UNIVERSIDAD DE MANILA

A.J. Villegas St. Mehan Gardens, Manila City

FINANCIAL MANAGEMENT JA LABAY

FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis is defined as the process of identifying financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the balance
sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements, such as
comparative statements, schedule of changes in working capital, common size percentages, funds
analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for decision
making purposes. They play a dominant role in setting the framework of managerial decisions.
But the information provided in the financial statements is not an end in itself as no meaningful
conclusions can be drawn from these statements alone. However, the information provided in the
financial statements is of immense use in making decisions through analysis and interpretation of
financial statements.

Tools and Techniques of Financial Statement Analysis

1. Horizontal and Vertical Analysis

Horizontal Analysis or Trend Analysis

Comparison of two or more year’s financial data is known as horizontal analysis, or trend
analysis. Horizontal analysis is facilitated by showing changes between years in both peso and
percentage form.

Trend Percentage
Horizontal analysis of financial statements can also be carried out by computing trend
percentages. Trend percentage states several years’ financial data in terms of a base year. The
base year equals 100%, with all other years stated in some percentage of this base.

Vertical Analysis
Vertical analysis is the procedure of preparing and presenting common size statements.
Common size statement is one that shows the items appearing on it in percentage form as well
as in peso form. Each item is stated as a percentage of some total of which that item is a part.
Key financial changes and trends can be highlighted by the use of common size statements.

2. Ratios Analysis
The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means
one number expressed in terms of another. A ratio is a statistical yardstick by means of which
relationship between two or various figures can be compared or measured. Ratios can be found

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out by dividing one number by another number. Ratios show how one number is related to
another.

Profitability Ratios
Profitability ratios measure the results of business operations or overall performance and
effectiveness of the firm. Some of the most popular profitability ratios are as under:

 Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a

percentage. It expresses the relationship between gross profit and sales.

Formula: Gross Profit Ratio = (Gross profit / Net sales) × 100

Analysis:
Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be
reduced without incurring losses on operations. It reflects efficiency with which a firm produces
its products. As the gross profit is found by deducting cost of goods sold from net sales, higher
the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from
business to business. However, the gross profit earned should be sufficient to recover all
operating expenses and to build up reserves after paying all fixed interest charges and dividends.

 Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage.

Formula: Net Profit Ratio = (Net profit / Net sales) × 100

Analysis:
NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The
ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a
satisfactory return on its investment. This ratio also indicates the firm’s capacity to face adverse
economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the
better is the profitability. But while interpreting the ratio it should be kept in mind that
the performance of profits also be seen in relation to investments or capital of the firm and not
only in relation to sales.

 Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is
generally expressed in percentage.

Formula: Operating Ratio = [(Cost of goods sold + Operating expenses) / Net sales] × 100

Analysis:
Operating ratio shows the operational efficiency of the business. Lower operating ratio shows
higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is
generally considered as standard for manufacturing concerns. This ratio is considered to be a
yardstick of operating efficiency, but it should be used cautiously because it may be affected by a
number of uncontrollable factors beyond the control of the firm. Moreover, in some firms, non-
operating expenses from a substantial part of the total expenses and in such cases operating ratio
may give misleading results.

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 Expense ratios indicate the relationship of various expenses to net sales. The operating ratio
reveals the average total variations in expenses. But some of the expenses may be increasing
while some may be falling. Hence, expense ratios are calculated by dividing each item of
expenses or group of expense with the net sales to analyze the cause of variation of the operating
ratio. The ratio can be calculated for individual items of expense or a group of items of a
particular type of expense like cost of sales ratio, administrative expense ratio, selling expense
ratio, materials consumed ratio, etc. The lower the operating ratio, the larger is the profitability
and higher the operating ratio, lower is the profitability. While interpreting expense ratio, it must
be remembered that for a fixed expense like rent, the ratio will fall if the sales increase and for a
variable expense, the ratio in proportion to sales shall remain nearly the same.

Formula: Particular Expense = (Particular expense / Net sales) × 100

 Return on assets is the ratio of annual net income to average total assets of a business during a
financial year. It measures efficiency of the business in using its assets to generate net income. It
is a profitability ratio.

