MAS 08 - FS Analysis PDF

MANAGEMENT ADVISORY SERVICES
Handout 08: Financial Statement Analysis
1) What is Financial Statement (FS) analysis?
Answer:
a. To provide information that allows decision makers to understand and evaluate the results of business
decisions. In short, it is to provide information in order to make decisions. Managers analyze financial
statements to evaluate past financial performance and make future decisions.
b. Involves the evaluation of an entity’s past performance, present condition, and business potentials by way of
analyzing the financial statement to obtain information about (among others):
1. Profitability of the business firm

2. Ability to meet company obligations
3. Safety of investment in the business
4. Effectiveness of management in running the firm
c. Three basic tools in financial statement analysis
1. Horizontal analysis (a.k.a. trend analysis)

2. Vertical analysis (a.k.a. common size analysis)
3. Ratio analysis
4. Cash Flow Analysis (refer to next Chapter)
2) What is Horizontal Analysis?
Answer:
§ A technique for evaluating a series of financial statement data over a period of time. Its purpose is to
determine the increase and decrease that has taken place, expressed either an amount or a percentage.
§ Involves comparison of amounts shown in the FS of two or more consecutive periods. The difference and
percentage change of the amounts are calculated using the EARLIER period as the BASE PERIOD.
To determine the increase and decrease expressed in percentage, the formula is:
Current Year Value – Base Year Value

= Percentage of Change (%)
Base Year Value
3) What is Vertical Analysis
Answer:
§ Vertical analysis is the process of comparing figures in the FS of a single period. It involves conversion of
amounts in the FS to a common base. This is accomplished by expressing all figures in the FS as
percentages of an important item such as total assets (in the balance sheet) or net sales (in the income
statement). These converted statements are called common-size statements or percentage composition
statements.
§ Stated otherwise,
Ø When preparing common-size statement for the balance sheet, the various items on the balance sheet
are typically stated as a percentage of total assets.
Ø When preparing common-size statement for the income statement, the various items on the income
statement are typically stated as a percentage of net sales pesos.
4) What is Ratio Analysis
Answer: This technique establishing relationship among financial statement accounts at given date or period of
time. These ratios analyze firm’s liquidity, the use of leverage, asset management, cost control, profitability,
growth, and valuation.
1. Liquidity ratio.
Provides information about the firm’s ability to pay its current obligations and continue operations.
Ratio Formula Purpose
Current Asset To evaluate company’s liquidity and

Current Ratio
Current Liabilities ability to pay current obligations.
Quick assets are cash, short term

investments and accounts receivable.
Quick Asset This ratio is a much more stringent test
Acid Test Ratio
Current Liabilities of short term liquidity. It measures the
(a.k.a. Quick Ratio)
number of times that the current
liabilities could be paid with the available
cash and near-cash asset.
2. Activity ratio.
Measures the firm’s use of assets to generate revenue and income. These ratios evaluate liquidity because
they indicate how quickly assets are turned into cash.
It measures the number of times

Receivable Net Credit Sales
receivables are recorded and collected
Turnover Average Receivables
during the period.
It indicates the average number of days

360 days during which the company must wait
Average Age of
before receivables are collected.
Receivable Receivable Turnover
(a.k.a. Average Collection period)
(a.k.a. Days’ Sales in Receivable)
Inventory Cost of Goods Sold It measures the number of times that the
Turnover Average Merchandise Inventory inventory is replaced during the period.
360 days It indicates the average number of days

Average Age
during which the company must wait
of Inventory Inventory Turnover
before the inventories are sold.
Net Credit Purchases It measures the number of times

Trade Payable
payables are recorded and paid during
Turnover Average Trade Payable
the period.
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Average Age 360 days It indicates the length of time during
of Trade Payables Trade Payable Turnover which payables remain unpaid.
Average Age of Inventory Measures the average number of days to

Operating Cycle
+ Average Age of Receivable convert inventories to cash.
Total Asset Net Sales Measures the level of capital investment

Turnover Average Total Asset relative to sales volume.
Net Sales It indicates how much revenue the

Fixed Asset
company generates for each peso
Turnover Average Net Fixed Asset
invested in fixed assets.
Indicates adequacy of working capital to

Net Sales support operations (sales)
Working Capital
Turnover Average Working Capital
Working capital = Current Asset –
Current Liabilities
3. Solvency ratio
Relate to the company’s long-run survival. It shows the company’s ability to repay lenders when debt
matures and to make the required payments prior to the date of maturity.
Total Liabilities
Debt Ratio Proportion of total provided by creditors
Total Asset
Total Shareholders’ Equity Proportion of total assets provided by

