FINMAN 301 – FINANCIAL MANAGEMENT W. MONDIDO JR.

SAINT COLUMBAN COLLEGE

COLLEGE OF BUSINESS EDUCATION
FINMAN 301 – Financial Management

CHAPTER 3 – FINANCIAL STATEMENT ANALYSIS

THEORY
Basic concepts
1. When a balance sheet amount is related to an income statement amount in
computing a ratio,
A. Comparisons with industry ratios are not meaningful.
B. The balance sheet amount should be converted to an average for the year.
C. The income statement amount should be converted to an average for the year.
D. The ratio loses its historical perspective because a beginning-of-the-year amount
is combined with an end-of-the-year amount.
2. How are financial ratios used in decision making?
A. They remove the uncertainty of the business environment.
B. They aren’t useful because decision making is too complex.
C. They give clear signals about the appropriate action to take.
D. They can help identify the reasons for success and failure in business, but
decision making requires information beyond the ratios.
Vertical analysis
3. A useful tool in financial statement analysis is the common-size financial statement.
What does this tool enable the financial analyst to do?
A. Ascertain the relative potential of companies of similar size in different industries.
B. Evaluate financial statements of companies within a given industry of
approximately the same value.
C. Determine which companies in the same industry are at approximately the same
stage of development.
D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over time or between companies within a given industry without
respect to relative size.
5. In a set of comparative financial statements, you observed a gradual decline in the
net of gross ratio, i.e., between net sales and gross sales. This indicates that:
A. Sales volume is decreasing.
B. The discount period is being lengthened.
C. There is adherence to the collection policies of the company.
D. There is a stiffening in the grant of discounts to the customers.
Horizontal analysis
6. Last year, a business had no long-term investments; this year long term investments
amount to P100,000. In a horizontal analysis the change in long-term investments
should be expressed as
A. An absolute value of P100,000, and an increase of 100%
B. An absolute value of P100,000 and an increase of 1,000%
C. An absolute value of P100,000 and no value for a percentage change
D. No change in any terms because there was no investment in the previous year.
Liquidity ratios
7. Which one of the following ratios would provide a best measure of liquidity?
A. Sales minus returns to total debt.
B. Total assets minus goodwill to total equity.
C. Net profit minus dividends to interest expense.
D. Current assets minus inventories to current liabilities.
8. Which ratio is most helpful in appraising the liquidity of current assets?
A. Accounts receivable turnover. C. Current ratio.
B. Acid-test ratio. D. Debt ratio.

4. Which of the following is not revealed on a common size balance sheet? Activity ratios
A. The debt structure of a firm. 9. The ratio that measures a firm's ability to generate earnings from its resources is
B. The capital structure of a firm. A. Asset turnover. C. Days' sales in receivables.
C. The peso amount of assets and liabilities. B. Days' sales in inventory. D. Sales to working capital.
D. The distribution of assets in which funds are invested.

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Profitability ratios 15. In comparing the current ratios of two companies, why is it invalid to assume that the
10. Which of these ratios are measures of a company’s profitability? company with the higher current ratio is the better company?
1. Earnings per share 5. Return on assets A. The current ratio includes assets other than cash.
2. Current ratio 6. Inventory turnover B. A high current ratio may indicate inadequate inventory on hand.
3. Return on sales 7. Receivables turnover C. The two companies may define working capital in different terms.
4. Debt-equity ratio 8. Price-earnings ratio D. A high current ratio may indicate inefficient use of various assets and liabilities.
A. 1, 3, and 5 only C. 1, 3, 5, 6, 7, and 8 only.
B. 1, 3, 5, and 8 only. D. All eight ratios. 16. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning
of the year. At the end of the year, the company has a current ratio of 2.5 to 1 and
11. The ratio of analytical measurements which measures the productivity of assets a quick ratio of 0.8 to 0.1 Which of the following could help explain the divergence
regardless of capital structure is in the ratios from the beginning to the end of the year?
A. Current ratio. C. Quick (acid test) ratio. A. An increase in inventory levels during the year.
B. Debt ratio. D. Return on total assets. B. An increase in credit sales in relationship to sales
C. An increase in the use of payables during the current year.
Market-test ratios D. An increase in the use of payables during the current year.
12. How are the following used in the calculation of the dividend-pay-out ratio for a
company with only common stock outstanding? 17. If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. B. C. D. A. Return on equity.
Dividends per share Denominator Denominator Numerator Numerator B. The current ratio.
Earnings per share Numerator Not used Denominator Not used C. Times interest earned.
Book value per share Not used Numerator Not used Denominator D. Total liabilities to total assets.

