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THEORY 5. In a set of comparative financial statements, you observed a gradual decline in the net of
Basic concepts gross ratio, i.e., between net sales and gross sales. This indicates that:
1. When a balance sheet amount is related to an income statement amount in computing a ratio, A. Sales volume is decreasing.
A. Comparisons with industry ratios are not meaningful. B. The discount period is being lengthened.
B. The balance sheet amount should be converted to an average for the year. C. There is adherence to the collection policies of the company.
C. The income statement amount should be converted to an average for the year. D. There is a stiffening in the grant of discounts to the customers.
D. The ratio loses its historical perspective because a beginning-of-the-year amount is
combined with an end-of-the-year amount. Horizontal analysis
6. Last year, a business had no long-term investments; this year long term investments amount
2. How are financial ratios used in decision making? to P100,000. In a horizontal analysis the change in long-term investments should be
A. They remove the uncertainty of the business environment. expressed as
B. They aren’t useful because decision making is too complex. A. An absolute value of P100,000, and an increase of 100%
C. They give clear signals about the appropriate action to take. B. An absolute value of P100,000 and an increase of 1,000%
D. They can help identify the reasons for success and failure in business, but decision C. An absolute value of P100,000 and no value for a percentage change
making requires information beyond the ratios. D. No change in any terms because there was no investment in the previous year.

Vertical analysis Liquidity ratios

3. A useful tool in financial statement analysis is the common-size financial statement. What 7. Which one of the following ratios would provide a best measure of liquidity?
does this tool enable the financial analyst to do? A. Sales minus returns to total debt.
A. Ascertain the relative potential of companies of similar size in different industries. B. Total assets minus goodwill to total equity.
B. Evaluate financial statements of companies within a given industry of approximately the C. Net profit minus dividends to interest expense.
same value. D. Current assets minus inventories to current liabilities.
C. Determine which companies in the same industry are at approximately the same stage of
development. 8. Which ratio is most helpful in appraising the liquidity of current assets?
D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company A. Accounts receivable turnover. C. Current ratio.
over time or between companies within a given industry without respect to relative size. B. Acid-test ratio. D. Debt ratio.

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

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Profitability ratios
10. Which of these ratios are measures of a company’s profitability? Ratio analysis
1. Earnings per share 5. Return on assets 14. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit.
2. Current ratio 6. Inventory turnover Belle’s quick ratio is significantly better than the industry average. Which of the following
3. Return on sales 7. Receivables turnover factors should North consider as possible limitation of using this ratio when evaluating Belle’s
4. Debt-equity ratio 8. Price-earnings ratio creditworthiness?
A. 1, 3, and 5 only C. 1, 3, 5, 6, 7, and 8 only. A. Belle may need to liquidate its inventory to meet its long-term obligations.
B. 1, 3, 5, and 8 only. D. All eight ratios. B. Increasing market prices for Belle’s inventory may adversely affect the ratio.
C. Fluctuating market prices of short-term investments may adversely affect the ratio.
11. The ratio of analytical measurements which measures the productivity of assets regardless of D. Belle may need to sell its available-for-sale investments to meet its current obligations.
capital structure is
A. Current ratio. C. Quick (acid test) ratio. 15. In comparing the current ratios of two companies, why is it invalid to assume that the company
B. Debt ratio. D. Return on total assets. with the higher current ratio is the better company?
A. The current ratio includes assets other than cash.
Market-test ratios B. A high current ratio may indicate inadequate inventory on hand.
12. How are the following used in the calculation of the dividend-pay-out ratio for a company with C. The two companies may define working capital in different terms.
only common stock outstanding? D. A high current ratio may indicate inefficient use of various assets and liabilities.
A. B. C. D.
Dividends per share Denominator Denominator Numerator Numerator 16. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the year.
Earnings per share Numerator Not used Denominator Not used At the end of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of 0.8 to
Book value per Not used Numerator Not used Denominator 0.1 Which of the following could help explain the divergence in the ratios from the beginning
share to the end of the year?
A. An increase in inventory levels during the year.
Integrated ratios B. An increase in credit sales in relationship to sales
13. An investor has been given several financial ratios for an enterprise but none of the financial C. An increase in the use of payables during the current year.
reports. Which combination of ratios can be used to derive return on equity? D. An increase in the use of payables during the current year.
A. Price-to-earnings ratio and return-on-assets ratio.
B. Net profit margin, total assets turnover, and equity multiplier. 17. If the ratio of total liabilities to equity increases, a ratio that must also increase is
C. Market-to-book-value ratio and total-debt-to-total-assets ratio. A. Return on equity.
D. Price-to-earnings ratio, earnings per share, and net profit margin. B. The current ratio.
C. Times interest earned.
D. Total liabilities to total assets.