Equity Ratio
Total Asset owners
Total Liabilities Proportion of assets provided by

Debt to Equity
creditors compared to that provided by
Ratio Total Shareholders’ Equity
creditors
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Times Interest Earnings Before Interest & Tax (EBIT) It determines the extent of which
Earned Ratio Interest Expense operations cover interest expense
4. Profitability ratio.
Relate to the company’s performance in the current period. It shows the company’s ability to generate
income. Measure earnings in relation to some base, such as assets, sales or capital.
Net Profit Margin Represents the percentage of revenue

Ratio Net Income that ultimately makes it into net income,
(a.k.a. Return on Net Sales after deducting expenses. It determines
Sales) the amount of income by owners.
Net Sales – Cost of Goods Sold In indicates how much profit was made,
Gross Profit
on average, on each peso of sales after
Percentage Net Sales
deducting the cost of goods sold.
Basic Earning EBIT

Indicates overall profitability of assets.
Power Total Asset
Return on Net Income Efficiency with which assets are used to

Total Asset Average Total Asset operate the business.
Return on Net Income Measures the amount earned on the

Equity (ROE) Average Shareholders’ Equity owners’ or stockholders’ investment
Return on Net Income – Preference Dividends Measures the profitability of common

Common Equity Average Common Equity equity.
Price Earnings (PE) Price Per Share It indicates the number of pesos
Ratio Earnings Per Share required to buy P1 of earnings.
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Dividend Per Share Measures the rate of return in the
Dividend Yield
Price Per Share investor’s common stock investments.
Dividend Pay-Out Dividend Per Share It indicates the proportion of earnings

Ratio Earnings Per Share distributed as dividends
Net Operating Profit after Taxes Shows the amount of current investment
Economic Value
Less: Total Cost of Capital that was “financed” by depreciation and
Added (EVA)
EVA increase in retained earnings
Liquidation Value of PS + Unpaid

Preference Share Dividends Amount that each PS will receive upon
Book Value Per
Outstanding and Subscribed PS liquidation of the Company
Share
Total SHE – [Liquidation Value of PS +

Ordinary Share Unpaid Dividends] Amount that each OS will receive upon
Book Value Per
Outstanding and Subscribed OS liquidation of the Company
Share
Net Income – PS Dividend The amount of earnings per year of each

EPS
Weighted Average Outstanding OS Ordinary Shares
5. Not Commonly Asked Ratio.
Ratios that are not frequently asked in examinations.
Cash + Cash Equivalents A more conservative variation of Quick

+ Marketable Securities Ratio. It tests short term liquidity
Cash Ratio
Current Liabilities without having to rely on receivables and
inventory.
Cash + Cash Equivalents

Cash to Current + Marketable Securities
Measures the liquidity of current assets.
Asset Ratio Current Assets
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Operating Cash Flow Shows the significance of cash flow for
Cash Flow Ratio settling current obligations as they
Current Liabilities
become due.
Cash Equivalent + Net Receivables

Defensive Internal + Marketable Securities Reflects the percentage of near cash
Ratio Daily Operating Cash Flow items to the daily operating cash flow.
Increase in Retained Earnings

Shows the amount of current investment
Investment + Depreciation
that was “financed” by depreciation and
Financing Current Investment increase in retained earnings
Weighted Non Cash Current Asset A measure of liquidity of current assets

Liquidity Index stated in days. It shows the period-to-
Current Asset
period changes in an entity’s liquidty.
EBIT + Interest portion of Operating

Fixed Charge Leases Indicates the margin of safety for
Coverage Ratio Interest + Interest portion of Operating payment of all fixed charges
Leases
Operating Cash Operating Cash Flow Measures the portion of total liabilities
Flow to Total Debt that can be paid out of the cash flows
Total Debt
Ratio from operations.
Amount Available for Reinvestment Measures the percentage of net income

Plowback Ratio available for investment. A high rate
Net Income
means less external financing
Labor Cost Measures the percentage of labor cost

Labor Cost Ratio
Net Sales to sales.
Used as a measure of operational

Employment Average Number of Workers growth. It is compared with the
Growth Rate Number of Works at the Beginning of the investment rate to determine whether
Year capital is being substituted for labor.
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Ratio of Operating Net Cash provided by Operation Measures the ability to pay dividends
Cash Flows to
Cash Dividends from current operating sources.
Cash Dividends
Internal Growth Amount of Retained Earnings Measures the percentage increase in

Rate Asset Base assets kept in the business
Financial Statement Analysis Limitations.
1. Financial statements contain numerous estimates.