Integrated ratios
13. An investor has been given several financial ratios for an enterprise but none of the
financial reports. Which combination of ratios can be used to derive return on
equity?
A. Price-to-earnings ratio and return-on-assets ratio.
B. Net profit margin, total assets turnover, and equity multiplier.
C. Market-to-book-value ratio and total-debt-to-total-assets ratio.
D. Price-to-earnings ratio, earnings per share, and net profit margin.
Ratio analysis
14. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of
credit. Belle’s quick ratio is significantly better than the industry average. Which of
the following factors should North consider as possible limitation of using this ratio
when evaluating Belle’s creditworthiness?
A. Belle may need to liquidate its inventory to meet its long-term obligations.
B. Increasing market prices for Belle’s inventory may adversely affect the ratio.
C. Fluctuating market prices of short-term investments may adversely affect the ratio.
D. Belle may need to sell its available-for-sale investments to meet its current
obligations.
18. The market value of a firm's outstanding common shares will be higher, everything
else equal, if
A. Investors expect lower dividend growth.
B. Investors have longer expected holding periods.
C. Investors have a lower required return on equity.
D. Investors have shorter expected holding periods.
19. In a comparison of 1992 to 1991, Neir Co.’s inventory turnover ratio increased
substantially although sales and inventory amounts were essentially unchanged.
Which of the following statements explains the increased inventory turnover ratio?
A. Cost of goods sold decreased.
B. Total asset turnover increased.
C. Gross profit percentage decreased.
D. Accounts receivable turnover increased.
20. Minix Co. has a high sales-to-working-capital ratio. This could indicate
A. The firm is not profitable. C. Working capital is not profitably utilized.
B. The firm is undercapitalized. D. The firm is likely to have liquidity problems.