Formula:
Annual Net Income
ROA = 
Average Total Assets

Analysis:
Return on assets indicates the number of cents earned on each peso of assets. Thus, higher values
of return on assets show that business is more profitable. This ratio should be only used to
compare companies in the same industry. The reason for this is that companies in some
industries are most asset-insensitive i.e. they need expensive plant and equipment to generate
income compared to others. Their ROA will naturally be lower than the ROA of companies
which are low asset insensitive. An increasing trend of ROA indicates that the profitability of the
company is improving. Conversely, a decreasing trend means that profitability is deteriorating.

 Return on equity or return on capital is the ratio of net income of a business during a year to
its stockholders' equity during that year. It is a measure of profitability of stockholders'
investments. It shows net income as percentage of shareholder equity.

Formula:
Annual Net Income
ROE = 
Average Stockholders' Equity

Analysis:
Return on equity is an important measure of the profitability of a company. Higher values are
generally favorable meaning that the company is efficient in generating income on new
investment. Investors should compare the ROE of different companies and also check the trend
in ROE over time. However, relying solely on ROE for investment decisions is not safe. It can be
artificially influenced by the management, for example, when debt financing is used to reduce
share capital there will be an increase in ROE even if income remains constant.

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 Dividend yield ratio is the relationship between dividends per share and the market value of
the shares. Shareholders are real owners of a company, and they are interested in real sense in the
earnings distributed and paid to them as dividend. Therefore, dividend yield ratio is calculated to
evaluate the relationship between dividends per share paid and the market value of the shares.

Formula: Dividend Yield Ratio = Dividend Per Share / Market Value Per Share

Analysis:
This ratio helps as intending investor knows the effective return he is going to get on the
proposed investment.

 Dividend payout ratio is calculated to find the extent to which earnings per share have been
used for paying dividend and to know what portion of earnings has been retained in the business.

Formula: Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

Analysis:
The payout ratio and the retained earnings ratio are the indicators of the amount of earnings that
have been ploughed back in the business. The lower the payout ratio, the higher will be the
amount of earnings ploughed back in the business and vice versa. A lower payout ratio or higher
retained earnings ratio means a stronger financial position of the company.

 Earnings per share ratio (EPS Ratio) is a small variation of return on equity capital ratio and
is calculated by dividing the net profit after taxes and preference dividend by the total number of
equity shares.

Formula: Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of
equity shares (common shares)

Analysis:
The earnings per share is a good measure of profitability and when compared with EPS of
similar companies, it gives a view of the comparative earnings or earnings power of the firm.
EPS ratio calculated for a number of years indicates whether or not the earning power of the
company has increased.

 Price earnings ratio (P/E ratio) is the ratio between market price per equity share and
earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a
share of a company and is widely used by investors to decide whether or not to buy shares in a
particular company.

Formula: Price Earnings Ratio = Market price per equity share / Earnings per share

Analysis:
Price earnings ratio helps the investor in deciding whether to buy or not to buy the shares of a
particular company at a particular market price. Generally, higher the price earnings ratio the

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better it is. If the P/E ratio falls, the management should look into the causes that have resulted
into the fall of this ratio.

Liquidity Ratios:
Liquidity ratios measure the short-term solvency of financial position of a firm. These ratios are
calculated to comment upon the short-term paying capacity of a concern or the firm’s ability to
meet its current obligations. Following are the most important liquidity ratios.

 Current ratio may be defined as the relationship between current assets and current liabilities.
This ratio is also known as “working capital ratio“. It is a measure of general liquidity and is
most widely used to make the analysis for short term financial position or liquidity of a firm. It is
calculated by dividing the total of the current assets by total of the current liabilities.

Formula: Current Ratio = Current Assets / Current Liabilities Or

Current Assets : Current Liabilities

Analysis:
Current ratio matches current assets with current liabilities and tells us whether the current assets
are enough to settle current liabilities. Current ratio below 1 shows critical liquidity problems
because it means that total current liabilities exceed total current assets. General rule is that
higher the current ratio better it is but there is a limit to this. Abnormally high value of current
ratio may indicate existence of idle or underutilized resources in the company.