2. Traditional financial statements are based on cost and are not adjusted for price level changes.
3. The use of different generally accepted accounting principles may distort comparison.
4. Ratio analysis may be affected by seasonal factor
5. Diversification limits comparability
6. Management may window dress financial statements.
7. Accounting policies among different companies may widely vary.
Final reminder.
1. In horizontal analysis, percentage of change is not computed if the base is zero or negative.
2. In vertical analysis, only percentages are presented.
3. When calculating a ratio using balance sheet (BS) amounts only (i.e., numerator and denominator is
balance sheet items), both the numerator and denominator should be based on amounts as of the same
balance sheet date (i.e., not averaged, not the balance of previous balance sheet). Same rule will apply
when it comes to using income statement (IS) amounts only.
4. If one income statement and one balance sheet item is used at the same ratio (i.e., numerator is income
statement item while denominator is BS item), the balance sheet amount should be expressed as an
average [(Beginning + Ending) ÷ 2].
5. When using average BS amounts and the beginning balance (previous year BS) is not available, use
ending balance now will represent the average (unless the beginning balance can be computed or work
backed).
6. When computing for a turnover ratio (e.g., AR turnover), sales and purchases are assumed to be on
account unless otherwise stated.
7. When computing for a ratio involving the number of days in a year, use 360 days, unless otherwise stated
that 365 days will be used.
8. The term “net income” is assumed to be after deducting all expenses and that includes interest and taxes,
unless otherwise stated.
DuPont Formula.
Return on Sales X Asset Turnover = Return on Asset
Net income Sales Net income

Sales X Average asset = Average Asset
Price – Earnings Ratio X Dividend Yield Ratio = Dividend Pay-out Ratio
Price Per Share Dividend Per Share Dividend Per Share

Earnings Per Share X Price Per Share = Earnings Per Share
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2.1 HORIZONTAL ANALYSIS.
1) Which one of the following is not a tool in financial statement analysis?

A. Horizontal analysis C. Circular analysis
B. Vertical analysis D. Ratio analysis
2) Horizontal analysis is analysis

A. Of percentage changes over several years.
B. In which all items are presented as a percentage of one selected item on a financial statement.
C. In which a statistic is calculated for the relationship between two items on a single financial statement or for
two items on different financial statements.
D. Of all ratios that increased or decreased over past accounting periods.
3) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
A. That has been arrange from the highest amount to the lowest amount.
B. That has been arrange from lowest amount to the highest amount.
C. To determine which items are in error
D. To determine the amount and (or) percentage increase or decrease that has taken place.
4) In horizontal analysis, each item is expressed as a percentage of the

A. Retained earnings figure C. Net income figure
B. Total assets figure D. Base year figure
5) Last year, a business had no long term investments; this year, long term investments amount to P500,000. In a
horizontal analysis, the change in long term investments should be expressed as
A. An absolute value of P500,000 and an increase of 100%
B. An absolute value of P500,000 and an increase of 1,000%
C. An absolute value of P500,000 and no value for a percentage change.
D. No change in any terms because there was no investment in previous year.
6) Assume the following sales data for a company:

Year Sales
2021 P 800,000
2020 750,000
2019 625,000
2018 400,000
What is the percentage increase in sales from 2018 to 2019, assuming that 2018 is the base year?
A. 50.00%
B. 56.25%
C. 60.00%
D. 62.50%
7) Assume the following sales data for a company:
2023 - P 1,800,000
2022 - 1,500,000
2021 - 1,000,000
If 2021 is the base year, what is the percentage increase in sales from 2021 to 2023?
A. 100.0%
B. 180.0%
C. 80.0%
D. 55.5%
8) Kaemil Corporation reported the following requires:
2021 2020
Cash and cash equivalents 2,450,000 2,094,000
Receivables 1,813,000 1,611,000
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Inventory 1,324,000 1,060,000
Prepaid expense 1,709,000 2,210,000
Total current assets 7,296,000 6,885,000
Other assets 18,500,000 15,737,000
Total assets 25,796,000 22,622,000
Total current liabilities 7,230,000 8,467,000

Long term liabilities 4,798,000 3,792,000
Common stock 6,568,000 4,363,000
Retained earnings 7,200,000 6,000,000
Total liabilities and equity 25,796,000 22,622,000
Sales 20,941,000
Cost of sales 7,055,000
Operating expenses 7,065,000
Operating income 6,821,000
Interest expense 210,000
Income tax 2,563,000
Net income 4,048,000
Horizontal analysis of Kaemil’s balance sheet for 2021 would report

