Financial Statement Analysis Drill C.

is calculated by taking one item from the income statement

Theory and one item from the balance sheet.
D. is the same as the current ratio except it is rounded to
the nearest whole percent.
1. Statements in which all items are expressed only in relative
terms (percentages of a base) are termed: 10. A general rule to use in assessing the average collection
A. Vertical statements C. Funds Statements period is
B. Horizontal Statements D. Common-Size Statements A. that is should not exceed 30 days.
B. it can be any length as long as the customer continues to
2. Vertical analysis is a technique that expresses each item in a buy merchandise.
financial statement C. that it should not greatly exceed the discount period.
A. in pesos and centavos. D. that it should not greatly exceed the credit term period.
B. as a percent of the item in the previous year.
C. as a percent of a base amount. 11. An acceleration in the collection of receivables will tend to
D. starting with the highest value down to the lowest value. cause the accounts receivable turnover to:
A. decrease C. either increase or decrease
3. Horizontal analysis is also known as B. remain the same D. increase
A. linear analysis. C. trend analysis.
B. vertical analysis. D. common size analysis. 12. Denver Dynamics has net income of P2,000,000. Oakland
Enterprises has net income of P2,500,000. Which of the
4. Horizontal analysis is a technique for evaluating a series of following best compares the profitability of Denver and
ffinancial statement data over a period of time Oakland?
A. that has been arranged from the highest number to the A. Oakland Enterprises is 25% more profitable than Denver
lowest number. Dynamics.
B. that has been arranged from the lowest number to the B. Oakland Enterprises is more profitable than Denver
highest number. Dynamics, but the comparison can't be quantified.
C. to determine which items are in error. C. Oakland Enterprises is only more profitable if it is smaller
D. to determine the amount and/or percentage increase or than Denver Dynamics.
decrease that has taken place. D. Further information is needed for a reasonable comparison.

5. The ability of a business to pay its debts as they come due 13. Which of the following would most likely cause a rise in
and to earn a reasonable amount of income is referred to as: net profit margin?
A. solvency and leverage A. increased sales
B. solvency and profitability B. decreased preferred dividends
C. solvency and liquidity C. decreased operating expenses
D. solvency and equity D. increased cost of sales
Return on assets cannot fall under which of the following
6. Short-term creditors are usually most interested in circumstances?
assessing A. B. C. D.
A. solvency. C. marketability. Net profit margin Decline Rise Rise Decline
B. liquidity. D. profitability. Total asset Rise Decline Rise Decline
turnover
7. Which of the following is a measure of the liquidity
position of a corporation?
A. earnings per share
Problem Solving
B. inventory turnover 1. Using the data presented below, calculate the cost of sales
C. current ratio for the Beta Corporation for the year just ended.
D. number of times interest charges earned
Current ratio 3.5
8. A weakness of the current ratio is Acid test ratio 3.0
A. the difficulty of the calculation. Current liabilities at year-end P600,000
B. that it does not take into account the composition of the Beginning inventory P500,000
current assets. Inventory turnover 8.0
C. that it is rarely used by sophisticated analysts.
D. that it can be expressed as a percentage, as a rate, or as a a .P1,600,000 c. P3,200,000
proportion. b. P2,400,000 d. P6,400,000

9. The acid-test or quick ratio 2. A firm’s inventory turnover is eight times on a cost of goods
A. is used to quickly determine a company’s solvency and sold, (CGS) of P800,000. If the turnover changes to five times
long-term debt paying ability. while the CGS remains the same, funds are either released form
B. relates cash, short-term investments, and net receivables to or additionally invested in inventory. In fact
current liabilities. a. P160,000 is released c. P60,000 is invested
b. P100,000 is invested d .60,000 is released
 a .P2.4 million c. P1.2 million
3. Alumbal Corporation has P800,000 of debt outstanding and b. P4.0 million d.P6.0 million
it pays and interest rate of 10 percent annually on its bank loan.
Alumbal’s annual sales are P3,200,000, its average tax rate is
40 percent, and its net profit margin on sales is 6 percent. If the
company does not maintain a TIE ratio of at least 4 times, its Break-Even Point Analysis
bank will refuse to renew its loan, and bankruptcy will result.
What is Alumbal’s current ratio? Theory
a. 3.4 c. 4.0
b. 3.6 d. 5.0 1. Cost-volume-profit analysis allows management to
determine the relative profitability of a product by
[Link] Corporation has current assets totalling P15 million and A. Highlighting potential bottlenecks in the production
a current ratio of 2.5 to 1. What is OTW’s current ratio process.
immediately after it has paid P2 million of its accounts payable? B. Determining the contribution margin per unit and projected
a. 3.75 to 1 c. 3.25 to 1 profits at various levels of production.
b. 2.75 to 1 d. 4.75 to 1 C. Assigning costs to a product in a manner that maximizes
the contribution margin.
5. The Wilson Corporation has the following relationships: D. Keeping fixed costs to an absolute minimum.

