Financial Statement Analysis Review (Problems)

3.7 times Times interest earned: Earnings before interest ÷ Interest Income before tax (P48,000 + P46,000) - 94,000 Add Interest expense - 35,000 Income before Interest expense = 129,000 129,000/35,000 = 3.7

House of Fashion Company had the following financial statistics for 2006 Long-term debt (average rate of interest is 8%) - 400,000 Interest expense - 35,000 Net income - 48,000 Income tax - 46,000 Operating income - 107,000 What is the times interest earned for 2006?

P351,000 Current Assets: Cash - 80,000 Marketable securities - 250,000 Accounts receivable - 110,000 Total liquid assets = 440,000 Inventory - 140,000 Prepaid expense - 15,000 Total Current Assets = 595,000 Current Liabilities: Accounts payable - 145,000 Income tax payable - 10,000 Notes payable, short-term - 85,000 Accrued liabilities - 4,000 Total = 244,000 Working Capital = 351,000

Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at the end of the current year: Accounts payable - 145,000 Accounts receivable - 110,000 Accrued liabilities - 4,000 Cash - 80,000 Income tax payable - 10,000 Inventory - 140,000 Marketable securities - 250,000 Notes payable, short-term - 85,000 Prepaid expenses - 15,000 The amount of working capital for the company is:

1.80:1 Acid-Test Ratio: Liquid Assets ÷ Current Liabilities (P440,000 ÷ P244,000) = 1.80:1.00

Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at the end of the current year: Accounts payable - 145,000 Accounts receivable - 110,000 Accrued liabilities - 4,000 Cash - 80,000 Income tax payable - 10,000 Inventory - 140,000 Marketable securities - 250,000 Notes payable, short-term - 85,000 Prepaid expenses - 15,000 The company's acid-test ratio as of the balance sheet date is:

20% Payout Ratio: Dividends ÷ Income to Common P40,000÷ P200,000 = 20.0%

Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Corporation's common stock is selling for P60 per share in the local stock exchange. Terry Corporation's payout ratio for 2007 is

15 times Price-earnings ratio: Market price ÷ EPSEPS: Net income ÷ /Weighted-average common shares EPS: P200,000 ÷ 50,000 sharesP4.00 P/E Ratio: P60 ÷ P4 15.0X

Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Corporation's common stock is selling for P60 per share in the local stock exchange. Terry Corporation's price-earnings ratio is

Total debt ratio must increase by 50% ROE: (8% x 1.25) - 10% Last year's Debt Ratio 1 - (10% ÷ 15%) - 33.33% Proposed Debt Ratio 1 - (10% ÷ 20%) - 50% Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% - 50%

The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio increase to achieve 20% ROE?

800,000 Inventory balance (P120,000 x (2.0 - 1.5) - 60,000 Cost of goods sold 60,000 x 8 - 480,000 Sales (P480,000 ÷ 0.60) = 800,000

Selected data from Mildred Company's year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio - 2.0 Quick ratio - 1.5 Current liabilities - 120,000 Inventory turnover (based on cost of sales) - 8 times Gross profit margin - 40% Mildred's net sales for the year were

42.9% Payout Ratio: Common Dividends ÷ Income Available to Common P120,000 ÷ P280,000 = 42.9%

Selected financial data of Alexander Corporation for the year ended December 31, 2007. is presented below Operating income - 900,000 Interest expense (100,000) Income before income taxes - 800,000 Income tax - (320,000) Net income - 480,000 Preferred stock dividend - (200,000) Net income available to common stockholders - 280,000 Common stock dividends were P120,000. The payout ratio is:

P 150,000 ÷ P120,000 Degree of Financial Leverage: Operating Income ÷ Interest Expense

A summarized income statement for Leveraged Inc. is presented below. Sales - 1,000,000 Cost of Sales - 600,000 Gross Profit = 400,000 Operating Expenses - 250,000 Operating Income = 150,000 Interest Expense - 30,000 Earnings Before Tax = 120,000 Income Tax - 40,000 Net Income = 80,000 The degree of financial leverage is:

Cannot be stated as a percentage

Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007. The increase in net income of P300,000:

40% 1-(0.03÷ 0.05)=40%

Assume you are given the following relationships for the Orange Company: Sales/total - assets - 1.5X Return on assets (ROA) - 3% Return on equity (ROE) - 5% The Orange Company's debt ratio is

3.3 Average Inventory: (P90,000 + P110,000) ÷ 2 - 100,000 Inventory Turnover: (P330,000 ÷ P100,000) = 3.3

Based on the following data for the current year, what is the inventory turnover? Net sales on account during year - 500,000 Cost of merchandise sold during year - 330,000 Accounts receivable, beginning of year - 45,000 Accounts receivable, end of year - 35,000 Inventory, beginning of year - 90,000 Inventory, end of year - 110,000

36 days Average Daily Sales: Annual credit sales ÷ Days' Year P4 million ÷ 360 days = P11,111 Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales [(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days

Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the year and a balance of P410,000 at the end of the year. The net credit sales during the year amounted to P4,000,000. Using 360-day year, what is the average collection period of the receivables?