A. Cash as 9.5% of total asset C. Current ratio of 1.01
B. 17% increase in cash D. Inventory turnover of 6 times
2.2 VERTICAL ANALYSIS.
9) The type of analysis that is concerned with the relationship among the components of the financial statements is to
prepare a
A. Vertical analysis C. Profitability analysis
B. Trend analysis D. Ratio analysis
10) In financial statements analysis, expressing figures for a single year as a percentage of a base amount on the
financial statement (for example, total assets in a balance sheet or sales in an income statement) is called
A. Trend analysis C. Horizontal analysis
B. Variance analysis D. Vertical common size analysis
11) In vertical analysis, line items on the balance sheet are generally expressed as a percentage of
A. Total liabilities C. Total assets
B. Net income D. Cost of goods sold
12) In vertical analysis, line items on the income statement are generally expressed as a percentage of
A. Net income C. Cost of goods sold
B. Net sales D. Total assets
13) Vertical analysis is a technique that expresses each item in a financial statement
A. In dollar and cents
B. As a percentage of the item in the previous year.
C. As a percent of a base amount
D. Starting with the highest value down to the lowest value.
14) Which of the following is not revealed on a common size balance sheet?
A. The debt structure of a firm
B. The capital structure of a firm
C. The peso amount of assets and liabilities
D. The distribution of assets in which funds are invested
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Use the following information for the next two (2) questions:
Kaemil Corporation reported the following requires:
2021 2020
Cash and cash equivalents 2,450,000 2,094,000
Receivables 1,813,000 1,611,000
Inventory 1,324,000 1,060,000
Prepaid expense 1,709,000 2,210,000
Total current assets 7,296,000 6,885,000
Other assets 18,500,000 15,737,000
Total assets 25,796,000 22,622,000
Total current liabilities 7,230,000 8,467,000

Long term liabilities 4,798,000 3,792,000
Common stock 6,568,000 4,363,000
Retained earnings 7,200,000 6,000,000
Total liabilities and equity 25,796,000 22,622,000
Sales 20,941,000
Cost of sales 7,055,000
Operating expenses 7,065,000
Operating income 6,821,000
Income tax 2,563,000
Net income 4,048,000
15) Vertical analysis of Kaemil’s balance sheet for 2021 would report
A. Cash as 9.5% of total asset C. Current ratio of 1.01
B. 17% increase in cash D. Inventory turnover of 6 times
16) A common size income statement for Kaemil would report (amounts rounded)
A. Net income of 19% C. Cost of sales at 34%
B. Sales of 100% D. All of the above
2.3 LIQUIDITY RATIO.
The following are taken from the balance sheet of Ava Company as of December 31, 2021:
Current assets:
Cash on hand and in banks 341,600
Accounts receivable 200,000
Merchandise inventory 308,400 850,000
Current liabilities
Notes payable 280,800
Accounts payable 781,700 1,062,500
Long term liabilities 3,000,000
17) What is the company’s current ratio?

A. 0.80
B. 0.51
C. 0.21
D. 3.03
18) What is the company’s quick (acid test) ratio?

A. 0.51
B. 0.80
C. 1.93
D. 0.32
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Use the following information for the next six (2) questions:
Compute the requested ratios using the following selected financial and operating data taken from financial statements
of Anthony Corporation:
Balance Sheet As of
December 31, 2022 December 31, 2021
Cash 80,000 640,000
Notes and accounts receivable, net 400,000 1,200,000
Merchandise inventory 720,000 1,200,000
Marketable securities – short term 240,000 80,000
Land and building – net 2,720,000 2,880,000
Bonds payable – long term 2,160,000 2,240,000
Accounts payable – trade 560,000 880,000
Notes payable – short term 160,000 320,000
Income Statement for the year ended

Sales (20% cash, 80% credit sales) 18,400,000 19,200,000
Cost of goods sold 8,000,000 11,200,000
19) Current ratio as of December 31, 2022:

A. 0.5 to 1
B. 2.0 to 1
C. 2.6 to 1
D. 1: to 2.6
20) Quick ratio as of December 31, 2022:

A. 2.0 to 1
B. 0.5 to 1
C. 1 to 1
D. 0.7 to 1
21) Swanson Company had P250,000 of current assets and P90,000 of current liabilities before borrowing P60,000
from the bank with a 3-month note payable. What effect did the borrowing transaction have on Swanson
Company’s current ratio?
A. The ratio remained unchanged
B. The change in the current ratio cannot be determined.
C. The ratio decreased.
D. The ratio increased.
22) Eagle Company has P9,000 in cash, P11,000 in marketable securities, P26,000 in current receivables, P34,000 in
inventories, and P40,000 in current liabilities. The company’s quick ratio is closest to
A. 1.35
B. 1.15
C. 2.00
D. 1.73
23) Dart Company has a quick ratio of 2.5 to 1. It has current liabilities of P40,000 and non current assets of P70,000.
If Dart’s current ratio is 3.1 to 1, its inventory and prepaid expenses must be
A. 12,400
B. 24,000
C. 30,000
D. 40,000
24) For KOBE 24 Company has a 2 to 1 acid test 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.
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25) Mamba Forever Company has a current ratio of 2 to 1. The ratio will decrease if the company
A. Borrow cash on a 6-month note.
B. Pays a large account payable which had been a current liability.
C. Receives 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.
Use the following information for the next three (3) questions:
Burn Down Company has a current ratio is 2.5 to 1; the acid-test ratio is 0.9 to 1; cash and receivables are P270,000.
The current assets are composed of cash, receivables, and inventory.
26) How much is the current liabilities of Burn Down based on the above ratios?
A. 421,875
B. 243,000
C. 300,000
D. 108,000
27) How much is the current asset of Burn Down based on the above ratios?
A. 421,875
B. 480,000
C. 270,000
D. 750,000
28) How much is the inventory of the company?

A. 300,000
B. 151,875
C. 480,000
D. 30,000
29) Pray For Australia Company has a quick ratio of 3.25 to 1. It has current liabilities of P90,000 and non current
assets of P560,000. If the company’s current ratio is 4 to 1, its inventory and prepaid expense must be
A. 67,500
B. 16,875
C. 292,500
D. 360,000
30) The following data were taken form the comparative balance sheets of Avery Company:

Cash 35,000 33,125
Marketable securities 16,375 15,125
Notes and accounts receivable, net 49,375 48,000
Inventories 71,250 69,375
Prepaid expenses 2,375 5,000
Notes and accounts payable (short term) 31,250 35,625
Accrued liabilities 7,500 10,500
Bonds payable, due 2035 100,000 100,000
The company’s working capital increased (decreased) from 2021 to 2022 by:
A. 135,625
B. 124,500
C. (11,125)
D. 11,125
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2.4 ACTIVITY RATIO.
Jordan River Company’s net sales for the year is P15,000,000 and average accounts receivable is P3,000,000. Use
365 days to answer the following:
31) What is the receivable turnover ratio?

A. 5 times
B. 20%
C. 73 days
D. 4 times
32) How many days sales are in accounts receivable on the average (average age of receivable)?
A. 73 days
B. 5 days
C. 72 days
D. 90 days
Nile River Company’s cost of goods sold is P7,200,000 and average inventory of merchandise is P600,000. Use 365
days to answer the following:
33) What is the inventory turnover ratio?

A. 12 times
B. 12 days
C. 8.33%
D. 30.42 days
34) How many days sales are in inventory on the average (average age of inventory)?
A. 12 times
B. 12 days
C. 8.33%
D. 30.42 days
35) Toller Drug Store had net credit sales of P6,000,000 and cost of goods sold of P2,000,000 for the year. The
accounts receivable balances at the beginning and end of the year were P350,000 and P250,000, respectively.
The accounts receivable turnover ratio was

A. 17.1 times
B. 10.0 times
C. 13.3 times
D. 20.0 times
36) Afraid Company has an accounts receivable turnover ratio of 9. The average accounts receivable during the period
was P525,000.
What is the amount of net sales for the period?
A. 58,333
B. 116,667
C. 2,362,500
D. 4,725,000
37) Milward Corporation’s books disclosed the following information for the year ended December 31, 2021:
Net credit sales P 1,500,000

Net cash sales 240,000
Accounts receivable, beginning 200,000
Accounts receivable, ending 400,000
Milward’s accounts receivable turnover is
A. 3.75 times
B. 5.00 times
C. 4.35 times
D. 5.80 times
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38) Winter Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the year
and a balance of P410,000 at the end of the year. Net credit sales during the year amounted to P4,000,000.
The average collection period of the receivable in terms of days was:

A. 30 days
B. 73 days
C. 365 days
D. 36 days
39) Jackson Company, a retailer, had cost of goods sold of P140,000 last year. The beginning inventory balance was
P8,000 and the ending inventory balance was P11,000.
The company’s inventory turnover ratio was closed to

A. 12.73 times
B. 14.73 times
C. 7.37 times
D. 17.50 times
40) Winslow Department Store had net credit sales of P16,000,000 and cost of goods sold of P12,000,000 for the year.
The average inventory for the year amounted to P2,000,000. Using 365 days:
What is the average age of inventory?