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D. Statements A and C are correct.

18. The market value of a firm's outstanding common shares will be higher, everything else equal, 23. The following situations are descriptive of SBD Corporation. Which would be considered as
if the most favorable for the common stockholders.
A. Investors expect lower dividend growth. A. Equity ratio is low; return on assets exceeds the cost of borrowing.
B. Investors have longer expected holding periods. B. Equity ratio is high; return on assets exceeds the cost of borrowing.
C. Investors have a lower required return on equity. C. SBD stops paying dividends on its cumulative preferred stock; the price-earnings ratio of
D. Investors have shorter expected holding periods. common stock is low.
D. Book value per share of common stock is substantially higher than market value per
19. In a comparison of 1992 to 1991, Neir Co.’s inventory turnover ratio increased substantially share; return on common stockholders’ equity is less than the rate of interest paid to
although sales and inventory amounts were essentially unchanged. Which of the following creditors.
statements explains the increased inventory turnover ratio?
A. Cost of goods sold decreased. 24. The company issued new common shares in a three-for-one stock split. Identify the
B. Total asset turnover increased. statements that indicate the correct effect(s) of this transaction.
C. Gross profit percentage decreased. A. It reduced equity per share of common stock.
D. Accounts receivable turnover increased. B. The peso amount of capita stock is increased.
C. Share of each common stockholder is reduced.
20. Minix Co. has a high sales-to-working-capital ratio. This could indicate D. Working capital and current ratio are increased.
A. The firm is not profitable.
Sensitivity analysis
B. The firm is undercapitalized.
25. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what
C. Working capital is not profitably utilized.
change if any, will occur in total assets?
D. The firm is likely to have liquidity problems.
A. Assets will be decreased. C. No change in total assets.
B. Assets will be increased. D. None of the above.
21. When compared to a debt-to-assets ratio, a debt-to-equity ratio would
A. Be lower than the debt-to-assets ratio. 26. Which of the following actions will increase a company’s quick ratio?
B. Be higher than the debt-to-assets ratio. A. Issue equity and use the proceeds to purchase inventory.
C. Be about the same as the debt-to-assets ratio. B. Issue short-term debt and use the proceeds to purchase inventory.
D. Have no relationship at all to the debt-to-assets ratio. C. Reduce inventories and use the proceeds to reduce long-term debt.
D. Issue long-term debt and use the proceeds to purchase fixed assets.
22. You observe that a firm’s profit margin and debt ratio are below the industry average, while its E. Reduce inventories and use the proceeds to reduce current liabilities.
return on equity exceeds the industry average. What can you conclude?
A. Return on assets is above the industry average. 27. On December 31, 1991, Northpark Co. collected a receivable due from a major customer.
B. Total assets turnover is below the industry average. Which of the following ratios would be increased by this transaction?
C. Total assets turnover is above the industry average. A. Current ratio. C. Quick ratio.
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B. Inventory turnover ratio. D. Receivable turnover ratio. D. sale of short-term marketable securities for cash that results in a profit.
28. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less than 2 33. If, just prior to the period of rising prices, a company changed its inventory measurement from
to 1 if the company FIFO to LIFO, the effect in the next period would be to
A. Paid an account payable. A. B. C. D.
B. Collected an account receivable. Current ratio Increase Increase Decrease Decrease
C. Purchased inventory on open account. Inventory turnover Increase Decrease Increase Decrease
D. Sold merchandise on open account that earned a normal gross margin.
34. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets either
29. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of by using borrowed funds for the purchase or by entering into an operating lease. The
the following transactions would improve Mabuhay’s current ratio? company's debt ratio as measured by the balance sheet will
A. Paying P40,000 of short-term accounts payable. A. Increase whether the assets are purchased or leased.
B. Collecting P20,000 of short-term accounts receivable. B. Remain unchanged whether the assets are purchased or leased.
C. Refinancing a P60,000 long-term mortgage with a short-term note. C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Purchasing P100,000 of merchandise inventory with a short-term accounts payable. D. Increase if the assets are purchased, and remain unchanged if the assets are leased.