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21. When compared to a debt-to-assets ratio, a debt-to-equity ratio would
A. Be lower than the debt-to-assets ratio.
B. Be higher than the debt-to-assets ratio.
C. Be about the same as the debt-to-assets ratio.
D. Have no relationship at all to the debt-to-assets ratio.
22. You observe that a firm’s profit margin and debt ratio are below the industry
average, while its return on equity exceeds the industry average. What can you
conclude?
A. Return on assets is above the industry average.
B. Total assets turnover is below the industry average.
C. Total assets turnover is above the industry average.
D. Statements A and C are correct.
23. The following situations are descriptive of SBD Corporation. Which would be
considered as the most favorable for the common stockholders.
A. Equity ratio is low; return on assets exceeds the cost of borrowing.
B. Equity ratio is high; return on assets exceeds the cost of borrowing.
C. SBD stops paying dividends on its cumulative preferred stock; the price-earnings
ratio of common stock is low.
D. Book value per share of common stock is substantially higher than market value
per share; return on common stockholders’ equity is less than the rate of interest
paid to creditors.
24. The company issued new common shares in a three-for-one stock split. Identify the
statements that indicate the correct effect(s) of this transaction.
A. It reduced equity per share of common stock.
B. The peso amount of capita stock is increased.
C. Share of each common stockholder is reduced.
D. Working capital and current ratio are increased.
Sensitivity analysis
25. If a transaction causes total liabilities to decrease but does not affect the owners’
equity, what change if any, will occur in total assets?
A. Assets will be decreased. C. No change in total assets.
B. Assets will be increased. D. None of the above.
26. Which of the following actions will increase a company’s quick ratio?
A. Issue equity and use the proceeds to purchase inventory.
B. Issue short-term debt and use the proceeds to purchase inventory.
C. Reduce inventories and use the proceeds to reduce long-term debt.
MCQ- FINANCIAL STATEMENT ANALYSIS
W. MONDIDO JR.
D. Issue long-term debt and use the proceeds to purchase fixed assets.
E. Reduce inventories and use the proceeds to reduce current liabilities.
27. On December 31, 1991, Northpark Co. collected a receivable due from a major
customer. Which of the following ratios would be increased by this transaction?
A. Current ratio. C. Quick ratio.
B. Inventory turnover ratio. D. Receivable turnover ratio.
28. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less
than 2 to 1 if the company
A. Paid an account payable.
B. Collected an account receivable.
C. Purchased inventory on open account.
D. Sold merchandise on open account that earned a normal gross margin.
29. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000.
Which of the following transactions would improve Mabuhay’s current ratio?
A. Paying P40,000 of short-term accounts payable.
B. Collecting P20,000 of short-term accounts receivable.
C. Refinancing a P60,000 long-term mortgage with a short-term note.
D. Purchasing P100,000 of merchandise inventory with a short-term accounts payable.
30. A company has a current ratio of 2 to 1. The ratio will decrease if the company
A. Borrow cash on a six-month note.
B. Pays a large account payable which had been a current liability.
C. Receives a 5% stock dividend on one of its marketable securities.
D. Sells merchandise for more than cost and records the sale using the perpetual
inventory method.
31. Recording cash dividend payment when declaration was recorded earlier would
A. Increase both current ratio and working capital
B. Decreases both current ratio and working capital
C. Have no effect on current ratio or earnings per share
D. Increase current ratio but no effect on working capital.
32. ABC Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A
transaction that would change Bond's quick ratio but not its current ratio is the
A. payment of accounts payable.
B. collection of accounts receivable.
C. sale of inventory on account at cost.
D. sale of short-term marketable securities for cash that results in a profit.
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33. If, just prior to the period of rising prices, a company changed its inventory Comprehensive
measurement from FIFO to LIFO, the effect in the next period would be to 38. All of the following statements are valid except
A. B. C. D. A. The inventory turnover is computed by dividing sales by average inventory.
Current ratio Increase Increase Decrease Decrease B. The results of financial statements analysis are of value only when viewed in
Inventory turnover Increase Decrease Increase Decrease comparison with the results of other periods or other firms.
C. If the return on total assets is higher than the after-tax cost of long-term debt,
34. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets then leverage is positive, and the common stockholders will benefit.
either by using borrowed funds for the purchase or by entering into an operating D. The short-term creditor is more interested in cash flows and in working capital
lease. The company's debt ratio as measured by the balance sheet will management that he is in how much accounting net income is reported.
A. Increase whether the assets are purchased or leased.
B. Remain unchanged whether the assets are purchased or leased.
C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Increase if the assets are purchased, and remain unchanged if the assets are
leased.

35. What would be the effect on book value per share and earnings per share if the PROBLEMS
corporation purchased its own shares in the open market at a price greater than
book value per share? Basic concepts
A. B. C. D. 1. A service company's working capital at the beginning of January of the current year
Book value per share Increase No effect Decrease Decrease was $70,000. The following transactions occurred during January:
Performed services on account $30,000
Earnings per share Increase Increase Increase Decrease
Purchased supplies on account 5,000
Consumed supplies 4,000
36. Which of the following statements is correct?
Purchased office equipment for cash 2,000
A. A high quick ratio is always a good indication of a well-managed liquidity
Paid short-term bank loan 6,500
position.
Paid salaries 10,000
B. A high degree of operating leverage lowers the risk by stabilizing the firm’s
Accrued salaries 3,500
earnings stream.
What is the amount of working capital at the end of January?
C. A relatively low return on assets (ROA) is always an indicator of managerial
A. $47,500 C. $80,500
incompetence.
B. $50,500 D. $90,000
D. An increase in a firm’s inventories will call for additional financing unless the
increase is offset by an equal or larger decrease in some other asset account.
Vertical analysis
2. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of
37. A company issued long-term bonds and used the proceeds to repurchase 40% of
goods manufactured is P480,000. The beginning inventories of goods in process and
the outstanding shares of its stock. This financial transaction will likely cause the
finished goods are P82,000 and P65,000, respectively. The ending inventories are,
A. Current ratio to decrease. C. Times-interest-earned ratio to decrease.
goods in process, P75,000, finished goods, P55,000. The selling expenses is 5%,
B. Fixed charge coverage ratio to increase. D. Total assets turnover ratio to
general and administrative expenses 2.5% of cost of sales, respectively. The net
increase.
profit in the year 1990 is
A. P45,725 C. P83,000
B. P53,850 D. P90,000

