Chapter 05 - Man Acc

MANAGEMENT ACCOUNTING - Solutions Manual
CHAPTER 5
FINANCIAL STATEMENTS ANALYSIS - II
I. Questions
1. By looking at trends, an analyst hopes to get some idea of whether a

situation is improving, remaining the same, or deteriorating. Such
analyses can provide insight into what is likely to happen in the future.
Rather than looking at trends, an analyst may compare one company to
another or to industry averages using common-size financial statements.
2. Ratios highlight relationships, movements, and trends that are very

difficult to perceive looking at the raw underlying data standing alone.
Also, ratios make financial data easier to grasp by putting the data into
perspective. As to the limitation in the use of ratios, refer to page 131.
3. Price-earnings ratios are determined by how investors see a firms future

prospects. Current reported earnings are generally considered to be
useful only so far as they can assist investors in judging what will happen
in the future. For this reason, two firms might have the same current
earnings, but one might have a much higher price-earnings ratio if
investors view it to have superior future prospects. In some cases, firms
with very small current earnings enjoy very high price-earnings ratios.
This is simply because investors view these firms as having very
favorable prospects for earnings in future years. By definition, a stock
with current earnings of P4 and a price-earnings ratio of 20 would be
selling for P80 per share.
4. A managers financing responsibilities relate to the acquisition of assets

for use in his or her company. The acquisition of assets can be financed
in a number of ways, including through issue of ordinary shares, through
issue of preference shares, through issue of long-term debt, through
leasing, etc. A managers operating responsibilities relate to how these
assets are used once they have been acquired. The return on total assets
ratio is designed to measure how well a manager is discharging his or her
operating responsibilities. It does this by looking at a companys income
before any consideration is given as to how the income will be
distributed among capital resources, i.e., before interest deductions.
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Chapter 5 Financial Statement Analysis II
5. Financial leverage, as the term is used in business practice, means

obtaining funds from investment sources that require a fixed annual rate
of return, in the hope of enhancing the well-being of the ordinary
shareholders. If the assets in which these funds are invested earn at a rate
greater that the return required by the suppliers of the funds, then
leverage is positive in the sense that the excess accrues to the benefit of
the ordinary shareholders. If the return on assets is less than the return
required by the suppliers of the funds, then leverage is negative in the
sense that part of the earnings from the assets provided by the ordinary
shareholders will have to go to make up the deficiency.
6. How a shareholder would feel would depend in large part on the stability
of the firm and its industry. If the firm is in an industry that experiences
wide fluctuations in earnings, then shareholders might be very pleased
that no interest-paying debt exists in the firms capital structure. In hard
times, interest payments might be very difficult to meet, or earnings
might be so poor that negative leverage would result.
7. No, the stock is not necessarily overpriced. Book value represents the
cumulative effects on the statement of financial position of past activities
evaluated using historical prices. The market value of the stock reflects
investors beliefs about the companys future earning prospects. For
most companies market value exceeds book value because investors
anticipate future growth in earnings.
8. A company in a rapidly growing technological industry probably would

have many opportunities to invest its earnings at a high rate of return;
thus, one would expect it to have a low dividend payout ratio.
9. It is more difficult to obtain positive financial leverage from preference

shares than from long-term debt due to the fact that interest on long-term
debt is tax deductible, whereas dividends paid on preference shares are
not tax deductible.
10. The current ratio would probably be highest during January, when both
current assets and current liabilities are at a minimum. During peak
operating periods, current liabilities generally include short-term
borrowings that are used to temporarily finance inventories and
receivables. As the peak periods end, these short-term borrowings are
paid off, thereby enhancing the current ratio.
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Financial Statement Analysis II Chapter 5
11. A 2-to-1 current ratio might not be adequate for several reasons. First,
the composition of the current assets may be heavily weighted toward
slow-turning inventory, or the inventory may consist of large amounts of
obsolete goods. Second, the receivables may be large and of doubtful
collectibility, or the receivables may be turning very slowly due to poor
collection procedures.
12. Expenses (including the cost of goods sold) have been increasing at an
even faster rate than net sales. Thus Sunday is apparently having
difficulty in effectively controlling its expenses.
13. If the companys earnings are very low, they may become almost
insignificant in relation to stock price. While this means that the p/e ratio
becomes very high, it does not necessarily mean that investors are
optimistic. In fact, they may be valuing the company at its liquidation
value rather than a value based upon expected future earnings.
14. From the viewpoint of the companys shareholders, this situation