30. A company has a current ratio of 2 to 1. The ratio will decrease if the company 35. What would be the effect on book value per share and earnings per share if the corporation
A. Borrow cash on a six-month note. purchased its own shares in the open market at a price greater than book value per share?
B. Pays a large account payable which had been a current liability. A. B. C. D.
C. Receives a 5% stock dividend on one of its marketable securities. Book value per share Increase No effect Decrease Decrease
D. Sells merchandise for more than cost and records the sale using the perpetual inventory Earnings per share Increase Increase Increase Decrease
method.
36. Which of the following statements is correct?
31. Recording cash dividend payment when declaration was recorded earlier would A. A high quick ratio is always a good indication of a well-managed liquidity position.
A. Increase both current ratio and working capital B. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings
B. Decreases both current ratio and working capital stream.
C. Have no effect on current ratio or earnings per share C. A relatively low return on assets (ROA) is always an indicator of managerial
D. Increase current ratio but no effect on working capital. incompetence.
D. An increase in a firm’s inventories will call for additional financing unless the increase is
32. ABC Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A offset by an equal or larger decrease in some other asset account.
transaction that would change Bond's quick ratio but not its current ratio is the
A. payment of accounts payable. 37. A company issued long-term bonds and used the proceeds to repurchase 40% of the
B. collection of accounts receivable. outstanding shares of its stock. This financial transaction will likely cause the
C. sale of inventory on account at cost. A. Current ratio to decrease. C. Times-interest-earned ratio to decrease.
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B. Fixed charge coverage ratio to increase. D. Total assets turnover ratio to increase. B. P53,850 D. P90,000
Comprehensive Horizontal analysis
38. All of the following statements are valid except 3. In 19x5, MPX Corporation’s net income was P800,000 and in 19x6 it was P200,000. What
A. The inventory turnover is computed by dividing sales by average inventory. percentage increase in net income must MPX achieve in 19x7 to offset the 19x6 decline in net
B. The results of financial statements analysis are of value only when viewed in comparison income?
with the results of other periods or other firms. A. 60% C. 400%
C. If the return on total assets is higher than the after-tax cost of long-term debt, then B. 300% D. 600%
leverage is positive, and the common stockholders will benefit.
Activity ratios
D. The short term creditor is more interested in cash flows and in working capital
4. Blasso Co.’s net accounts receivable were $500,000 at December 31, 2000 and $600,000 at
management that he is in how much accounting net income is reported.
December 31, 2001. Net cash sales for 2001 were $200,000. The accounts receivable
turnover for 2001 was 5.0. What were Blasso’s total net sales for 2001?
PROBLEMS
A. $2,950,000 C. $3,200,000
Basic concepts
B. $3,000,000 D. $5,500,000
1. A service company's working capital at the beginning of January of the current year was
$70,000. The following transactions occurred during January:
5. During 1989, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 1989
Performed services on account $30,000
was $900,000, and the ending inventory at December 31, 1989 was $180,000. What was the
Purchased supplies on account 5,000
inventory turnover for 1989?
Consumed supplies 4,000
A. 5.0 C. 6.0
Purchased office equipment for cash 2,000
B. 5.3 D. 6.4
Paid short-term bank loan 6,500
Paid salaries 10,000 Solvency ratios
Accrued salaries 3,500 6. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10
What is the amount of working capital at the end of January? percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate
A. $47,500 C. $80,500 is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain
B. $50,500 D. $90,000 a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.
What is Alumbat’s current TIE ratio?
Vertical analysis A. 2.4 C. 3.6
2. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of goods B. 3.4 D. 5.0
manufactured is P480,000. The beginning inventories of goods in process and finished goods
are P82,000 and P65,000, respectively. The ending inventories are, goods in process, 7. What would be a company’s “times interest earned ratio” if interest paid on loans amount to
P75,000, finished goods, P55,000. The selling expenses is 5%, general and administrative P9,000 and its net income after income tax is P99,000. (Assume a 25% income tax rate on
expenses 2.5% of cost of sales, respectively. The net profit in the year 1990 is first P100,000 of income and 35% income tax rate on income in excess of P100,000.)
A. P45,725 C. P83,000 A. 10 times C. 13 times
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B. 12 times D. 16.21 times B. 8.27% and 88.6%. D. 8.86% and 88.6%.