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Horizontal analysis Profitability ratios

3. In 19x5, MPX Corporation’s net income was P800,000 and in 19x6 it was P200,000. 9. The average stockholders equity for ABC Company for 2000 was P2,000,000.
What percentage increase in net income must MPX achieve in 19x7 to offset the Included in this figure is P200,000 par value of 8% preferred stock, which remained
19x6 decline in net income? unchanged during the year. The return on common shareholders’ equity was 12.5%
A. 60% C. 400% during the 2000. How much was the net income of the company in 2000?
B. 300% D. 600% A. P234,000 C. P250,000
B. P241,000 D. P225,000
Activity ratios
4. Blasso Co.’s net accounts receivable were $500,000 at December 31, 2000 and Market-test ratios
$600,000 at December 31, 2001. Net cash sales for 2001 were $200,000. The accounts 10. Ehrenburg Co. had net income of $5.3 million and earnings per share of common
receivable turnover for 2001 was 5.0. What were Blasso’s total net sales for 2001? stock of $2.50. Included in the net income was $500,000 of bond interest expense
A. $2,950,000 C. $3,200,000 related to its long-term debt. The income tax rate was 50%. Dividends on preferred
B. $3,000,000 D. $5,500,000 stock were $300,000. The dividend payout ratio on common stock was 40%. What
were the dividends on common stock?
5. During 1989, Rand Co. purchased $960,000 of inventory. The cost of goods sold for A. $1,800,000 C. $2,000,000
1989 was $900,000, and the ending inventory at December 31, 1989 was $180,000. B. $1,900,000 D. $2,120,000
What was the inventory turnover for 1989?
A. 5.0 C. 6.0 Integrated ratios
B. 5.3 D. 6.4 11. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The
amount of current assets is
Solvency ratios A. P600,000 C. P1,200,000
6. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate B. P900,000 D. P1,800,000
of 10 percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its
average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the 12. India Oats pays dividends of $0.62 per quarter, and has annual earnings per share of
company does not maintain a TIE ratio of at least 4 times, its bank will refuse to $2.80. What is India Oats's dividend yield and dividend payout ratio for 2000,
renew its loan, and bankruptcy will result. What is Alumbat’s current TIE ratio? respectively, if its recent market price is $30.00 and its average market price was
A. 2.4 C. 3.6 $28.00?
B. 3.4 D. 5.0 A. 8.27% and 22.1%. C. 8.86% and 22.1%.
B. 8.27% and 88.6%. D. 8.86% and 88.6%.
7. What would be a company’s “times interest earned ratio” if interest paid on loans
amount to P9,000 and its net income after income tax is P99,000. (Assume a 25% 13. The following were reflected from the records of War Freak Company:
income tax rate on first P100,000 of income and 35% income tax rate on income in Earnings before interest and taxes P1,250,000
excess of P100,000.) Interest expense 250,000
A. 10 times C. 13 times Preferred dividends 200,000
B. 12 times D. 16.21 times Payout ratio 40%
Shares outstanding throughout 2003
8. Manufacturer’s Inc. estimates that its interest charges for this year will be $700 and its Preferred 20,000
net income will be $3,000. Assuming its average tax rate is 30 percent, what is the Common 35,000
company’s estimated times interest earned ratio? Income tax ratio 40%
A. 2.40 C. 5.33 Price earnings ratio 5 times
B. 4.25 D. 7.12 The dividend yield ratio is:

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A. 0.08 C. 0.40 20. The Intelinet Corporation and Comp Inc. have assets of $100,000 each and a return
B. 0.12 D. 0.50 on common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp
has half the sales of Intelinet. If Intelinet has net income of $10,000 and a total assets
14. Last year, Quayle Energy had sales of $200 million and its inventory turnover ratio was turnover ratio of 3.5, what is Comp Inc.'s profit margin?
5.0. The company’s current assets totaled $100 million and its current ratio was 1.2. A. 3.31% C. 10.00%
What was the company’s quick ratio? B. 7.71% D. 13.50%
A. 0.55 C. 1.20
B. 0.72 D. 1.39 21. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The
president is unhappy with the current return on assets, and he thinks it could be
15. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm doubled. This could be accomplished (1) by increasing the profit margin to 15% and
experienced $2 million in sales and sustains an inventory turnover of 8.0, what are the (2) by increasing total assets turnover. What new asset turnover ratio, along with the
firm's current assets? 15% profit margin, is required to double the return on assets?
A. $500,000 C. $1,250,000 A. 35% C. 45%
B. $1,000,000 D. $1,500,000 B. 40% D. 50%

16. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. 22. Selected information from the accounting records of the Blackwood Co. is as
The company has $2 million in sales and its current liabilities are $1 million. What is follows:
the company’s inventory turnover ratio? Net A/R at December 31, 2000 $ 900,000
A. 5.0 C. 5.5 Net A/R at December 31, 2001 $1,000,000
B. 5.2 D. 6.0 Accounts receivable turnover 5 to 1
Inventories at December 31, 2000 $1,100,000
17. Perry Technologies Inc. had the following financial information for the past year: Inventories at December 31, 2001 $1,200,000
Sales $860,000 Inventory turnover 8x Inventory turnover 4 to 1
Quick ratio 1.5 Current ratio 1.75 What was the gross margin for 2001?
What were Perry’s current liabilities? A. $150,000 C. $300,000
A. $ 61,429 C. $430,000 B. $200,000 D. $400,000
B. $107,500 D. $500,000
23. Watson Corporation computed the following items from its financial records for the
18. Taft Technologies has the following relationships: year just ended:
Annual sales $1,200,000 Inventory turnover ratio 4.8 Price-earnings ratio 12
Current liabilities $ 375,000 Current ratio 1.2 Payout ratio .6
Days sales outstanding (DSO) 40 (360-day year) Asset turnover .9
The company’s current assets consist of cash, inventories, and accounts receivable. The dividend yield on Watson's common stock is
How much cash does Taft have on its balance sheet? A. 5.0% C. 7.5%
A. -$ 8,333 C. $125,000 B. 7.2% D. 10.8%
B. $ 66,667 D. $200,000
24. Assume Meyer Corporation is 100 percent equity financed. Calculate the return on
19. An enterprise has total asset turnover of 3.5 times and a total debt to total assets equity, given the following information:
ratio of 70%. If the enterprise has total debt of $1,000,000, it has a sales level of (1) Earnings before taxes = $1,500
A. $200,000.00 C. $2,450,000.00 (2) Sales = $5,000
B. $408,163.26 D. $5,000,000.00 (3) Dividend payout ratio = 60%

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(4) Total assets turnover = 2.0 C. The amount of dividend cannot be determined.
(5) Tax rate = 30% D. Market value of the stock cannot be determined.
A. 25% C. 35%
B. 30% D. 42% 31. Selected data from the year-end financial statements of World Cup Corp. are
presented below. The difference between average and ending inventories is
25. Shepherd Enterprises has an ROE of 15 percent, a debt ratio of 40 percent, and a immaterial.
profit margin of 5 percent. The company’s total assets equal $800 million. What are Current ratio 2.0
the company’s sales? (Assume that the company has no preferred stock.) Quick ratio 1.5
A. $ 360,000,000 C. $1,440,000,000 Current liabilities P600,000
B. $ 960,000,000 D. $2,400,000,000 Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
26. A fire has destroyed many of the financial records of R. Son & Co. You are assigned World’s net sales for the year were
to put together a financial report. You have found the return on equity to be 12% A. P1.2 million C. P4.0 million
and the debt ratio was 0.40. What was the return on assets? B. P2.4 million D. P6.0 million
A. 5.35% C. 7.20%
B. 6.60% D. 8.40% 32. The following ratios and data were computed from the 1997 financial statements of
Star Co.:
27. A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has Current ratio 1.5
sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm’s Working capital P20,000
before-tax cost of debt is 10 percent and the firm’s tax rate is 40 percent, what is the Debt/equity ratio .8
firm’s ROE? Return on equity .2
A. 1.7% C. 6.0% If net income for 1997 is P40,000, the balance sheet at the end of 1997 total assets of
B. 2.5% D. 8.3% A. P300,000 C. P360,000
B. P340,000 D. P400,000
28. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of
$500,000 on $5,000,000 of total debt outstanding. Its tax rate is 40 percent. If the 33. Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days
firm’s ROA is 6 percent, by how many percentage points is the firm’s ROE greater sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million,
than its ROA? and a debt ratio of 0.64. What is the firm’s return on equity (ROE)? Assume a 360-
A. 0.0% C. 5.2% day year.
B. 3.0% D. 7.4% A. 3.3% C. 8.1%
B. 7.1% D. 33.3%
29. Given the following information, calculate the market price per share of WAM Inc.
Net income = $200,000 Earnings per share = $2.00 34. Kansas Office Supply had $24,000,000 in sales last year. The company’s net income
Stockholders’ equity = $2,000,000 Market/Book ratio = 0.20 was $400,000, its total assets turnover was 6.0, and the company’s ROE was 15
A. $ 2.00 C. $ 8.00 percent. The company is financed entirely with debt and common equity. What is
B. $ 4.00 D. $20.00 the company’s debt ratio?
A. 0.20 C. 0.33
30. Earnings per share amount to P10 and the price earnings ratio is 5. If the dividend B. 0.30 D. 0.60
yield is 8%,
A. The dividend is P4 per share.
B. Market price of the stock must be P40.