5 times Income before interest expense ÷ Interest expense Income before income tax - 400,000 Add back Interest expense - 100,0000 Income before interest expense = 500,000 P500,000 ÷ P100,000 = 5 times

Brava Company reported the following on its income statement: Income before taxes - 400,000 Income tax expense - 100,000 Net income = 300,000 An analysis of the income statement revealed that interest expense was P100,000. Brava Company's times interest earned (TIE) was

P31,000 Sales - 30,000 Add decrease in Accounts Receivable - 1,000 Cash collected from sales = 31,000

Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of P4,000. What was the cash collected from customers?

6.0 Inventory Turnover: Cost of Goods Sold ÷ Average Inventory Cost of goods sold - 900,000 Add Ending inventory - 180,000 Total cost available for sales = 1,080,000 Deduct cost of purchases - (960,000) Beginning inventory - 120,000 Average Inventory: (P120,000 + P180,000) ÷ 2 - 150,000 Inventory Turnover: (P900,000 ÷ P150,000) - 6 times

During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What was the inventory turnover for 2007?

0.49 Current liabilities - 100,000 Long-term debt - 400,000 Deferred income tax - 10,000 Total Liabilities = 510,000 Stockholders' Equity Preferred stock - P 80,000 Common stock - 100,000 Premium on common stock - 180,000 Retained earnings - 170,000 Total = 530,000 Total assets = 1,040,000 Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

Jordan Manufacturing reports the following capital structure: Current liabilities - 100,000 Long-term debt - 400,000 Deferred income taxes - 10,000 Preferred stock - 80,000 Common stock - 100,000 Premium on common stock - 180,000 Retained earnings - 170,000 What is the debt ratio?

P600,000 and P5,500,000 2007: 2,000,000 (1-0.7) = 600,000 2008: 2,000,000 (1+1.75) = 5,500,000

Kline Corporation had net income of P2 million in 2006. Using the2006 financial elements as the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in 2008. The respective net income reported by Kline Corporation for 2007 and 2008 are:

5.50 Total stockholders' equity - 8,000,000 Deduct: Liquidation value of Preferred Stock (50,000 s P110) - 5,500,000 Unpaid Preferred Dividends (P5M x 6%) - 300,000 Total = 5,800,000 Common equity - 2,200,000 Book Value per Share: P2.2M ÷ 400,000 shares = 5.50

M Corporation's stockholders' equity at December 31, 2007 consists of the following: 6% cumulative preferred stock, P100 par, liquidating valuewas P110 per share; issued and outstanding 50,000 shares 5,000,000 Common stock, par, P5 per share; issued and outstanding, 400,000 shares - 2,000,000 Retained earnings - 1,000,000 Total = 8,000,000 Dividends on preferred stock have been paid through 2006.At December 31, 2007, M Corporation's book value per share was

5.00 times Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times

Milward Corporation's books disclosed the following information for the year ended December 31, 2007: Net credit sales - 1,500,000 Net cash sales - 240,000 Accounts receivable at beginning of year - 200,000 Accounts receivable at end of year - 400,000 Milward's accounts receivable turnover is

1,200,000 2,800,000*3 = 8,400,000 8,400,000-6,000,000 = 2,400,000 2,400,000/2,= 1,200,000

Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the ending total asset balance?

16 to 1 EPS: (P1,200,000 - P300,000) ÷ 100,000 - 9.00 P/E Ratio: 144 ÷ 9 = 16

On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information: Stockholders' equity at 12/31/07 - 4,500,000 Net income year ended 12/31/07 - 1,200,000 Dividends on preferred stock year ended 12/31/07 - 300,000 Market price per share of common stock at 12/31/07 - 144 The price-earnings ratio on common stock at December 31, 2007, was

8 to 1 EPS: P50,000 ÷ 100,000 shares - 0.50 P/E Ratio: P4.00 ÷ P0.50 = 8 to 1

Orchard Company's capital stock at December 31 consisted of the following:• Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.• 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares authorized, issued, and outstanding. Orchard's common stock, which is listed on a major stock exchange, was quoted at P4 per share on December 31. Orchard's net income for the year ended December 31 was P50,000. The yearly preferred dividend was declared. No capital stock transactions occurred. What was the price earnings ratio on Orchard's common stock at December 31?