8. Manufacturer’s Inc. estimates that its interest charges for this year will be $700 and its net 13. The following were reflected from the records of War Freak Company:
income will be $3,000. Assuming its average tax rate is 30 percent, what is the company’s Earnings before interest and taxes P1,250,000
estimated times interest earned ratio? Interest expense 250,000
A. 2.40 C. 5.33 Preferred dividends 200,000
B. 4.25 D. 7.12 Payout ratio 40%
Shares outstanding throughout 2003
Profitability ratios Preferred 20,000
9. The average stockholders equity for ABC Company for 2000 was P2,000,000. Included in this Common 35,000
figure is P200,000 par value of 8% preferred stock, which remained unchanged during the Income tax ratio 40%
year. The return on common shareholders’ equity was 12.5% during the 2000. How much Price earnings ratio 5 times
was the net income of the company in 2000? The dividend yield ratio is:
A. P234,000 C. P250,000 A. 0.08 C. 0.40
B. P241,000 D. P225,000 B. 0.12 D. 0.50
Market-test ratios
14. Last year, Quayle Energy had sales of $200 million and its inventory turnover ratio was 5.0.
10. Ehrenburg Co. had net income of $5.3 million and earnings per share of common stock of
The company’s current assets totaled $100 million and its current ratio was 1.2. What was the
$2.50. Included in the net income was $500,000 of bond interest expense related to its long-
company’s quick ratio?
term debt. The income tax rate was 50%. Dividends on preferred stock were $300,000. The
A. 0.55 C. 1.20
dividend payout ratio on common stock was 40%. What were the dividends on common
B. 0.72 D. 1.39
stock?
A. $1,800,000 C. $2,000,000
15. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced $2
B. $1,900,000 D. $2,120,000
million in sales and sustains an inventory turnover of 8.0, what are the firm's current assets?
Integrated ratios A. $500,000 C. $1,250,000
11. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount of B. $1,000,000 D. $1,500,000
current assets is
A. P600,000 C. P1,200,000 16. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
B. P900,000 D. P1,800,000 company has $2 million in sales and its current liabilities are $1 million. What is the company’s
inventory turnover ratio?
12. India Oats pays dividends of $0.62 per quarter, and has annual earnings per share of $2.80. A. 5.0 C. 5.5
What is India Oats's dividend yield and dividend payout ratio for 2000, respectively, if its recent B. 5.2 D. 6.0
market price is $30.00 and its average market price was $28.00?
A. 8.27% and 22.1%. C. 8.86% and 22.1%.
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double the return on assets?