Sales / Total assets 2.0 2. At the breakeven point, fixed cost is always
Return of assets (ROA) 4% A. Less than the contribution margin
Return on equity (ROE) 6% B. Equal to the contribution margin.
What is Wilson’s profit margin and debt ratio? C. More than the contribution margin
a. 2%; 0.33 c. 4%; 0.67 D. More than the variable cost
b. 4%; 0.33 d. 2%; 0.67
3. At the break-even point:
6. Miller and Rogers Partnership has P3 million in total assets, A. net income will increase by the unit contribution margin for
P1.65 million in equity, and a P500,000 capital budget. To each additional item sold above break-even.
maintain the same debt ratio, how much debt should be B. the total contribution margin changes from negative to
incurred? positive
a. P50,000 c. P225,000 C. fixed costs are greater than contribution margin
b. P225,000 d. P450,000 D. the contribution margin ratio begins to increase

7. Culver Inc. has earnings after interest but before taxes of 4. Pines Company has a higher degree of operating leverage
P300. The company’s before-tax times interest earned ratio is than Tagaytay Company. Which of the following is true?
7.00. Calculate the company’s interest charges. A. Pines has higher variable expense.
a. P42.86 c. P40.00 B. Pines is more profitable than Tagaytay Company’s.
b. P50.00 d. P60.00 C. Pines is more risky than Tagaytay is.
D. Pines' profits are less sensitive to percentage changes in
8. Lombardi Trucking Company has the following data: sales.
Assets: P10,000 Profit margin: 3.0%
Debt ratio: 60.0% Interest rate: 10.0% 5. With the aid of computer software, managers can vary
What is Lombardi’s TIE ratio? assumptions regarding selling prices, costs, and volume and
a. 0.95 c. 2.10 can immediately see the effects of each change on the break-
b. 1.75 d. 2.67 even point and profit. Such an analysis is called
A. “What if” or sensitivity analysis.
9. A company has 100,000 outstanding common shares with a B. Vary the data analysis.
market value of P20 per share. Dividends of P2 per share were C. Computer aided analysis.
paid in the current year, and the company has a dividend-payout D. Data gathering.
ratio of 40%. The price-to-earnings ratio of the company is
a. 2.5 c .10 6. Which of the following best describes the impact of selling
b. 4 d. 50 more units?
A. The increase in sales volume increases total variable cost.
10. Selected data from the year-end financial statements of B. The increase in sales volume means an increase in total
World Cup Corp. are presented below. The difference between fixed cost.
average and ending inventories is immaterial. C. The increase in sales increases contribution margin, causing
net income to decrease.
Current ratio 2.0 D. The increase in sales increases contribution margin per unit
Quick ratio 1.5 causing the break-even point to decrease.
Current liabilities P600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
World’s net sales for the year were
Problem
1. Green Corporation expects to sell 3,000 plants a month. Its
operations manager estimated the following monthly costs:
Variable costs P 7,500
Fixed costs 15,000
What sales price per plant does she need to achieve to begin
making a profit if she sells the estimated number of plants
per month?
A. P7.51 C. P5.00
B. P7.50 D. P2.50

2. An organization's break-even point is 4,000 units at a sales

price of P50 per unit, variable cost of P30 per unit, and total
fixed costs of P80,000. If the company sells 500 additional
units, by how much will its profit increase?
A. P25,000 C. P10,000
B. P15,000 D. P12,000

3. Seal Yard Ornaments sells lawn ornaments for P15 each.

Seal's contribution margin ratio is 40%. Fixed costs are
P32,000. Should fixed costs increase 30%, how many
additional units will Seal have to produce and sell in order
to generate the same net profit as under the current
conditions?
A. 1,600. C. 6,933.
B. 5,333. D. 1,067.

4. At a break-even point of 5,000 units sold, variable expenses

were P10,000 and fixed expenses were P50,000. The profit
from the 5,001st unit would be?
A. P10 C. P15
B. P50 D. P12

5. In 2006 Lucia Company had a net loss of P8,000. The

company sells one product with a selling price of P80 and a
variable cost per unit of P60. In 2007, the company would like
to earn a before-tax profit of P40,000. How many additional
units must the company sell in 2007 than it sold in 2006?
Assume that the tax rate is 40 percent.
A. 1,600 C. 2,000
B. 2,400 D. 5,400

6. Bulusan Company has sales of P400,000 with variable costs

of P300,000, fixed costs of P120,000, and an operating loss
of P20,000. How much increase in sales would Bulusan
need to make in order to achieve a target operating income
of 10% of sales?
A. P400,000 C. P500,000
B. P462,000 D.
P800,000