FINANCIAL STATEMENT ANALYSIS with ADDITIONAL FUNDS NEEDED

Question 1

1. Which of the following standards of comparison is particularly useful in identifying trends?
   a. Competitor’s performance
   b. Predetermined standards
   c. Past performance
   d. Forecast

Answer 1

c. Past performance

Question 2

2. A company has an acid-test ratio of 1.5 to 1.0. Which will cause this ratio to deteriorate for the company?
   a. Sale of equipment at a loss
   b. Sale of inventory on account
   c. Borrowing short-term loan from a bank
   d. Payment of cash dividends previously declared

Answer 2

c. Borrowing short-term loan from a bank

Question 3

3. Based on the data presented below, what is Jihyo Corporation’s cost of sales for the year?
   Current ratio 3.5
   Acid test ratio 3.0
   Year-end current liabilities P 600,000
   Beginning inventory P 500,000
   Inventory turnover 8.0
   a. P 1,600,000
   b. P 2,400,000
   c. P 3,200,000
   d. P 6,400,000

Answer 3

c. P 3,200,000
Solution: Ending inventory = (current ratio – quick ratio) current liabilities = (3.5 – 3) 600,000 = P 300,000
Average inventory = (500,000 + 300,000) ÷ 2 = 400,000
Inventory turnover = CGS ÷ average inventory CGS = 8 times x 400,000

Question 4

4. The lowest inventory turnover can be expected for a:
   a. Flower shop
   b. Shoe retailer
   c. Grocery store
   d. Furniture shop

Answer 4

d. Furniture shop

Question 5

5. Accounts receivable turnover will normally decrease because of:
   a. An increase in cash sales in proportional to credit sales
   b. A change in credit policy to lengthen the period for cash discounts
   c. A significant sales volume decreases near the end of the accounting period
   d. The write-off of an uncollectible account (assume the use of allowance for doubtful accounts method)

Answer 5

b. A change in credit policy to lengthen the period for cash discounts

Question 6

6. Identify the set of ratios that is most useful in evaluating solvency.
   a. Debt ratio, current ratio, and TIE
   b. Debt ratio, TIE, and RoA
   c. Debt ratio, quick ratio, and TIE
   d. Debt ratio, TIE, and cash flow to debt

Answer 6

d. Debt ratio, TIE, and cash flow to debt

Question 7

7. The Du Pont model measures
   a. Return on investment
   b. Residual income
   c. Throughput
   d. Profit

Answer 7

a. Return on investment

Question 8

8. A company has a Total Assets Turnover of 2.0, Return on Assets (ROA) of 4% and Return on Equity (ROE) of 6%.
   What is the profit margin and debt ratio, respectively?
   a. 2% and 0.33
   b. 4% and 0.33
   c. 4% and 0.67
   d. 2% and 0.67

Answer 8

Solution: ROA = Profit Margin x Assets Turnover 4% = Profit Margin x 2
ROE = ROA ÷ equity ratio 6% = 4% ÷ equity ratio equity ratio: 4% ÷ 6% = 0.67
Debt ratio = 100% - equity ratio Incidentally, equity multiplier is 1.5 (6% ÷ 4%) or 1 ÷ (0.666666)

Question 9

9. A firm has a debt-equity ratio of 50%. It has interest expense of P 500,000 on P 5,000,000 of total debt outstanding.
   Its tax rate is 40%. If the firm’s RoA is 6%, by how many percentage points is the firm’s RoE greater than its RoA?
   a. 0.0%
   b. 3.0%
   c. 5.2%
   d. 7.4%

Answer 9

b. 3.0%
Solution: Du Pont technique: RoA ÷ equity ratio = RoE 6% ÷ (100 ÷ 150) = 9%

Question 10

10. Dahyun Company’s net income for 2024 was P 60,250. Its average stockholders’ equity for 2024 was P 500,000, inclusive of P 50,000 par value of preferred stock with a dividend rate of 8%. What is the company’s return on
    common stockholders’ equity?
    a. 11.25%
    b. 12.05%
    c. 12.50%
    d. 13.39%

Answer 10

Solution: Return on common SHE = Income available to common shareholders ÷ average common SHE
Return on common SHE = [60,250 – 8% (50,000)] ÷ (500,000 – 50,000)

Question 10

Items 11 and 12 are based on the following information
Mina Company has earnings per share (EPS) of P 6.20, pays dividend of P 3.72 per share, and has a market price of
P 49.60 per share.

11. What is the dividend yield?
    a. 7.5%
    b. 8%
    c. 13.3%
    d. 60%

Answer 10

a. 7.5%
Solution: Dividend yield = dividends ÷ price = 3.72 ÷ 49.60

Question 11

12. What is the payout ratio?
    a. 7.5%
    b. 8%
    c. 13.3%
    d. 60%

Answer 11

Solution: Dividend payout = dividends ÷ EPS = 3.72 ÷ 6.20
Dividend payout = dividend yield x price-earnings ratio = 7.5% x 8
Incidentally, retention or plowback ratio = 100% - dividend payout = 40%

Question 12

13. External capital requirements (i.e., AFN) are lower for entities with which one of the following characteristics?
    a. Lower profit margins
    b. Lower retention ratios
    c. Higher sales growth rates
    d. Lower capital intensity ratios

Answer 12

d. Lower capital intensity ratios