A. 91 days
B. 36 days
C. 61 days
D. 26 days
41) Virus Company has an average inventory on hand of P23,000 and the days in inventory are 29.20 days. Use 365
days. What is the cost of goods sold?
A. 143,750
B. 287,500
C. 335,800
D. 671,600
42) The following information pertains to Asher Company for 2022:
Inventory at December 31, 2022 P 16,000

Purchases of merchandise, all on credit 72,000
Cost of goods sold 80,000
The company’s merchandise inventory turnover for 2022 was
A. 4.0 months
B. 8.0 times
C. 4.0 times
D. 5.0 times
43) Selected information from the accounting records of Vassar Company is as follows:
Net accounts receivable at December 31, 2020 900,000
Net accounts receivable at December 31, 2021 1,000,000
Accounts receivable turnover 5 times
Inventories at December 31, 2020 1,000,000
Inventories at December 31, 2021 1,200,000
Inventory turnover 4 times
What was Vassar’s gross margin for 2021?
A. 350,000
B. 400,000
C. 200,000
D. 500,000
44) If accounts receivable should be collected in 40 days and inventory turns over six times per year. How long is the
operating cycle?
A. 46 days
B. 15 times
C. 15 days
D. 100 days
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45) Gard Corporation’s sales last year were P38,000, and its total assets were P16,000. What was its total asset
turnover ratio?
A. 2.04
B. 2.14
C. 2.26
D. 2.38
46) The data presented below show actual figures for selected accounts of McKeon Company for the fiscal year ended
May 31, 2022, and selected budget figures for the 2023 fiscal year. MckKeon’s controller is in the process of
reviewing the 2022 budget. McKeon Company monitors yield or return ratios using the average financial position
of the company. (Round all calculations to three decimal places if necessary).
May 31, 2023 May 31, 2022

Current asset 210,000 180,000
Non current asset 275,000 255,000
Current liabilities 78,000 85,000
Long term debt 75,000 30,000
Common stock P30 par value 300,000 300,000
Retained earnings 32,000 20,000
2023 operation
Sales (all credit) 350,000
Income taxes (40% tax rate) 48,000
Dividends declared and paid in 2023 60,000
Administrative expenses 67,000
Current Assets
May 31, 2023 May 31, 2022
Cash 20,000 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
McKeon Company’s total asset turnover for 2023 is
A. 0.805
B. 0.761
C. 0.722
D. 0.348
2.5 SOLVENCY RATIO.
Palma Oil Corporation processes palm oils. The following information pertains to its financial position as of December
31, 2023:
Short term debt 30,000

Long term debt 40,000
Equity 70,000
Total assets 140,000
Palma also showed the following income statement for the year just ended:
Sales 60,000
Cost of sale 36,000
Gross profit 24,000
Operating expenses 9,000
Operating income 15,000
Income before taxes 9,000
Income tax (30%) 2,700
Net income 6,300
47) What is the company’s times interest earned ratio?

A. 2.5 times
B. 1.5 times
C. 11.67 times
D. 1.05 times
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48) The following data were abstracted from the records of Johnson Corporation for the year:
Sales P 1,800,000
Bond interest expense 60,000
Income taxes 300,000
Net income 400,000
How many times was bond interest earned?
A. 7.67 times
B. 11.67 times
C. 12.67 times
D. 13.67 times
49) Opis Company has total assets of P475,000 and total liabilities of P130,000. The company’s debt to equity ratio is
closest to
A. 0.32
B. 0.21
C. 0.38
D. 0.27
50) Jordan Manufacturing reports the following capital structure:
Current liabilities P 100,000

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
B. 0.49
C. 0.93
D. 0.96
51) The data presented below show actual figures for selected accounts of McKeon Company for the fiscal year ended
May 31, 2022, and selected budget figures for the 2023 fiscal year. MckKeon’s controller is in the process of
reviewing the 2022 budget. McKeon Company monitors yield or return ratios using the average financial position
of the company. (Round all calculations to three decimal places if necessary).
May 31, 2023 May 31, 2022

Current asset 210,000 180,000
Non current asset 275,000 255,000
Current liabilities 78,000 85,000
Long term debt 75,000 30,000
Common stock P30 par value 300,000 300,000
2023 operation
Sales (all credit) 350,000
Income taxes (40% tax rate) 48,000
Dividends declared and paid in 2023 60,000
Administrative expenses 67,000
Current Assets
May 31, 2023 May 31, 2022
Cash 20,000 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
52) McKeon Company’s debt to total asset ratio for 2023 is
A. 0.352
B. 0.315
C. 0.264
D. 0.237
Page 16 of 20
2.6 PROFITABILITY RATIO.
53) Selected data from Kim Company’s year-end financial statements are presented below. The difference between
average and ending inventory is immaterial.
Current ratio 2.0

