c) Purchase of equipment
(d) Net income
(e) Issuance of the company’s common stock
(f) Amortization expense

2. For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on
the statement of cash flows under the indirect method.

(a) Purchased buildings

(b) Sold Patents
(c) Net income
(d) Issued Common Stock
(e) Paid cash dividends
(f) Depreciation expense

3. For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on
the statement of cash flows under the indirect method.
(a) Purchased treasury stock
(b) Dispose of equipment
(c) Net income
(d) Sold long-term investments
(e) Issued common stock
(f) Depreciation expense

4. Rowen Corporation’s accumulated depreciation increased by $11,000, while patents decreased by $3,200 between
consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year.
In addition, the income statement showed a gain of $3,500 from sale of land. Reconcile a net income of $45,000 to
net cash flow from operating activities.
5. Glamoreen Corporation’s comparative balance sheet for current assets and liabilities was as follows:

Dec. 31, 2009 Dec. 31, 2008

Accounts receivable 7,500 5,200
Inventory 11,500 16,000
Accounts payable 4,300 5,200
Dividends payable 4,000 3,000

Reconcile net income of $50,000 for changes in operating assets and liabilities.

6. Nelson, Inc. reported the following data:

Net income $130,000
Depreciation expense 15,000
Loss on disposal of equipment 10,000
Increase in accounts receivable 7,000
Decrease in accounts payable (2,000)

Prepare the cash flows for operating activities under the indirect method as it would appear on the statement of cash
flows.

7. Johnston Corporation purchased land for $150,000. Later in the year the company sold land with a book value of
$180,000 for $200,000. Show how the effects of these transactions are reported on the statement of cash flows.

8. Sales reported on the income statement were $340,000. The accounts receivable balance declined $10,000 over the
year. Determine the amount of cash received from customers?

9. Cost of merchandise sold reported on the income statement was $155,000. The accounts payable balance increased
$5,000, and the inventory balance increased by $9,000 over the year. Determine the amount of cash paid for
merchandise?

PROBLEM

1. Indicate the section (operating activities, investing activities, financing activities, or none) in which each of the
following would be reported on the statement of cash flows prepared by the indirect method:

(a) Gain on sale of fixed assets

(b) Operating income
(c) Retirement of long-term debt
(d) Sale of capital stock
(e) Distribution of stock dividends
(f) Payment of cash dividends
(g) Purchase of fixed assets
(h) Sale of fixed assets
(i) Receipt of interest revenue
(j) Payment of interest expense

2. State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing
activities, financing activities, or not reported) and the amount that would be reported for each of the following
transactions:

(a) Received $145,000 from the sale of land costing $70,000.

(b)Purchased investments for $50,000.
(c) Declared $35,000 cash dividends on stock. $5,000 dividends were payable at the beginning
of the year, and $6,000 were payable at the end of the year.
(d)Acquired equipment for $32,000 cash.
(e) Declared and issued 100 shares of $20 par common stock as a stock dividend, when the
market price of the stock was $32 a share.
(f) Recognized by an adjusting entry depreciation for the year, $48,000.
(g)Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash.
(h)Issued $500,000 of 20-year, 10% bonds payable at 99.
(i) Borrowed $43,000 from Busey National Bank, issuing a 5-year, 8% note for that amount.