represents a favorable use of leverage. It is probable that little interest, if
any, is paid for the use of funds supplied by current creditors, and only
11% interest is being paid to long-term bondholders. Together these two
sources supply 40% of the total assets. Since the firm earns an average
return of 16% on all assets, the amount by which the return on 40% of
the assets exceeds the fixed-interest requirements on liabilities will
accrue to the residual equity holders the ordinary shareholders raising
the return on equity.
15. The length of operating cycle of the two companies cannot be

determined from the fact the one companys current ratio is higher. The
operating cycle depends on the relationships between receivables and
sales, and between inventories and cost of goods sold. The company
with the higher current ratio might have either small amounts of
receivables and inventories, or large sales and cost of sales, either of
which would tend to produce a relatively short operating cycle.
16. The investor is calculating the rate of return by dividing the dividend by
the purchase price of the investment (P5 P50 = 10%). A more
meaningful figure for rate of return on investment is determined by
relating dividends to current market price, since the investor at the
present time is faced with the alternative of selling the stock for P100
and investing the proceeds elsewhere or keeping the investment. A
decision to retain the stock constitutes, in effect, a decision to continue to
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invest P100 in it, at a return of 5%. It is true that in a historical sense the
investor is earning 10% on the original investment, but this is interesting
history rather than useful decision-making information.
17. A corporate net income of P1 million would be unreasonably low for a
large corporation, with, say, P100 million in sales, P50 million in assets,
and P40 million in equity. A return of only P1 million for a company of
this size would suggest that the owners could do much better by
investing in insured bank savings accounts or in government bonds
which would be virtually risk-free and would pay a higher return.
On the other hand, a profit of P1 million would be unreasonably high for
a corporation which had sales of only P5 million, assets of, say, P3
million, and equity of perhaps one-half million pesos. In other words,
the net income of a corporation must be judged in relation to the scale of
operations and the amount invested.
II. True or False
1. True 3. True 5. True 7. True 9. False

2. True 4. False 6. True 8. True 10. False
III. Problems
Problem 1 (Common Size Income Statements)
Common size income statements for 2013 and 2014:

2014 2013
Sales .................................................. 100% 100%
Cost of goods sold............................. 66 67
Gross profit ....................................... 34% 33%
Operating expenses ........................... 28 29
Net income ........................................ 6% 4%
The changes from 2013 to 2014 are all favorable. Sales increased and the
gross profit per peso of sales also increased. These two factors led to a
substantial increase in gross profit. Although operating expenses increased
in peso amount, the operating expenses per peso of sales decreased from 29
cents to 28 cents. The combination of these three favorable factors caused
net income to rise from 4 cents to 6 cents out of each peso of sales.
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Problem 2 (Measures of Liquidity)
Requirement (a)
Current assets:
Cash P 47,600
Marketable securities 175,040
Accounts receivable 230,540
Inventory 179,600
Unexpired insurance 4,500
Total current assets P637,280
Current liabilities:
Notes payable P 70,000
Accounts payable 125,430
Salaries payable 7,570
Income taxes payable 14,600
Unearned revenue 10,000
Total current liabilities P227,600
Requirement (b)
The current ratio is 2.8 to 1. It is computed by dividing the current assets of

P637,280 by the current liabilities of P227,600. The amount of working
capital is P409,680, computed by subtracting the current liabilities of
P227,600 from the current assets of P637,280.
The company appears to be in a strong position as to short-run debt-paying

ability. It has almost three pesos of current assets for each peso of current
liabilities. Even if some losses should be sustained in the sale of the
merchandise on hand or in the collection of the accounts receivable, it
appears probable that the company would still be able to pay its debts as they
fall due in the near future. Of course, additional information, such as the
credit terms on the accounts receivable, would be helpful in a careful
evaluation of the companys current position.
Problem 3 (Common-Size Income Statement)
Requirement 1
2014 2013
Sales 100.0 % 100.0 %
Less cost of goods sold ................................................... 63.2 60.0
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Gross margin................................................................... 36.8 40.0