17. Perry Technologies Inc. had the following financial information for the past year: A. 35% C. 45%
Sales $860,000 Inventory turnover 8x B. 40% D. 50%
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities? 22. Selected information from the accounting records of the Blackwood Co. is as follows:
A. $ 61,429 C. $430,000 Net A/R at December 31, 2000 $ 900,000
B. $107,500 D. $500,000 Net A/R at December 31, 2001 $1,000,000
Accounts receivable turnover 5 to 1
18. Taft Technologies has the following relationships: Inventories at December 31, 2000 $1,100,000
Annual sales $1,200,000 Inventory turnover ratio 4.8 Inventories at December 31, 2001 $1,200,000
Current liabilities $ 375,000 Current ratio 1.2 Inventory turnover 4 to 1
Days sales outstanding (DSO) 40 (360-day year) What was the gross margin for 2001?
The company’s current assets consist of cash, inventories, and accounts receivable. How A. $150,000 C. $300,000
much cash does Taft have on its balance sheet? B. $200,000 D. $400,000
A. -$ 8,333 C. $125,000
B. $ 66,667 D. $200,000 23. Watson Corporation computed the following items from its financial records for the year just
ended:
19. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%. Price-earnings ratio 12
If the enterprise has total debt of $1,000,000, it has a sales level of Payout ratio .6
A. $200,000.00 C. $2,450,000.00 Asset turnover .9
B. $408,163.26 D. $5,000,000.00 The dividend yield on Watson's common stock is
A. 5.0% C. 7.5%
20. The Intelinet Corporation and Comp Inc. have assets of $100,000 each and a return on B. 7.2% D. 10.8%
common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half the
sales of Intelinet. If Intelinet has net income of $10,000 and a total assets turnover ratio of 3.5, 24. Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity,
what is Comp Inc.'s profit margin? given the following information:
A. 3.31% C. 10.00% (1) Earnings before taxes = $1,500
B. 7.71% D. 13.50% (2) Sales = $5,000
(3) Dividend payout ratio = 60%
21. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president (4) Total assets turnover = 2.0
is unhappy with the current return on assets, and he thinks it could be doubled. This could be (5) Tax rate = 30%
accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets A. 25% C. 35%
turnover. What new asset turnover ratio, along with the 15% profit margin, is required to B. 30% D. 42%
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B. Market price of the stock must be P40.