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35. Last year, Thomas Lumber Co. had a profit margin of 10 percent, total assets 40. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets of
turnover of 0.5, and a debt ratio of 20 percent. (The company finances its assets with 12%. If the debt ratio is 36% and the market price of the stock is $38 per share, what is
debt and common equity; it does not use preferred stock.) This year, the company’s the return on equity?
CFO wants to double ROE. She expects the total assets turnover will remain at 0.5, A. 7.68% C. 12.0%
while the profit margin and debt ratio will increase enough to double ROE. Assume B. 9.0% D. 18.75%
that the profit margin is increased to 15 percent, what debt ratio will the company
need in order to double its ROE?
A. 0.30 C. 0.40
B. 0.33 D. 0.45 Questions 41 through 43 are based on the following information.
The condensed balance sheet as of December 31, 1982 of San Matias Company is
36. Deb & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit given below. Figures shown by a question mark (?) may be computed from the
margin of 10%. The president is unhappy with the current return on equity, and he additional information given:
thinks it could be doubled. This could be accomplished (1) by increasing the profit ASSETS LIAB. & STOCKHOLDERS’ EQUITY
margin to 14% and (2) increasing debt utilization. Total assets turnover will not Cash P 60,000 Accounts payable P ?
change. What new debt ratio, along with the 14% profit margin, is required to Trade receivable- ? Current notes payable 40,000
double the return on equity? net
A. 0.55 C. 0.70 Inventory ? Long-term payable ?
B. 0.65 D. 0.75 Fixed assets-net 252,000 Common stock 140,000
Retained earnings ?
37. Lone Star Plastics has the following data: Total Assets P 480,000 Total L & SHE P 480,000
Assets: $100,000 Interest rate: 8.0% Additional information:
Debt ratio: 40.0% Total assets turnover: 3.0 Current ratio (as of Dec. 31, 1982) 1.9 to 1
Profit margin: 6.0% Tax rate: 40% Ratio of total liabilities to total stockholders’ equity 1.4
What is Lone Star’s EBIT? Inventory turnover based on sales and ending inventory 15 times
A. $12,000 C. $30,000 Inventory turnover based on cost of goods sold and ending 10 times
B. $18,000 D. $33,200 inventory
Gross margin for 1982 P500,000
38. Lombardi Trucking Company has the following data:
Assets: $10,000 Interest rate: 10.0% 41. The balance of accounts payable of San Matias as of December 31, 1982 is
Debt ratio: 60.0% Total assets turnover: 2.0 A. P40,000 C. P95,000
Profit margin: 3.0% Tax rate: 40% B. P80,000 D. P280,000
What is Lombardi’s TIE ratio?
A. 0.95 C. 2.10 42. The balance of retained earnings of San Matias as of December 31, 1982 is
B. 1.75 D. 2.67 A. P60,000 C. P200,000
B. P140,000 D. P360,000
39. The Meryl Corporation’s common stock is currently selling at $100 per share, which
represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, 43. The balance of inventory of San Matias as of December 31, 1982 is
a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on A. P68,000 C. P168,000
total assets (ROA)? B. P100,000 D. P228,000
A. 8.0% C. 12.0%
B. 10.0% D. 16.7%

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FINMAN 301 – FINANCIAL MANAGEMENT W. MONDIDO JR.