10.0 times. AR Turnover: Credit sales ÷ Average AR 6,500,000/650,000 = 10.0 times

Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were P600,000 and P700,000, respectively. The receivables turnover was

2.44:1 Current Ratio: Current Assets ÷ Current Liabilities (P595,000 ÷ P244,000) = 2.44:1.00

Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at the end of the current year: Accounts payable - 145,000 Accounts receivable - 110,000 Accrued liabilities - 4,000 Cash - 80,000 Income tax payable - 10,000 Inventory - 140,000 Marketable securities - 250,000 Notes payable, short-term - 85,000 Prepaid expenses - 15,000 The company's current ratio as of the balance sheet date is:

7.5% Dividend per share: 0.75 x P2.20 - 1.65 Market price: 10 x 2.20 - 22.00 Dividend yield: P1.65 ÷ P22.00 = 7.5%

Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio of 75%. The dividend yield is

23% Income to Common; (P240,000 - P20,000) - 220,000 Average Common Equity: (P750,000 + P1,170,000) - 960,000 Return on Common Equity: (P220 ÷ P960) = 23%

Selected information for Ivano Company as of December 31 is as follows 2006 Preferred stock, 8%, par P100, nonconvertible, noncumulative - 250,000 Common stock - 600,000 Retained earnings - 150,000 Dividends paid on preferred stock for the year - 20,000 Net income for the year - 120,000 2007 Preferred stock, 8%, par P100, nonconvertible, noncumulative - 250,000 Common stock - 800,000 Retained earnings - 370,000 Dividends paid on preferred stock for the year - 20,000 Net income for the year - 240,000 Ivano's return on common stockholders' equity, rounded to the nearest percentage point, for 2007 is

94.9 Average Inventory: (P672,000 + P576,000) ÷2 - 624,000 Inventory Turnover: (P2,400,000 ÷ P624,000) - 3.846 times Inventory Turnover in Days: 365 days ÷ 3.846 - 94.9 days Alternative computation: Average daily cost of goods sold: = (P2,400,000 ÷ 365) - P6,575.34 Turnover in Days: P624,000 ÷ P6,575.34 = 94.9 days

Selected information from the accounting records of Eternity Manufacturing Company follows: Net sales - 3,600,000 Cost of goods sold - 2,400,000 Inventories at January 1 - 672,000 Inventories at December 31 - 576,000 What is the number of days' sales in average inventories for the year?

3.57 times Average inventory: (P180,000 + P156,000) ÷ 2 - 168,000 Inventory Turnover: (P600,000 ÷ P168,000) - 3.57 times

Selected information from the accounting records of Petals Company is as follows: Net sales for 2007 - 900,000 Cost of goods sold for 2007 - 600,000 Inventory at December 31, 2006 - 180,000 Inventory at December 31, 2007 - 156,000

150,000 Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P - 950,000 Average inventory; (P1.1M + P1.2M) ÷ 2 - 1,150,000 Net sales: (P950,000 x 5) - 4,750,000 Cost of goods sold (P1,150,000 x 4) - 4,600,000 Gross margin = 150,000

Selected information from the accounting records of the Blackwood Co. is as follows: Net A/R at December 31, 2006 - 900,000 Net A/R at December 31, 2007 - 1,000,000 Accounts receivable turnover - 5 to 1 Inventories at December 31, 2006 - 1,100,000 Inventories at December 31, 2007 - 1,200,000 Inventory turnover - 4 to 1 What was the gross margin for 2007?

5.6 Average Inventory: (P341,169 + P376,526) ÷ 2 - P358,847.50 Inventory Turnover: (P2,000,326 ÷ P358,847.50) = 5.6 times

The Moss Company presents the following data for 2007 Net Sales, 2007 - 3,007,124 Net Sales, 2006 - 930,247 Cost of Goods Sold, 2007 - 2,000,326 Cost of Goods Sold, 2007 - 1,000,120 Inventory, beginning of 2007 - 341,169 Inventory, end of 2007 -376,526 The merchandise inventory turnover for 2007 is:

4.5 Interest Expense: P1M x 0.1 - 100,000 Income before interest expense: P350,000 + P100,000 - P450,000 Times interest earned: (P450,000 ÷ P100,000) = 4.5

The balance sheet and income statement data for Candle Factory indicate the following: Bonds payable, 10% (issued 1998 due 2022) - 1,000,000 Preferred 5% stock, P100 par (no change during year) - 300,000 Common stock, P50 par (no change during year) - 2,000,000 Income before income tax for year - 350,000 Income tax for year - 80,000 Common dividends paid - 50,000 Preferred dividends paid - 15,000 Based on the data presented above, what is the number of times bond interest charges were earned (round to one decimal point)?