25. Shepherd Enterprises has an ROE of 15 percent, a debt ratio of 40 percent, and a profit C. The amount of dividend cannot be determined.
margin of 5 percent. The company’s total assets equal $800 million. What are the company’s D. Market value of the stock cannot be determined.
sales? (Assume that the company has no preferred stock.)
A. $ 360,000,000 C. $1,440,000,000 31. Selected data from the year-end financial statements of World Cup Corp. are presented below.
B. $ 960,000,000 D. $2,400,000,000 The difference between average and ending inventories is immaterial.
Current ratio 2.0
26. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to put Quick ratio 1.5
together a financial report. You have found the return on equity to be 12% and the debt ratio Current liabilities P600,000
was 0.40. What was the return on assets? Inventory turnover (based on cost of sales) 8 times
A. 5.35% C. 7.20% Gross profit margin 40%
B. 6.60% D. 8.40% World’s net sales for the year were
A. P1.2 million C. P4.0 million
27. A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of B. P2.4 million D. P6.0 million
$2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm’s before-tax cost
32. The following ratios and data were computed from the 1997 financial statements of Star Co.:
of debt is 10 percent and the firm’s tax rate is 40 percent, what is the firm’s ROE?
Current ratio 1.5
A. 1.7% C. 6.0%
Working capital P20,000
B. 2.5% D. 8.3%
Debt/equity ratio .8
Return on equity .2
28. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on
If net income for 1997 is P40,000, the balance sheet at the end of 1997 total assets of
$5,000,000 of total debt outstanding. Its tax rate is 40 percent. If the firm’s ROA is 6 percent,
A. P300,000 C. P360,000
by how many percentage points is the firm’s ROE greater than its ROA?
B. P340,000 D. P400,000
A. 0.0% C. 5.2%
B. 3.0% D. 7.4% 33. Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales
outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt
29. Given the following information, calculate the market price per share of WAM Inc. ratio of 0.64. What is the firm’s return on equity (ROE)? Assume a 360-day year.
Net income = $200,000 Earnings per share = $2.00 A. 3.3% C. 8.1%
Stockholders’ equity = $2,000,000 Market/Book ratio = 0.20 B. 7.1% D. 33.3%
A. $ 2.00 C. $ 8.00
B. $ 4.00 D. $20.00 34. Kansas Office Supply had $24,000,000 in sales last year. The company’s net income was
$400,000, its total assets turnover was 6.0, and the company’s ROE was 15 percent. The
30. Earnings per share amount to P10 and the price earnings ratio is 5. If the dividend yield is 8%, company is financed entirely with debt and common equity. What is the company’s debt ratio?
A. The dividend is P4 per share. A. 0.20 C. 0.33
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B. 0.30 D. 0.60
35. Last year, Thomas Lumber Co. had a profit margin of 10 percent, total assets turnover of 0.5, 39. The Meryl Corporation’s common stock is currently selling at $100 per share, which represents
and a debt ratio of 20 percent. (The company finances its assets with debt and common a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of
equity; it does not use preferred stock.) This year, the company’s CFO wants to double ROE. 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?
She expects the total assets turnover will remain at 0.5, while the profit margin and debt ratio A. 8.0% C. 12.0%
will increase enough to double ROE. Assume that the profit margin is increased to 15 percent, B. 10.0% D. 16.7%
what debt ratio will the company need in order to double its ROE?
A. 0.30 C. 0.40 40. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets of 12%. If
B. 0.33 D. 0.45 the debt ratio is 36% and the market price of the stock is $38 per share, what is the return on
equity?
36. Deb & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%. A. 7.68% C. 12.0%
The president is unhappy with the current return on equity, and he thinks it could be doubled. B. 9.0% D. 18.75%
This could be accomplished (1) by increasing the profit margin to 14% and (2) increasing debt
utilization. Total assets turnover will not change. What new debt ratio, along with the 14% Questions 41 through 43 are based on the following information.
profit margin, is required to double the return on equity? The condensed balance sheet as of December 31, 1982 of San Matias Company is given below.
A. 0.55 C. 0.70 Figures shown by a question mark (?) may be computed from the additional information given:
B. 0.65 D. 0.75 ASSETS LIAB. & STOCKHOLDERS’ EQUITY
Cash P 60,000 Accounts payable P ?
37. Lone Star Plastics has the following data: Trade receivable-net ? Current notes payable 40,000
Assets: $100,000 Interest rate: 8.0% Inventory ? Long-term payable ?
Debt ratio: 40.0% Total assets turnover: 3.0 Fixed assets-net 252,000 Common stock 140,000
Profit margin: 6.0% Tax rate: 40% Retained earnings ?
What is Lone Star’s EBIT? Total Assets P 480,000 Total L & SHE P 480,000
A. $12,000 C. $30,000 Additional information:
B. $18,000 D. $33,200 Current ratio (as of Dec. 31, 1982) 1.9 to 1
Ratio of total liabilities to total stockholders’ equity 1.4
38. Lombardi Trucking Company has the following data: Inventory turnover based on sales and ending inventory 15 times
Assets: $10,000 Interest rate: 10.0% Inventory turnover based on cost of goods sold and ending inventory 10 times
Debt ratio: 60.0% Total assets turnover: 2.0 Gross margin for 1982 P500,000
Profit margin: 3.0% Tax rate: 40%
What is Lombardi’s TIE ratio? 41. The balance of accounts payable of San Matias as of December 31, 1982 is
A. 0.95 C. 2.10 A. P40,000 C. P95,000
B. 1.75 D. 2.67 B. P80,000 D. P280,000
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B. P550,00 D. P714,750
42. The balance of retained earnings of San Matias as of December 31, 1982 is 47. Total current assets would amount to
A. P60,000 C. P200,000 A. P580,000 C. P780,000
B. P140,000 D. P360,000 B. P630,825 D. P930,825