Acid – test ratio 1.5
Current liabilities P 120,000
Sales 800,000
Inventory turnover 8
What is the gross margin percentage (ratio)?
A. 20%
B. 40%
C. 50%
D. 60%
54) Selected financial data from Maria Cabal Company for the most recent year appear below:
Sales 100,000
Dividend declared and paid 5,000
Operating expense 18,000
The income tax rate is 30 percent.
The return on sales ratio (a.k.a. net profit margin) was closest to:
A. 14.0%
B. 40.0%
C. 9.8%
D. 5.8%
The following data are available from Lennon Shipping Company. No shares were issued in 2021:
Transactions during 2021

Net sales for 2021 6,360,000
Net income for 2021 398,000
Cash dividends – preferred 36,000
Cash dividends – common 120,000
Average market price per common share P150 per share
Average balances amounts:

Common stock – par value, P100 (15,000 shares outstanding) 1,500,000
Paid in capital in excess of par – common 100,000
Preferred stock – par value, P100, 6% (6,000 shares outstanding) 600,000
Retained earnings 500,000
Average Total Shareholders’ Equity 2,700,000
Calculate the following ratios:
55) Return on total equity

A. 14.7%
B. 13.4%
C. 11.5%
D. 8.9%
56) Return on common equity

A. 14.70%
B. 13.40%
C. 5.70%
D. 17.24%
Page 17 of 20
57) The following information was made available by Goslier Company:
Net income 130,000

Dividends paid to preferred stockholders 42,000
Average common stockholders’ equity 610,000
What is the company’s return on common stockholders’ equity for the year?
A. 15.8%
B. 28.1%
C. 21.3%
D. 14.4%
58) Excerpt from Wuhan Corporation’s most recent balance sheet appear below:

Preferred stock 246,000 246,000
Common stock 246,000 246,000
Additional paid in capital – common stock 492,000 492,000
Total shareholders’ equity 1,586,700 1,525,200
Net income for the year ended December 31, 2022 was P115,620. Dividends on common stock were P40,590 in
total and dividends on preferred stock were P13,530. The return on common stockholders’ equity for 2022 is
closest to
A. 4.8%
B. 7.4%
C. 7.8%
D. 8.8%
59) For the year 2022, Lim Company’s return on common stockholders’ equity was 12.5%. Its average stockholders’
equity for the same period was P500,000, inclusive of P50,000 par value of preferred stock with a dividend rate of
8%.
How much was the company’s net income for 2022?

A. 60,250
B. 56,250
C. 58,500
D. 62,500
60) The following information was made available by Dowling Company:
Net income 40,000

Total assets, beginning 260,000
Total assets, ending 315,000
Tax rate 35%
What is the company’s return on total assets for the year was closest to:
A. 14.5%
B. 15.7%
C. 16.7%
D. 13.9%
61) The following ratios were computed from Siason Company’s financial statements for 2022:
Return on assets 24%

Asset turnover 1.6 times
What was the company’s profit margin ratio (a.k.a. return on sales)?
A. 38.4%
B. 6.0%
C. 15.0%
D. 24.0%
Page 18 of 20
62) Presented below are selected data from the financial statements of John Cena Company for 2022 and 2021:

Net income 100,000 123,000
Cash dividends paid on preferred stock 12,000 15,000
Cash dividends paid on common stock 48,000 38,000
Weighted average number of common shares outstanding 105,000 95,000
Earnings per share is reported on 2022 income statement as

A. 0.44
B. 0.55
C. 0.84
D. 0.95
63) Wellston Company’s net income last year was P300,000. The company has 100,000 shares of common stock and
30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares
outstanding during the year. The company declared and paid dividends last year of P1.90 per share on the
common stock and P1.70 per share on the preferred stock.
The earnings per share of common stock is closest to:

A. 2.49
B. 1.10
C. 3.51
D. 3.00
64) The following data have been taken from your company’s financial records for the current year:
Earnings per share P 4.50

Market price per share 46.00
Dividend per share 3.00
Book value per share 31.00
The price-earnings ratio is
A. 10.2
B. 6.9
C. 1.5
D. 15.3
65) Following are selected data taken from the records of Jemson Company:
Income before tax 200,000