840,000 The inventory amount can be calculated as follows:Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1 current ratio, the amount of working capital and current liabilities are both P1,120,000. Inventory: Current liabilities x (Current ratio - Acid test ratio) P1,120,000 x (2.0 - 1.25) - 840,000 A detailed computation can be made as follows: Current assets: P1,120,000 x 2 - 2,240,000 Liquid assets: P1,120,000 x 1.25 - 1,400,000 Inventory = 840,000

The current assets of Mayon Enterprise consists of cash, accounts receivable, and inventory. The following information is available: Credit sales - 75% of total sales Inventory turnover - 5 times Working capital - 1,120,000 Current ratio - 2.00 to 1 Quick ratio = 1.25 to 1 Average Collection period - 42 days Working days - 360 The estimated inventory amount is:

12.67 Net income - 400,000 Add: Income taxes - 300,000 Interest - 60,000 Income before interest = 760,000 P760,000 ÷ P60,000 = 12.67

The following data were abstracted from the records of Johnson Corporation for the year: Sales -1,800,000 Bond interest expense - 60,000 Income taxes - 300,000 Net income - 400,000

14.00 Book Value per Share: Common Equity ÷ Outstanding Shares P140,000 ÷ 10,000 shares = P14.00

The following data were gathered from the annual report of Desk Products. Market price per share - 30.00 Number of common shares - 10,000 Preferred stock, 5% P100 par - 10,000 Common equity - 140,000 The book value per share is

80,000 Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) 360,000/(15 - 10.5) = P80,000

The following data were obtained from the records of Salacot Company: Current ratio (at year end) - 1.5 to 1 Inventory turnover based on sales and ending inventory 15 timesInventory turnover based on cost of goods sold and ending inventory - 10.5 times Gross margin for 2007 - 360,000 What was Salacot Company's December 31, 2007 balance in the Inventory account?

Increase, Decrease Current Assets: Cash - 100,000 Accounts receivable - 200,000 Total liquid assets = 300,000 Inventory - 440,000 Total current assets = 740,000 Current Liabilities Accounts payable - 80,000 Notes payable, due in 6 months - 250,000 Interest payable - 25,000 Total current liabilities = 355,000 Current Ratio (740,000 ÷ 355,000) = 2.08:1.00 Acid-test Ratio (300,000 ÷ 355,000) = 0.85:1.00 Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1. Therefore, the current ratio shall rise but acid test ratio shall go down. If any of these two ratios is below 1:1, the equal change in current assets and current liabilities brings direct effect on the ratio, that is, equal increase in current assets and current liabilities causes the ratio to rise.

The following financial data have been taken from the records of Ratio Company: Accounts receivable - 200,000 Accounts payable - 80,000 Bonds payable, due in 10 years - 500,000 Cash - 100,000 Interest payable, due in three months - 25,000 Inventory - 440,000 Land - 800,000 Notes payable, due in six months - 250,000 What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of its accounts payable?

The dividend yield is 8.0%, which is of special interest to investors seeking current returns on their investments. The dividend yield is 8 percent (P1.40 ÷ P17.50)The dividend yield measures the return of investment in terms of dividends received. The total expected returns consists of Dividend Yield and the Appreciation in market price and dividend

The following information is available for Duncan Co.: Dividends per share of common stock - 1.40 Market price per share of common stock - 17.50 What is the dividend yield?

0.08 EBIT - 1,250,000 Less interest expense - 250,000 Earnings before tax - 1,000,000 Less Income tax 40% - 400,000 Net income - 600,000 Less Preferred dividends - 200,000 Earnings to Common Stock - 400,000 Earnings per share 400,000/25,000 - 16.00 Dividend per share: 400,000 x 0.40 ÷ 25,000 - 6.40 Dividend yield 6.4 ÷ (16 x 5) = 8.0%

The following were reflected from the records of Salvacion Company: Earnings before interest and taxes - 1,250,000 Interest expense - 250,000 Preferred dividends - 200,000 Payout ratio - 40% Shares outstanding throughout 2006 Preferred - 20,000 Common - 25,000 Income tax rate - 40% Price earnings ratio - 5 times The dividend yield ratio is

42,000 Earnings before interest expense (P20,000 x 4.5) - 90,000 Deduct interest expense - 20,000 Income before income tax = 70,000 Deduct income tax (P70,000 x 0.4) - 28,000 Net income = 42,000

The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for the year was P20,000, and the company's tax rate is 40%. The company's net income is:

105.00 Market Value of Equity (P3M x 3.5) - 10,500,000 Market price per share: (P10.5M ÷ 100,000) = 105

What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of P3,000,000, and a market/book ratio of 3.5?