 Liquid ratio is also termed as “Liquidity Ratio “, “Acid Test Ratio” or “Quick Ratio“. It is
the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to
pay its short-term obligations as and when they become due.

Formula: Liquid Ratio = Liquid Assets / Current Liabilities

Analysis:
The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It
measures the firm’s capacity to pay off current obligations immediately and is more rigorous test
of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid
ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories and
prepaid expenses as a part of current assets. Usually, a high liquid ratio is an indication that the
firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other
hand a low liquidity ratio represents that the firm’s liquidity position is not good. As a
convention, generally, a quick ratio of “one to one” (1:1) is considered to be satisfactory.

Absolute liquidity is represented by cash and near cash items. It is a ratio of absolute liquid
assets to current liabilities. In the computation of this ratio only the absolute liquid assets are
compared with the liquid liabilities. The absolute liquid assets are cash, bank and marketable
securities. It is to be observed that receivables (debtors/accounts receivables and bills
receivables) are eliminated from the list of liquid assets in order to obtain absolute4 liquid assets
since there may be some doubt in their liquidity.

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Formula: Absolute Liquid Ratio = Absolute Liquid Assets / Current Assets

This ratio gains much significance only when it is used in conjunction with the current and liquid
ratios. A standard of 0.5: 1 absolute liquidity ratio is considered an acceptable norm. That is,
from the point of view of absolute liquidity, fifty cents worth of absolute liquid assets are
considered sufficient for one-peso worth of liquid liabilities. However, this ratio is not in much
use.

 Working capital is a measure of liquidity of a business. It equals current assets minus current
liabilities.

Formula:
Working Capital = Current Assets − Current Liabilities

Analysis:
If current assets of a business at the point in time are more than its current liabilities the working
capital is positive, and this tells that the company is not expected to suffer from liquidity crunch
in near future. However, if current assets are less than current liabilities the working capital is
negative, and this communicates that the business may not be able to pay off its current liabilities
when due.

Activity Ratios:
Activity ratios are calculated to measure the efficiency with which the resources of a firm have
been employed. These ratios are also called turnover ratios because they indicate the speed with
which assets are being turned over into sales. Following are the most important activity ratios:

 Inventory turnover is the ratio of cost of goods sold by a business to its average inventory
during a given accounting period. It is an activity ratio measuring the number of times per
period; a business sells and replaces its entire batch of inventory again.

Formula:
Cost of Goods Sold
Inventory Turnover =
Average Inventory

Analysis:
Inventory turnover ratio is used to measure the inventory management efficiency of a business.
In general, a higher value of inventory turnover indicates better performance and lower value
means inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an
indication of over-stocking which may pose risk of obsolescence and increased inventory
holding costs. However, a very high value of this ratio may be accompanied by loss of sales due
to inventory shortage. Inventory turnover is different for different industries. Businesses which
trade perishable goods have very higher turnover compared to those dealing in durables. Hence a
comparison would only be fair if made between businesses of same industry.

 Days' inventory on hand (also called days' sales in inventory or simply days of inventory) is
an accounting ratio which measures the number of days a company takes to sell its average

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balance of inventory. It is also an estimate of the number of days for which the average balance
of inventory will be sufficient. Days' sales in inventory ratio are very similar to inventory
turnover ratio and both measure the efficiency of a business in managing its inventory.

Formula:
Number of Days in the Period
Days of Inventory = 
Inventory Turnover for the Period

If we substitute inventory turnover as "cost of goods sold ÷ average inventory" in the above
formula and simplify the equation, we get:
Average Inventory
Days of Inventory =   × Number of Days in the Period
Cost of Goods Sold

Analysis:
Since inventory carrying costs take significant investment, a business must try to reduce the level
of inventory. Lower level of inventory will result in lower days' inventory on hand ratio.
Therefore, lower values of this ratio are generally favorable and higher values are unfavorable.
However, inventory must be kept at safe level so that no sales are lost due to stock-outs. Thus,
low value of days of inventory ratio of a company which finds it difficult to satisfy demand is not
favorable. Days' sales in inventory vary significantly between different industries. For example,
business which sells perishable goods such as fruits and vegetables have very low values of days'
sales in inventory whereas companies selling non-perishable goods such as cars have high values
of days of inventory.