43. The balance of inventory of San Matias as of December 31, 1982 is Sensitivity analysis
A. P68,000 C. P168,000 48. OTW Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1. What
B. P100,000 D. P228,000 is OTW’s current ratio immediately after it has paid P2million of its accounts payable?
A. 2.75 to 1 C. 3.75 to 1
Questions 44 thru 47 are based on the following information. B. 3.25 to 1 D. 4.75 to 1
You are requested to reconstruct the accounts of Angela Trading for analysis. The following data
were made available to you: 49. Rainier Inc. has $2 million in current assets, its current ratio is 1.6, and its quick ratio is 1.2.
Gross margin for 19x8 P472,500 The company plans to raise funds as additional notes payable and to use these funds to
Ending balance of merchandise inventory P300,000 increase inventory. By how much can Rainier’s short-term debt (notes payable) increase
Total stockholders’ equity as of December 31, 19x8 P750,000 without pushing its quick ratio below 0.8?
Gross margin ratio 35% A. $278,000 C. $556,000
Debt to equity ratio 0.8:1 B. $333,000 D. $625,000
Times interest earned 10
Quick ratio 1.3:1 50. Last year's asset turnover ratio for Wuerffel Airlines was 2.5. This year, sales increased by
Ratio of operating expenses to sales 18% 20% and average total assets increased by 10%. What is the new asset turnover ratio?
Long-term liabilities consisted of bonds payable with interest rate of 20% A. 2.50 C. 2.73
Based on the above information, B. 2.59 D. 3.00

44. What was the operating income for 19x8? 51. Victoria Enterprises has $1.6 million of accounts receivable on its balance sheet. The
A. P205,550 C. P229,500 company’s DSO is 40 (based on a 360-day year), its current assets are $2.5 million, and its
B. P243,500 D. P472,500 current ratio is 1.5. The company plans to reduce its DSO from 40 to the industry average of
30 without causing a decline in sales. The resulting decrease in accounts receivable will free
45. How much was the bonds payable? up cash that will be used to reduce current liabilities. If the company succeeds in its plan, what
A. P114,750 C. P370,500 will Victoria’s new current ratio be?
B. P200,750 D. P400,000 A. 0.72 C. 1.66
B. 1.50 D. 1.97
46. Total current liabilities would amount to
A. P485,250 C. P600,000
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52. Vance Motors has current assets of $1.2 million. The company’s current ratio is 1.2, its quick 56. Barr Co. has total debt of $420,000 and shareholders’ equity of $700,000. Barr is seeking
ratio is 0.7, and its inventory turnover ratio is 4. The company would like to increase its capital to fund an expansion. Barr is planning to issue an additional $300,000 in common
inventory turnover ratio to the industry average, which is 5, without reducing its sales. Any stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-
reductions in inventory will be used to reduce the company’s current liabilities. What will be to-equity rate of 0.75. What is the maximum additional amount Barr will be able to borrow?
the company’s current ratio, assuming that it is successful in improving its inventory turnover A. $225,000 C. $525,000
ratio to 5? B. $330,000 D. $750,000
A. 0.75 C. 1.33
B. 1.22 D. 1.67 57. Planners have determined that sales will increase by 25% next year, and that the profit margin
will remain at 15% of sales. Which of the following statements is correct?
53. Miller and Rogers Partnership has $3 million in total assets, $1.65 million in equity, and a A. Profit will grow by 25%.
$500,000 capital budget. To maintain the same debt-equity ratio, how much debt should be B. The profit margin will grow by 15%.
incurred? C. Profit will grow proportionately faster than sales.
A. $50,000 C. $275,000 D. Ten percent of the increase in sales will become net income.
B. $225,000 D. $450,000
58. Associated Co. paid out one-half of its 1994 earnings by dividends. Its earnings increased by
54. Standard Company's bonds have a provision which stipulates that the ratio of senior debt to 20% and the amounts of its dividends increased by 15% in 1995. Associated’s dividend
total assets will never rise above 45%. The company is at the limit of that ratio and it wishes to payout ratio for 1995 was
issue still another $25 million in senior debt. How much additional equity capital must it raise A. 47.9% C. 52.3%
to comply with this restrictive provision? B. 51.5% D. 75.0%
A. $11.25 million. C. $30.56 million.
B. $20.45 million. D. $55.56 million. 59. Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000
shares of common stock, and it currently trades at $60 a share. The company continues to
55. The following information pertains to AL Corporation as of and for the year-ended December expand and anticipates that one year from now its net income will be $2,500,000. Over the
31, 19x7. next year the company also anticipates issuing an additional 100,000 shares of stock, so that
Liabilities P 60,000 one year from now the company will have 400,000 shares of common stock. Assuming the
Stockholders’ equity P 500,000 company’s price/earnings ratio remains at its current level, what will be the company’s stock
Shares of common stock issued and outstanding 10,000 price one year from now?
Net income P 30,000 A. $55 C. $70
During 1997, AL officers exercised stock options for 1,000 shares of stock at an option price of B. $60 D. $75
P8 per share. What was the effect of exercising the stock option?
A. No ratios were affected. C. Debt to equity ratio decreased to 12%.
B. Asset turnover increased to 50.4% D. Earnings per share increased by P0.33
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60. Landry Retailers has annual sales of $365 million. The company’s days sales outstanding
(calculated on a 365-day basis) is 50, which is well above the industry average of 35. The
company has $200 million in current assets, $150 million in current liabilities, and $75 million in
inventories. The company’s goal is to reduce its DSO to the industry average without reducing
sales. Cash freed up would be used to repurchase common stock. What will be the current
ratio if the company accomplishes its goal?
A. 0.73 C. 1.33
B. 1.23 D. 1.43