Questions 44 thru 47 are based on the following information. payable) increase without pushing its quick ratio below 0.8?
You are requested to reconstruct the accounts of Angela Trading for analysis. The A. $278,000 C. $556,000
following data were made available to you: B. $333,000 D. $625,000
Gross margin for 19x8 P472,500
Ending balance of merchandise inventory P300,000 50. Last year's asset turnover ratio for Wuerffel Airlines was 2.5. This year, sales increased
Total stockholders’ equity as of December 31, 19x8 P750,000 by 20% and average total assets increased by 10%. What is the new asset turnover
Gross margin ratio 35% ratio?
Debt to equity ratio 0.8:1 A. 2.50 C. 2.73
Times interest earned 10 B. 2.59 D. 3.00
Quick ratio 1.3:1
Ratio of operating expenses to sales 18% 51. Victoria Enterprises has $1.6 million of accounts receivable on its balance sheet. The
Long-term liabilities consisted of bonds payable with interest rate of 20% company’s DSO is 40 (based on a 360-day year), its current assets are $2.5 million,
Based on the above information, and its current ratio is 1.5. The company plans to reduce its DSO from 40 to the
industry average of 30 without causing a decline in sales. The resulting decrease in
44. What was the operating income for 19x8? accounts receivable will free up cash that will be used to reduce current liabilities. If
A. P205,550 C. P229,500 the company succeeds in its plan, what will Victoria’s new current ratio be?
B. P243,500 D. P472,500 A. 0.72 C. 1.66
B. 1.50 D. 1.97
45. How much was the bonds payable?
A. P114,750 C. P370,500 52. Vance Motors has current assets of $1.2 million. The company’s current ratio is 1.2, its
B. P200,750 D. P400,000 quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to
increase its inventory turnover ratio to the industry average, which is 5, without
46. Total current liabilities would amount to reducing its sales. Any reductions in inventory will be used to reduce the company’s
A. P485,250 C. P600,000 current liabilities. What will be the company’s current ratio, assuming that it is
B. P550,00 D. P714,750 successful in improving its inventory turnover ratio to 5?
47. Total current assets would amount to A. 0.75 C. 1.33
A. P580,000 C. P780,000 B. 1.22 D. 1.67
B. P630,825 D. P930,825
53. Miller and Rogers Partnership has $3 million in total assets, $1.65 million in equity, and
a $500,000 capital budget. To maintain the same debt-equity ratio, how much debt
should be incurred?
Sensitivity analysis A. $50,000 C. $275,000
48. OTW Corporation has current assets totaling P15 million and a current ratio of 2.5 to B. $225,000 D. $450,000
1. What is OTW’s current ratio immediately after it has paid P2million of its accounts
payable? 54. Standard Company's bonds have a provision which stipulates that the ratio of senior
A. 2.75 to 1 C. 3.75 to 1 debt to total assets will never rise above 45%. The company is at the limit of that ratio
B. 3.25 to 1 D. 4.75 to 1 and it wishes to issue still another $25 million in senior debt. How much additional
equity capital must it raise to comply with this restrictive provision?
49. Rainier Inc. has $2 million in current assets, its current ratio is 1.6, and its quick ratio is A. $11.25 million. C. $30.56 million.
1.2. The company plans to raise funds as additional notes payable and to use these B. $20.45 million. D. $55.56 million.
funds to increase inventory. By how much can Rainier’s short-term debt (notes

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FINMAN 301 – FINANCIAL MANAGEMENT W. MONDIDO JR.

55. The following information pertains to AL Corporation as of and for the year-ended
December 31, 19x7. 60. Landry Retailers has annual sales of $365 million. The company’s days sales
Liabilities P 60,000 outstanding (calculated on a 365-day basis) is 50, which is well above the industry
Stockholders’ equity P 500,000 average of 35. The company has $200 million in current assets, $150 million in current
Shares of common stock issued and outstanding 10,000 liabilities, and $75 million in inventories. The company’s goal is to reduce its DSO to
Net income P 30,000 the industry average without reducing sales. Cash freed up would be used to
During 1997, AL officers exercised stock options for 1,000 shares of stock at an option repurchase common stock. What will be the current ratio if the company
price of P8 per share. What was the effect of exercising the stock option? accomplishes its goal?
A. No ratios were affected. C. Debt to equity ratio decreased to 12%. A. 0.73 C. 1.33
B. Asset turnover increased to 50.4% D. Earnings per share increased by P0.33 B. 1.23 D. 1.43