 Accounts receivable turnover is the ratio of net credit sales of a business to its average
accounts receivable during a given period, usually a year. It is an activity ratio which estimates
the number of times a business collects its average accounts receivable balance during a period.

Formula:
Receivables Net Credit Sales
=
Turnover Average Accounts Receivable

Analysis:
Accounts receivable turnover measures the efficiency of a business in collecting its credit sales.
Generally, a high value of accounts receivable turnover is favorable and lower figure may
indicate inefficiency in collecting outstanding sales. Increase in accounts receivable turnover
overtime generally indicates improvement in the process of cash collection on credit sales.
However, a normal level of receivables turnover is different for different industries. Also, very
high values of this ratio may not be favorable, if achieved by extremely strict credit terms since
such policies may repel potential buyers.

 Days' sales outstanding ratio (also called average collection period or days' sales in
receivables) is used to measure the average number of days a business takes to collect its trade
receivables after they have been created. It is an activity ratio and gives information about the
efficiency of sales collection activities.
Formula:
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Accounts Receivable
DSO =   × Number of Days
Credit Sales

Another formula which uses the accounts receivable turnover is:

Number of Days in the Period
DSO = 
Accounts Receivable Turnover

Analysis:
Since it is profitable to convert sales into cash quickly, this means that a lower value of Days
Sales Outstanding is favorable whereas a higher value is unfavorable. However, it is more
meaningful to create monthly or weekly trend of DSO. Any significant increase in the trend is
unfavorable and indicates inefficiency in credit sales collection.

 Working capital turnover ratio is an activity ratio that measures pesos of revenue generated
per peso of investment in working capital. Working capital is defined as the amount by which
current assets exceed current liabilities.

Formula:
Revenue
Working Capital Turnover Ratio = 
Average Working Capital

Analysis:
A higher working capital turnover ratio is better. It means that the company is utilizing its
working capital more efficiently i.e. generating more revenue using less investment.

Long Term Solvency or Leverage Ratios:

Long term solvency or leverage ratios convey a firm’s ability to meet the interest costs and
payment schedules of its long-term obligations. Following are some of the most important long-
term solvency or leverage ratios.

 Debt-to-Equity ratio Debt-to-Equity ratio is the ratio of total liabilities of a business to its
shareholders' equity. It is a leverage ratio and it measures the degree to which the assets of the
business are financed by the debts and the shareholders' equity of a business.

Formula:
Total Liabilities
Debt-to-Equity Ratio = 
Shareholders' Equity
Analysis:
Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity
ratio is unfavorable because it means that the business relies more on external lenders thus it is at
higher risk, especially at higher interest rates. A debt-to-equity ratio of 1.00 means that half of
the assets of a business are financed by debts and half by shareholders' equity. A value higher
than 1.00 means that more assets are financed by debt that those financed by money of
shareholders' and vice versa. An increasing trend in of debt-to-equity ratio is also alarming

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because it means that the percentage of assets of a business which are financed by the debts is
increasing.

 Times interest earned (also called interest coverage ratio) is the ratio of earnings before
interest and tax (EBIT) of a business to its interest expense during a given period. It is a solvency
ratio measuring the ability of a business to pay off its debts.

Formula:
Earnings before Interest and Tax
Times Interest Earned =
Interest Expense

Analysis:
Higher value of times interest earned ratio is favorable meaning greater ability of a business to
repay its interest and debt. Lower values are unfavorable. A ratio of 1.00 means that income
before interest and tax of the business is just enough to pay off its interest expense. That is why
times interest earned ratio is of special importance to creditors. They can compare the debt
repayment ability of similar companies using this ratio. Other things equal, a creditor should lend
to a company with highest times interest earned ratio. It is also beneficial to create a trend of
times interest earned ratio.

