FINANCIAL STATEMENT ANALYSIS

THEORIES:

1. Which of the following ratios best measures short-term

solvency?
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 measures of

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?
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 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

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 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

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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, Return on
Asset

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

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18. Statement 1. Gross Profit Margin is calculated by
dividing the difference of Net Sales and Cost of Sales by
the 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. Statement
2. 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

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 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 Receivable
Turnover.

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. Solvency Ratio
measures the ability of the company to pay its short
term obligation one of which is the so called Times
Interest 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 balance of
Asset.
D. All of the above statements are wrong.

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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

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28. It measures the rate of return on stockholder’s
investment?
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 leas liquid in all
current assets and their liquidation usually results in a
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. Statement
2: 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 developed are
meaningful for the investors
B. Because they are required by the PFRS
C. Because they are prescribed by GAAP

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 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

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

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

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

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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

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

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

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

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

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

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 C. 18 days
D. 21 days

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

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

(For Items Number 12 – 15):

On December 31, 2017 and 2018, Blue-Wind Manufacturing,

Inc. had 100,000 shares of common stock and 50,000 shares of
noncumulative and nonconvertible preferred stock issued and
outstanding. Additional information is as follows:

Market price per share of common stock P 72

Stockholders’ equity at 12/31/18 P
4,500,000
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
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 13. The price-earnings ratio on common stock at December
31, 2018 was
A. 9 : 1
B. 8 : 1
C. 7.2 : 1
D. 6.5 : 1

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

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

(For Items Number 16 – 20):

Black-Duck Company has information pertaining to its total

assets. However, only Cash and Equipment has a determined
amount of P 80,000.00 and P 750,000.00 respectively, other
assets were Account Receivables and Inventories. More so, the
company has net sales amounting to P800,000.00. If Operating
profit margin (OPM) was 8%, Gross profit rate (GPR) based on
cost was 25%, Current ratio was 4:1,Turnovers based on year
end balances were 5 times and 4 times for Accounts Receivable
and Inventory respectively.

16. What is the ending balance of Accounts Receivable of

Black-Duck Company?
A. P 100,000

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 B. P 130,000
C. P 160,000
D. P 190,000

17. What is the ending balance of Inventories of Black-Duck

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

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

19. How much is the Operating Expense of Black-Duck

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

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

(For Items Number 21 – 23):

Green-Mind, Inc. has the following data:

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 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

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

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

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

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

(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 45
without causing a decline in sales. The resulting decrease in
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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

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

26. How much cash was collected from Accounts Receivable

due to the change in the policy?
A. 600,000
B. 700,000
C. 800,000
D. 900,000

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

28. After the change in policy, what will be the Company’s

new Current Ratio?
A. 1.50 : 1

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 B. 1.32 : 1
C. 1.26: 1
D. 1.12 : 1

(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 120,000 shares
Market Price of shares P72

29. How much is the Net Income of REDD FINANCIAL CORP.

for the year 2018?
A. P 300,000
B. P 320,000
C. P 360,000
D. P 400,000

30. How much is the Price/Earnings Ratio?

A. 28.8 : 1
B. 27.0 : 1
C. 25.0 : 1
D. 24.0 : 1

(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%

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  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

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

A. 1.5 : 1
B. 2.0 : 1
C. 2.5 : 1
D. 3.0 : 1

(For Items Number 32 – 35):

You have the task of piecing together information in order to

release a financial report. You have found the Return on Assets
to be 9.68 percent. If sales were P4,000,000, the debt ratio was
0.4, 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

34. How much is the Net Income?

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

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 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

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 P
42,000
 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

(For Items Number 37 – 40):

Selected data from Jollivee’s 2016 Statements are presented

below. Turnover is based on year end balances. Current Assets
are 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?

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

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

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

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

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

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