Module 3 (Midterm Coverage)

Question 1

This is comparison within a company to detect changes in financial relationships and significant trends.

Answer 1

Intra-company basis

Question 2

This is comparison with other companies to provide insight into a company’s competitive position.

Answer 2

Inter-company basis

Question 3

This is comparisons with the industry to provide information about a company’s relative position within the industry.

Answer 3

Industry averages

Question 4

This is an analytical method by which comparative
statements are presented to show changes in each item as of different dates or for different period as a means of
determining improvement or deterioration of the financial
condition or results of operations of a business enterprise.

Answer 4

Horizontal or Trend analysis

Question 5

This highlights the peso and the percentage increase or decrease of each item in the comparative statements.

Answer 5

Increase/Decrease Method

Question 6

This shows the changes in financial statement items from a base year to the following years to show the extent and direction of change.

Answer 6

Trend Percentages or Index Numbers

Question 7

Differentiate percent change and trend percentage.

Answer 7

Percent change - compares data of only two years

Trend percentage - compares data of more than two years

Question 8

This is a technique, also known as common-size analysis, for evaluating financial statement data that expresses each item
in a financial statement within a year as percent of a base
amount.

This is the procedure of preparing common-size statements.

Answer 8

Vertical Analysis

Question 9

This common-size statement is where total assets represent 100% in vertical analysis.

Answer 9

Common-size statement of financial position

Question 10

These are percentages, turnovers, or ratios expressing the relationship between selected items derived from the statement of financial
position, from the statement of comprehensive income, or from both.

Answer 10

Ratio Analysis

Question 11

These measure the ability of a company to meet its current obligation.

Answer 11

Liquidity ratios

Question 12

This is another way to express the relation between current assets and current liabilities. This is also known as the working capital ratio.

Answer 12

Current ratio

Question 13

What does the working capital ratio near 2:1 mean?

Answer 13

Standard or satisfactory

Question 14

What does the working capital ratio less than 1 mean?

Answer 14

Unacceptable. The current liabilities exceed current assets.

Question 15

It is used as a complementary
ratio to the current ratio. It is a more rigorous test of a company’s ability to meet its short-term debts than the current ratio since it excludes less liquid current assets such as inventories and prepaid expenses. It measures the firm’s ability to pay off
short-term obligations without relying on the sale of inventories.

Answer 15

Acid-test ratio

Question 16

These are calculated to measure the efficiency with
which a firm’s resources have been employed. They are also called turnover ratios.

Answer 16

Efficiency Ratios

Question 17

This is a measure of
how quickly accounts receivables are turned into cash or how quickly receivables are collected.

Answer 17

Accounts Receivable Turnover

Question 18

This ratio is used to evaluate credit management and account collection practices.

It measures the quality of debtors.

Answer 18

Average Collection Period

Question 19

This measures how quickly inventory is converted into sales.

Answer 19

Inventory Turnover

Question 20

True or False: The current ratio and inventory turnover are related.

Answer 20

True

Question 21

True or False: The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Answer 21

True

Question 22

This inventory turnover
ratio measures how quickly inventory is manufactured.

Answer 22

Work in Process Inventory Turnover

Question 23

This inventory turnover ratio
measures how quickly raw materials are used. It gives an indication of the sufficiency of raw materials in stock.

Answer 23

Raw Materials Inventory Turnover

Question 24

It calculates the number of days, on average, that elapsed between finished goods production and sale of
product.

Answer 24

Average Sales Period
Average Age of Inventory
Inventory Holding Period

Question 25

This convey a firm’s ability to meet the interest costs and payment schedules of its long term obligations.

Answer 25

Leverage/ Long-term solvency ratios

Question 26

This is a measure of a firm’s ability to meet interest payments. It indicates the relation between interest payments and the earnings that are available to make those interest payments.

Answer 26

Times Interest Earned Ratio

Question 27

This is referred to also as financial leverage. It measures the portion of a company’s assets that is provided by borrowing.

Answer 27

Debt to Asset Ratio

Question 28

This show the combined effects of liquidity, asset
management, and debt management on a firm’s operating results. It measures the earning ability of a company and the extent to which invested funds are being used efficiently.

Answer 28

Profitability ratios

Question 29

It measures the margin on sales the company is achieving. It can be an indication of manufacturing efficiency or marketing effectiveness.

Answer 29

Gross Profit Ratio

Question 30

It is the percentage of net
profit to net sales. It measures the overall profitability of the
company, or how much is being brought to the bottom line.

Answer 30

Return on sales or Profit margin

Question 31

This measures a company’s ability to use asset storage generate sales.

Answer 31

Total Assets Turnover

Question 32

This is a total measure of how profitably assets have been employed.

Answer 32

Return on Assets

Question 33

This is the most important measure of profitability for investors. It represent the amount of income generated per peso of book value of equity or common equity.

Answer 33

Return on Equity

Question 34

This gives a view of the comparative earnings or earning power of the firm.

Answer 34

Earnings per share

Question 35

This stated the relation between the market price of a share of stock and the stock’s current earnings per share.

Answer 35

Price-Earnings ratio

Question 36

This gauges the portion of current earnings being paid out in dividends.

Answer 36

Dividend payout ratio

Question 37

This is primarily of interest to retirees and other shareholders who need a steady stream of cash income from their investments.

Answer 37

Dividend Yield Ratio

Question 38

This measures the amount that would be distributed to holders of each share if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.

Answer 38

Book Value per Share