Advantages and Limitations

Financial ratio analysis is a useful tool for users of financial statement. It has following
advantages:

Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company
by just looking at few numbers instead of reading the whole financial statements.

Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of
financial ratio analysis are:
1. Different companies operate in different industries each having different environmental
conditions such as regulation, market structure, etc. Such factors are so significant
that a comparison of two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence
ratio analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are more
concerned about current and future information.

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PROBLEMS

1. The comparative balance sheet of Glider Company appears below:

GLIDER COMPANY
Comparative Balance Sheet
December 31,
Assets 2022 2021
Current assets ............................................................... P 360 P300
Plant assets ................................................................... 640 500
Total assets ............................................................. P1,000 P800

Liabilities and Stockholders' Equity

Current liabilities ......................................................... P 150 P120
Long-term debt ............................................................. 240 160
Common stock ............................................................. 350 280
Retained earnings ......................................................... 260 240
Total liabilities and stockholders' equity ............... P1,000 P800

a. Using horizontal analysis, show the percentage change for each balance sheet item using 2021
as a base year.

b. Using vertical analysis, prepare a common size comparative balance sheet.

2. Shelter Corporation's most recent balance sheet and income statement appear below:
Shelter Corporation
Statement of Financial Position
As of December 31,

2022 2021
Current Assets
Cash P 180,000 P 150,000
Accounts receivable 200,000 190,000
Inventory 140,000 140,000
Prepaid expenses 100,000 90,000
Total current assets 620,000 570,000
Plant and equipment, net 780,000 800,000
Total Assets P 1,400,000 P 1,370,000

Current Liabilities:
Accounts payable P 110,000 P 130,000
Accrued liabilities 80,000 70,000
Notes payable, short term 60,000 60,000
Total current liabilities 250,000 260,000
Bonds payable 220,000 240,000
Total Liabilities 470,000 500,000

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Stockholders’ Equity:
Preferred stock, P100 par value, 5% 200,000 200,000
Common stock, P20 par value 400,000 400,000
Additional paid-in-capital – common 100,000 100,000
Retained earnings 230,000 170,000
Total Stockholders’ Equity 930,000 870,000
Total Liabilities & Stockholders’ Equity P 1,400,000 P1,370,000

Shelter Corporation
Income Statement
For the Year Ended December 31, 2022

Sales (all on account) P 1,130,000

Cost of goods sold (700,000)
Gross Margin 430,000
Selling and administrative expense (244,000)
Net operating income 186,000
Interest expense (29,000)
Net income before taxes 157,000
Income taxes (47,000)
Net income P 110,000

Dividends on common stock during 2022 totaled P40,000. Dividends on preferred stock totaled
P10,000. The market price of common stock at the end of 2020 was P98.00 per share.

Required:
Compute the following for 2022:
a. Gross margin percentage.

b. Earnings per share (of common stock).

c. Price-earnings ratio.

d. Dividend payout ratio.

e. Dividend yield ratio.

f. Return on total assets.

g. Return on common stockholders' equity.

h. Book value per share.

i. Working capital.

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j. Current ratio.

k. Acid-test ratio.

l. Accounts receivable turnover.

m. Average collection period.

n. Inventory turnover.

o. Average sale period.

p. Times interest earned.

q. Debt-to-equity ratio. 

3. Condensed financial statements of Mill Company at the beginning and at the end of the
current year are given below:
Mill Company
Balance Sheet

End of CY Beg. of CY
Cash P 10,000 P 8,000
Marketable securities 20,000 22,000
Accounts receivable 90,000 110,000
Inventories 150,000 100,000
Plant and equipment, net 280,000 260,000
Total Assets P 550,000 P 500,000

Accounts payable P 80,000 P 60,000

Accrued short-term liabilities 20,000 25,000
Bonds payable 75,000 75,000
Preferred stock, 10%, P10 par 50,000 50,000
Common stock, P10 par 100,000 100,000
Additional paid-in-capital – common 50,000 50,000
Retained earnings 175,000 140,000
Total Liabilities & Stockholders’ Equity P 550,000 P 500,000
  Mill Company
Income Statement
For the Current Year

Sales (all on account) P 650,000

Cost of goods sold (350,000)
Gross Margin 300,000
Selling and administrative expense (200,000)
Net operating income 100,000

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Interest expense (10,000)

Net income before taxes 90,000
Income taxes (40,000)
Net income P 50,000

 The company paid total dividends of P15,000 during the year, of which P5,000 were to
preferred stockholders. The market price of a share of common stock at the end of the year was
P30.

