Module 2 - Analysis and Use of Financial Statements

Question 1

Sales of Automobiles by an automobile dealer would be classified under which cash flow activity?

Answer 1

Operating Cashflow Activity

Question 2

ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered
poor if its actual average collection period was

Answer 2

More than 45days

Question 3

A liquidity ratio measures the

Answer 3

short-term ability of the enterprise to pay its maturing obligations and to meet unexpected
needs for cash

Question 4

A successful grocery store would probably have

Answer 4

A high inventory turnover

Question 5

Apple Company had ₱250,000 of total current assets and ₱90,000 of total current liabilities before
borrowing ₱50,000 from BDO with a maturity of nine (9) months. On the date the loan from BDO is
made official, what effect did the borrowing transaction have on the amount of Apple Company’s
working capital?

Answer 5

No effect

Question 6

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The average number of days to sell inventory in 2018 improved compared to 2016.

Answer 6

True

Question 7

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The average number of days to collect receivables in 2018 deteriorated compared to 2016.

Answer 7

False

Question 8

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The average number of days to pay accounts payable 2018 is higher than in 2016.

Answer 8

False

Question 9

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The cash conversion cycle in 2018 improved compared to 2016

Answer 9

True

Question 10

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

WLCON’s liquidity as measured by the current ratio improved in 2018 compared to 2017.

Answer 10

False

Question 11

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

WLCON’s interest-bearing debt increased gradually from 2016 to 2018, thus indicating higher risk
for investors.

Answer 11

False

Question 12

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

Based on the P/E ratio, WLCON shares were relatively cheaper at yearend 2018 compared to
yearend 2017:
Stock price at yearend 2018 : ₱12.60
Stock price at yearend 2017 : ₱8.28

Answer 12

False

Question 13

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The operating profit margin (using EBIT) improved in 2018 compared to 2017.

Answer 13

True

Question 14

Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.

The net profit margin deteriorated in 2018 compared to 2016.

Answer 14

False

Question 15

The return on equity (ROE) improved in 2018 compared to 2017.

Answer 15

True

Question 16

Apple Company had ₱250,000 of current assets and ₱90,000 of current liabilities before borrowing
₱50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction
have on the amount of Apple Company’s current ratio?

Answer 16

The ratio decreased

Question 17

What does an increasing collection period for accounts receivable suggest about a firm’s credit
policy (i.e. the policy of who to grant credit to and in what manner to grant credit)?

Answer 17

The credit policy may be too lenient

Question 18

Which of the following statements is true regarding profitability ratios?

Answer 18

A return on assets of 15% indicates that for every peso invested in assets, the company is
generating 15 centavos in net income.

Question 19

Sam is examining the solvency of ABC Manufacturing Corporation and has collected the following data. What is the most appropriate conclusion based on the data provided?

Answer 19

The company is becoming increasingly less solvent, as evidenced by the increase in its debt-toequity ratio from 0.35 to 0.50 from 2018 to 2020

Question 20

Sam is examining the solvency of ABC Manufacturing Corporation and has collected the following data. What would be a reasonable explanation of these financial results?

Answer 20

The decline in the company’s equity indicates that the company may be incurring losses on its operations, paying dividends greater than income, and / or repurchasing shares

Question 21

Megan observes a decrease in a company’s inventory turnover. Which of the following would explain this trend?

Answer 21

The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

Question 22

A decomposition of ROE for XYZ Company is as follows. Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition?

Answer 22

A higher average tax rate in 2020 offset the improvement in efficiency during 2020, thus leaving ROE unchanged.

Question 23

In general, a creditor would consider a decrease in which of the following ratios to be positive news?

Answer 23

Debt to total assets

Question 24

Assuming no changes in other variables, which of the following would decrease ROA?

Answer 24

An increase in assets.

Question 25

What does the P/E ratio measure?

Answer 25

The “multiple” that the stock market places on a company’s EPS.

Question 26

The primary weakness of the current ratio is

Answer 26

it includes some items, such as inventory, that may not be readily liquid.

Question 27

The primary weakness of the current ratio is

Answer 27

it includes some items, such as inventory, that may not be readily liquid.

Question 28

The fixed asset turnover ratio is influenced by

Answer 28

all of the above choices are correct

Question 29

A firm’s return on equity is a function of its net profit margin, ______ and equity multiplier (i.e. “financial leverage”).

Answer 29

total asset turnover

Question 30

What is a lender’s primary objective in performing an analysis of financial statements?

Answer 30

To decide whether or not the borrower has the ability to repay interest and principal on borrowed funds.

Question 31

What is a limitation common to both the current and the quick ratios?

Answer 31

Accounts receivable may not be truly liquid.