61. Hanson Corporation's present year ROE remained at last year's 14% level, while the profit
margin was reduced from 8% to 4% and the leverage ratio increased from 1.2 to 1.5. The
effects on asset turnover were to
A. Remain constant. C. Increase from 1.46 to 2.33.
B. Decease from 14.58 to 2.33. D. Increase from 4.76 to 9.60.

62. Roland & Company has a new management team that has developed an operating plan to
improve upon last year’s ROE. The new plan would place the debt ratio at 55 percent, which
will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of
$270,000, it expects to have a total assets turnover ratio of 3.0, and the average tax rate will
be 40 percent. What does Roland & Company expect its return on equity to be following the
changes?
A. 17.65% C. 26.67%
B. 21.82% D. 44.44%

63. Southeast Packaging’s ROE last year was only 5 percent, but its management has developed
a new operating plan designed to improve things. The new plan calls for a total debt ratio of
60 percent, which will result in interest charges of $8,000 per year. Management projects an
EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of
2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made,
what return on equity will Southeast earn?
A. 9.00% C. 17.50%
B. 11.25% D. 22.50%
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Theory Problem
1. B 26. E 1. C 26. C 51. C
2. D 27. D 2. B 27. A 52. B
3. D 28. C 3. B 28. B 53. B
4. C 29. D 4. A 29. B 54. C
5. B 30. A 5. C 30. A 55. C
6. C 31. D 6. D 31. C 56. B
7. D 32. C 7. D 32. C 57. A
8. A 33. C 8. D 33. A 58. A
9. A 34. D 9. B 34. C 59. D
10. B 35. C 10. C 35. C 60. B
11. D 36. D 11. B 36. B 61. C
12. C 37. C 12. B 37. D 62. C
13. B 38. A 13. A 38. D 63. D
14. C 14. B 39. A
15. D 15. C 40. D
16. A 16. A 41. B
17. D 17. C 42. A
18. C 18. B 43. B
19. C 19. D 44. C
20. B 20. B 45. A
21. B 21. B 46. A
22. C 22. A 47. D
23. B 23. A 48. B
24. A 24. D 49. D
25. A 25. C 50. C

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