Required:

On the basis of the information given above, fill in the blanks with the appropriate figures.

Example: The current ratio at the end of the current year would be computed by dividing
P270,000 by P100,000

a. The acid-test ratio at the end of the current year would be computed by dividing
_______________ by _________________.

b. The inventory turnover for the year would be computed by dividing _______________ by
_________________.

c. The debt-to-equity ratio at the end of the current year would be computed by dividing
_______________ by _________________.

d. The earnings per share of common stock would be computed by dividing _______________
by _________________.

e. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.

f. The times interest earned for the year would be computed by dividing _______________ by
_________________.

g. The return on common stockholders' equity for the year would be computed by dividing
_______________ by _________________.

h. The dividend yield would be computed by dividing _______________ by

_________________. 

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MULTIPLE CHOICE QUESTIONS

1. Under which of the following cases may a percentage change be computed?

A. The trend of the amounts is decreasing but all amounts are positive.
B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative amount in the subsequent
year.
D. There is a negative amount in the base year and a positive amount in the subsequent
year.

2. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time
A. that has been arranged from the highest number to the lowest number.
B. that has been arranged from the lowest number to the highest number.
C. to determine which items are in error.
D. to determine the amount and/or percentage increase or decrease that has taken place.

3. In performing a vertical analysis, the base for prepaid expenses is

A. total current assets.
B. total assets.
C. total liabilities.
D. prepaid expenses in a previous year.

4. Long-term creditors are usually most interested in evaluating

A. liquidity.
B. marketability.
C. profitability.
D. solvency.

5. Stockholders are most interested in evaluating

A. liquidity.
B. solvency.
C. profitability.
D. marketability.

6. Crast Company's net income last year was P70,000. The company paid preferred dividends of
P10,000 and its average common stockholders' equity was P480,000. The company's return on
common stockholders' equity for the year was closest to:
A. 12.5%
B. 14.6%
C. 16.7%
D. 2.1%

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7. Art Company's net income last year was P300,000. The company has 150,000 shares of
common stock and 60,000 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 P1.50 per share on the common stock and P0.60 per share on the
preferred stock. The earnings per share of common stock is closest to:
A. P2.00
B. P1.76
C. P0.50
D. P2.24

8. The Hera Company has 50,000 shares of common stock outstanding. Earnings per share of
common stock for the year is P15.00. The dividend paid to the preferred stockholders during the
year was P2.00 per share. Common stockholders received dividends totaling P150,000. The
dividend payout ratio for the year was closest to:
A. 38.4%
B. 33.3%
C. 23.1%
D. 20.0%

9. Brack Company's net income last year was P85,000 and its interest expense was P10,000.
Total assets at the beginning of the year were P660,000 and total assets at the end of the year
were P600,000. The company's income tax rate was 30%. The company's return on total assets
for the year was closest to:
A. 14.6%
B. 14.0%
C. 13.5%
D. 15.1%

10. Leon Corporation's net income last year was P3,800,000. The dividend on common stock
was P2.00 per share and the dividend on preferred stock was P1.80 per share. The market price
of common stock at the end of the year was P53.40 per share. Throughout the year, 500,000
shares of common stock and 100,000 shares of preferred stock were outstanding. The price-
earnings ratio is closest to:
A. 9.54
B. 7.03
C. 7.38
D. 10.19

11. Centerv Company's debt-to-equity ratio is 0.60 Total assets are P320,000, current assets are
P170,000 and working capital is P80,000. Centerv’s long-term liabilities must be:
A. P30,000
B. P80,000
C. P90,000
D. P120,000