Income tax rate 40%
Dividend pay-out ratio 0.80
Number of common shares outstanding 10,000 shares
How much dividends per share was paid by the company during the year?
A. 9.60
B. 6.40
C. 16.00
D. 15.00
66) M Corporation’s stockholders’ equity at December 31, 2021 consists of the following:
10% Cumulative preferred stock, P100 par, outstanding 2,000 shares 200,000
Common stock, P5 par, outstanding 20,000 shares 100,000
M’s net income for the first year ended December 31 was P1,880,000, but no dividends were declared. How much
was M’s book value per common share at December 31?
A. 90
B. 99
C. 98
D. 120
Page 19 of 20
Use the following information for the next four (4) questions:
Lyn Merchandising has 1,000,000 common shares outstanding, with each shares priced at P8.00. In 2021, the
company declared dividends of P0.10 per share. The balance sheet at the end of 2021 showed approximately the
same amounts as that at the end of 2020. The financial statements for Lyn Merchandising are as follows:
Sales 4,700,000
Cost of goods sold 2,300,000
Gross profit 2,400,000
Operating expenses:
Depreciation 320,000
Others 1,230,000 1,550,000
Income before interest and taxes 850,000
Income before taxes 700,000
Income taxes 280,000
Net income 420,000
Cash 220,000 Accounts payable 190,000

Accounts receivable 440,000 Accrued expenses 180,000
Inventory 410,000 Total current liabilities 370,000
Total current assets 1,070,000 Long term debt 1,960,000
Plant and equipment 5,600,000 Common stock 1,810,000
Accumulated depreciation (2,100,000) Retained earnings 430,000
Total assets 4,570,000 Total Liabilities & Equity 4,570,000
67) What is the earnings per share ratio?

A. 0.42
B. 0.70
C. 0.85
D. 19.05
68) What is the price-earnings ratio?

A. 19.05
B. 5.25%
C. 23.81%
D. 1.25%
69) What is the dividend yield ratio?

A. 23.81%
B. 1.25%
C. P80 per share
D. P4.2 per share
70) What is the dividend pay-out ratio?

A. 23.81%
B. 32.81%
C. 25.00%
D. 1.25%
Page 20 of 20

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MANAGEMENT ADVISORY SERVICES

Handout 08: Financial Statement Analysis

1) What is Financial Statement (FS) analysis?

1. Profitability of the business firm

c. Three basic tools in financial statement analysis

1. Horizontal analysis (a.k.a. trend analysis)

2) What is Horizontal Analysis?

Current Year Value – Base Year Value

3) What is Vertical Analysis

Ratio Formula Purpose

Current Asset To evaluate company’s liquidity and

Quick assets are cash, short term

It measures the number of times

It indicates the average number of days

360 days It indicates the average number of days

Net Credit Purchases It measures the number of times

Average Age of Inventory Measures the average number of days to

Total Asset Net Sales Measures the level of capital investment

Net Sales It indicates how much revenue the

Indicates adequacy of working capital to

Ratio Formula Purpose

Total Shareholders’ Equity Proportion of total assets provided by

Total Liabilities Proportion of assets provided by

Ratio Formula Purpose

Net Profit Margin Represents the percentage of revenue

Basic Earning EBIT

Return on Net Income Efficiency with which assets are used to

Return on Net Income Measures the amount earned on the

Return on Net Income – Preference Dividends Measures the profitability of common

Dividend Pay-Out Dividend Per Share It indicates the proportion of earnings

Liquidation Value of PS + Unpaid

Total SHE – [Liquidation Value of PS +

Net Income – PS Dividend The amount of earnings per year of each

5. Not Commonly Asked Ratio.

Ratios that are not frequently asked in examinations.

Cash + Cash Equivalents A more conservative variation of Quick

Cash + Cash Equivalents

Cash Equivalent + Net Receivables

Increase in Retained Earnings

Weighted Non Cash Current Asset A measure of liquidity of current assets

EBIT + Interest portion of Operating

Amount Available for Reinvestment Measures the percentage of net income

Labor Cost Measures the percentage of labor cost

Used as a measure of operational

Internal Growth Amount of Retained Earnings Measures the percentage increase in

Financial Statement Analysis Limitations.

1. Financial statements contain numerous estimates.

Return on Sales X Asset Turnover = Return on Asset

Net income Sales Net income

Price – Earnings Ratio X Dividend Yield Ratio = Dividend Pay-out Ratio

Price Per Share Dividend Per Share Dividend Per Share

1) Which one of the following is not a tool in financial statement analysis?

2) Horizontal analysis is analysis

4) In horizontal analysis, each item is expressed as a percentage of the

6) Assume the following sales data for a company:

7) Assume the following sales data for a company:

8) Kaemil Corporation reported the following requires:

Total current liabilities 7,230,000 8,467,000

Horizontal analysis of Kaemil’s balance sheet for 2021 would report