56. Barr Co. has total debt of $420,000 and shareholders’ equity of $700,000. Barr is 61. Hanson Corporation's present year ROE remained at last year's 14% level, while the
seeking capital to fund an expansion. Barr is planning to issue an additional profit margin was reduced from 8% to 4% and the leverage ratio increased from 1.2
$300,000 in common stock, and is negotiating with a bank to borrow additional to 1.5. The effects on asset turnover were to
funds. The bank is requiring a debt-to-equity rate of 0.75. What is the maximum A. Remain constant. C. Increase from 1.46 to 2.33.
additional amount Barr will be able to borrow? B. Decease from 14.58 to 2.33. D. Increase from 4.76 to 9.60.
A. $225,000 C. $525,000
B. $330,000 D. $750,000 62. Roland & Company has a new management team that has developed an
operating plan to improve upon last year’s ROE. The new plan would place the
57. Planners have determined that sales will increase by 25% next year, and that the debt ratio at 55 percent, which will result in interest charges of $7,000 per year. EBIT is
profit margin will remain at 15% of sales. Which of the following statements is correct? projected to be $25,000 on sales of $270,000, it expects to have a total assets
A. Profit will grow by 25%. turnover ratio of 3.0, and the average tax rate will be 40 percent. What does Roland
B. The profit margin will grow by 15%. & Company expect its return on equity to be following the changes?
C. Profit will grow proportionately faster than sales. A. 17.65% C. 26.67%
D. Ten percent of the increase in sales will become net income. B. 21.82% D. 44.44%

58. Associated Co. paid out one-half of its 1994 earnings by dividends. Its earnings
increased by 20% and the amounts of its dividends increased by 15% in 1995.
Associated’s dividend payout ratio for 1995 was
A. 47.9% C. 52.3%
B. 51.5% D. 75.0%
59. Dean Brothers Inc. recently reported net income of $1,500,000. The company has
300,000 shares of common stock, and it currently trades at $60 a share. The company
continues to expand and anticipates that one year from now its net income will be
$2,500,000. Over the next year the company also anticipates issuing an additional
100,000 shares of stock, so that one year from now the company will have 400,000
shares of common stock. Assuming the company’s price/earnings ratio remains at its
current level, what will be the company’s stock price one year from now?
A. $55 C. $70
B. $60 D. $75
63. Southeast Packaging’s ROE last year was only 5 percent, but its management has
developed a new operating plan designed to improve things. The new plan calls for
a total debt ratio of 60 percent, which will result in interest charges of $8,000 per
year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects
to have a total assets turnover ratio of 2.0. Under these conditions, the average tax
rate will be 40 percent. If the changes are made, what return on equity will
Southeast earn?
A. 9.00% C. 17.50%
B. 11.25% D. 22.50%
- - - END - - -

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FINMAN 301 – FINANCIAL MANAGEMENT W. MONDIDO JR.

ANSWER KEY

THEORY PROBLEM
1. B 26. E 1. C 26. C 51. C
2. D 27. D 2. B 27. A 52. B
3. D 28. C 3. B 28. B 53. B
4. C 29. D 4. A 29. B 54. C
5. B 30. A 5. C 30. A 55. C
6. C 31. D 6. D 31. C 56. B
7. D 32. C 7. D 32. C 57. A
8. A 33. C 8. D 33. A 58. A
9. A 34. D 9. B 34. C 59. D
10. B 35. C 10. C 35. C 60. B
11. D 36. D 11. B 36. B 61. C
12. C 37. C 12. B 37. D 62. C
13. B 38. A 13. A 38. D 63. D
14. C 14. B 39. A
15. D 15. C 40. D
16. A 16. A 41. B
17. D 17. C 42. A
18. C 18. B 43. B
19. C 19. D 44. C
20. B 20. B 45. A
21. B 21. B 46. A
22. C 22. A 47. D
23. B 23. A 48. B
24. A 24. D 49. D
25. A 25. C 50. C

MCQ- FINANCIAL STATEMENT ANALYSIS Page 11 of 11