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12. Starr Company has current assets of P300,000 and current liabilities of P200,000. Which of
the following transactions would increase its working capital?
A. Prepayment of P50,000 of next year's rent
B. Refinancing P50,000 of short-term debt with long-term debt
C. Acquisition of land valued at P50,000 by issuing new common stock
D. Purchase of P50,000 of marketable securities for cash

13. Har Company has a current ratio of 3.5 and an acid-test ratio of 2.8. Current assets equal
P175,000 of which P5,000 consists of prepaid expenses. The remainder of current assets consists
of cash, accounts receivable, marketable securities, and inventory. Har Company's inventory
must be:
A. P30,000
B. P40,000
C. P50,000
D. P35,000

14. The times interest earned ratio of McHu Company is 4.5. The interest expense for the year
was P20,000, and the company's tax rate is 40%. The company's net income is:
A. P22,000
B. P42,000
C. P54,000
D. P66,000

15. Mar Corporation's current ratio is currently 1.75. The firm's current ratio cannot fall below
1.5 without violating agreements with its bondholders. If current liabilities are presently P250
million, the maximum new short-term debt that can be issued to finance an equivalent amount of
inventory expansion is:
A. P41.67 million
B. P375.00 million
C. P125.00 million
D. P62.50 million

16. Era Company has P16,000 in cash, P8,000 in marketable securities, P29,000 in account
receivable, P30,000 in inventories, and P34,000 in current liabilities. The company's current
assets consist of cash, marketable securities, accounts receivable, and inventory. The company's
acid-test ratio is closest to:
A. 0.85
B. 2.44
C. 1.56
D. 1.32

17. Frawn Company had P140,000 in sales on account last year. The beginning accounts
receivable balance was P12,000 and the ending accounts receivable balance was P10,000. The
company's accounts receivable turnover was closest to:
A. 11.67
B. 6.36

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C. 14.00
D. 12.73

18. Gra Company had P170,000 in sales on account last year. The beginning accounts receivable
balance was P14,000 and the ending accounts receivable balance was P16,000. The company's
average collection period was closest to:
A. 32.21 days
B. 30.06 days
C. 64.41 days
D. 34.35 days

19. Harr Company, a retailer, had cost of goods sold of P180,000 last year. The beginning
inventory balance was P26,000 and the ending inventory balance was P24,000. The company's
inventory turnover was closest to:
A. 7.20
B. 6.92
C. 3.60
D. 7.50

20. Ira Company, a retailer, had cost of goods sold of P200,000 last year. The beginning
inventory balance was P24,000 and the ending inventory balance was P22,000. The company's
average sale period was closest to:
A. 41.98 days
B. 83.95 days
C. 43.80 days
D. 40.15 days

21 – 22. Ter Corporation had net income of P200,000 and paid dividends to common
stockholders of P40,000 in 2022. The weighted average number of shares outstanding in 2022
was 50,000 shares. Ter Corporation's common stock is selling for P60 per share.

21. Ter Corporation's price-earnings ratio is

A. 3.8 times.
B. 15 times.
C. 18.8 times.
D. 6 times.

22. Ter Corporation's payout ratio for 2022 is

A. P4 per share.
B. 25%.
C. 20%.
D. 12.5%.

23. Grad Company reported the following on its income statement:

Income before income taxes P400,000
Income tax expense 100,000

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Financial Management

Net income P300,000

An analysis of the income statement revealed that interest expense was P100,000. Grad
Company's times interest earned was
A. 5 times.
B. 4 times.
C. 3.5 times.
D. 3 times.

24. A company has a receivables turnover of 10 times. The average net receivables during the
period are P300,000. What is the amount of net credit sales for the period?
A. P30,000.
B. P3,000,000.
C. P360,000.
D. Cannot be determined from the information given.

25. A company has an average inventory on hand of P40,000 and its average days in inventory is
73 days. What is the cost of goods sold?
A. P200,000.
B. P2,920,000.
C. P400,000.
D. P1,460,000.

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