Selling expenses ............................................................. 18.0 17.5
Administrative expenses ................................................. 13.6 14.6
Total expenses................................................................. 31.6 32.1
Net operating income ...................................................... 5.2 7.9
Interest expense .............................................................. 1.4 1.0
Net income before taxes ................................................. 3.8 % 6.9 %
Requirement 2
The companys major problem seems to be the increase in cost of goods sold,
which increased from 60.0% of sales in 2013 to 63.2% of sales in 2014. This
suggests that the company is not passing the increases in costs of its products
on to its customers. As a result, cost of goods sold as a percentage of sales
has increased and gross margin has decreased. Selling expenses and interest
expense have both increased slightly during the year, which suggests that
costs generally are going up in the company. The only exception is the
administrative expenses, which have decreased from 14.6% of sales in 2013
to 13.6% of sales in 2014. This probably is a result of the companys efforts
to reduce administrative expenses during the year.
Problem 4 (Comparing Operating Results with Average Performance in

the Industry)
Requirement (a)
Ms. Freeze,Inc. Industry Average
Sales (net) 100% 100%
Cost of goods sold 49 57
Gross profit on sales 51% 43%
Operating expenses:
Selling 21% 16%
General and administrative 17 20
Total operating expenses 38% 36%
Operating income 13% 7%
Income taxes 6 3
Net income 7% 4%
Requirement (b)
Ms. Freezes operating results are significantly better than the average
performance within the industry. As a percentage of sales revenue, Ms.
Freezes operating income and net income after nearly twice the average for
the industry. As a percentage of total assets, Ms. Freezes profits amount to
an impressive 23% as compared to 14% for the industry.
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The key to Ms. Freezes success seems to be its ability to earn a relatively
high rate of gross profit. Ms. Freezes exceptional gross profit rate (51%)
probably results from a combination of factors, such as an ability to
command a premium price for the companys products and production
efficiencies which lead to lower manufacturing costs.
As a percentage of sales, Ms. Freezes selling expenses are five points higher
than the industry average (21% compared to 16%). However, these higher
expenses may explain Ms. Freezes ability to command a premium price for
its products. Since the companys gross profit rate exceeds the industry
average by 8 percentage points, the higher-than-average selling costs may be
part of a successful marketing strategy. The companys general and
administrative expenses are significantly lower than the industry average,
which indicates that Ms. Freezes management is able to control expenses
effectively.
Problem 5 (Common-Size Statements)
Requirement 1
The income statement in common-size form would be:

2014 2013
Sales ....................................................... 100.0% 100.0%
Less cost of goods sold .......................... 65.0 60.0
Gross margin .......................................... 35.0 40.0
Less operating expenses ......................... 26.3 30.4
Net operating income ............................. 8.7 9.6
Less interest expense.............................. 1.2 1.6
Net income before taxes......................... 7.5 8.0
Less income taxes (30%) ....................... 2.3 2.4
Net income ............................................. 5.3% 5.6%
The statement of financial position in common-size form would be:
2014 2013
Current assets:
Cash ................................................... 2.0% 5.1%
Accounts receivable, net.................... 15.0 10.1
Inventory ........................................... 30.1 15.2
Prepaid expenses ............................... 1.0 1.3
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Total current assets ..................... 48.1 31.6

Plant and equipment................................. 51.9 68.4
Total assets ............................................... 100.0% 100.0%
Liabilities:
Current liabilities ............................... 25.1% 12.7%
Bonds payable, 12% .......................... 20.1 25.3
Total liabilities ............................ 45.1 38.0
Equity:
Preference shares, 8%, P10 par ......... 15.0 19.0
Ordinary shares, P5 par ..................... 10.0 12.7
Retained earnings .............................. 29.8 30.4
Total equity ................................. 54.9 62.0
Total liabilities and equity ....................... 100.0% 100.0%
Note: Columns do not total down in all cases due to rounding differences.
Requirement 2
The companys cost of goods sold has increased from 60 percent of sales in
2013 to 65 percent of sales in 2014. This appears to be the major reason the
companys profits showed so little increase between the two years. Some
benefits were realized from the companys cost-cutting efforts, as evidenced
by the fact that operating expenses were only 26.3 percent of sales in 2014 as
compared to 30.4 percent in 2013. Unfortunately, this reduction in operating
expenses was not enough to offset the increase in cost of goods sold. As a
result, the companys net income declined from 5.6 percent of sales in 2013
to 5.3 percent of sales in 2014.
Problem 6 (Solvency of Alabang Supermarket)
Requirement (a)
(Pesos in
Millions)
Current assets:
Cash P 74.8
Receivables 152.7
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Merchandise inventories 1,191.8

Prepaid expenses 95.5
Total current assets P1,514.8
Quick assets:
Cash P 74.8
Receivables 152.7
Total quick assets P 227.5
Requirement (b)
(1) Current ratio:

Current assets (Req. a) P1,514.8
Current liabilities P1,939.0
Current ratio (P1,514.8 P1,939.0) 0.8 to 1
(2) Quick ratio:

Quick assets (Req. a) P 227.5
Current liabilities P1,939.0
Quick ratio (P227.5 P1,939.0) 0.1 to 1
(3) Working capital:

Current assets (Req. a) P1,514.8
Less: Current liabilities P1,939.0
Working capital P(424.2)
Requirement (c)
No. It is difficult to draw conclusions from the above ratios. Alabang

Supermarkets current ratio and quick ratio are well below safe levels,
according to traditional rules of thumb. On the other hand, some large
companies with steady ash flows are able to operate successfully with current
ratios lower than Alabang Supermarkets.
Requirement (d)
Due to characteristics of the industry, supermarkets tend to have smaller

amounts of current assets and quick assets than other types of merchandising
companies. An inventory of food has a short shelf life. Therefore, the
inventory of a supermarket usually represents only a few weeks sales. Other
merchandising companies may stock inventories representing several
months sales. Also, supermarkets sell primarily for cash. Thus, they have
relatively few receivables. Although supermarkets may generate large
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amounts of cash, it is not profitable for them to hold assets in this form.
Therefore, they are likely to reinvest their cash flows in business operations
as quickly as possible.
Requirement (e)
In evaluating Alabang Supermarkets liquidity, it would be useful to review

the companys financial position in prior years, statements of cash flows, and
the financial ratios of other supermarket chains. One might also ascertain the
companys credit rating from an agency such as Dun & Bradstreet.
Note to Instructor: Prior to the year in which the data for this problem was
collected, Alabang Supermarket had reported a negative retained earnings
balance in its statement of financial position for several consecutive periods.
The fact that Alabang Supermarket has only recently removed the deficit
from its financial statements is also worrisome.
Problem 7 (Statement of Financial Position Measures of Liquidity and

Credit Risk)
Requirement (a)
(1) Quick assets:

Cash P 47,524
Marketable securities (short-term) 55,926
Total quick assets P127,003
(2) Current assets:

Cash P 47,524
Marketable securities (short-term) 55,926
Inventories 32,210
Prepaid expenses 5,736
Total current assets P164,949
(3) Current liabilities:

Notes payable to banks (due within one year) P 20,000
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Accounts payable 5,912

Dividends payable 1,424
Accrued liabilities (short-term) 21,532
Income taxes payable 6,438
Total current liabilities P 55,306
Requirement (b)
(1) Quick ratio:

Quick assets (Req. a) P127,003
Current liabilities (Req. a) P 55,306
Quick ratio (P127,003 P55,306) 2.3 to 1
(2) Current ratio:

Current assets (Req. a) P164,949
Current liabilities (Req. a) P 55,306
Current ratio (P164,949 P55,306) 3.0 to 1
(3) Working capital:

Current assets (Req. a) P164,949
Less: Current liabilities (Req. a) 55,306
Working capital P109,643
(4) Debt ratio:

Total liabilities (given) P 81,630
Total assets (given) P353,816
Debt ratio (P81,630 P353,816) 23.1%
Requirement (c)
(1) From the viewpoint of short-term creditors, Bonbon Sweets appear

highly liquid. Its quick and current ratios are well above normal rules of
thumb, and the companys cash and marketable securities alone are
almost twice its current liabilities.
(2) Long-term creditors also have little to worry about. Not only is the
company highly liquid, but creditors claims amount to only 23.1% of
total assets. If Bonbon Sweets were to go out of business and liquidate
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its assets, it would have to raise only 23 cents from every peso of assets
for creditors to emerge intact.
(3) From the viewpoint of shareholders, Bonbon Sweets appears overly

liquid. Current assets generally do not generate high rates of return.
Thus, the companys relatively large holdings of current assets dilutes its
return on total assets. This should be of concern to shareholders. If
Bonbon Sweets is unable to invest its highly liquid assets more
productively in its business, shareholders probably would like to see the
money distributed as dividends.
Problem 8 (Selected Financial Measures for Short-term Creditors)
Requirement 1
Current assets (P80,000 + P460,000 + P750,000 +

P10,000) ............................................................................... P1,300,000
Current liabilities (P1,300,000 2.5) ...................................... 520,000
Working capital ........................................................................ P 780,000
Requirement 2
Cash + Marketable securities + Accounts receivable
Acid-test ratio =
Current liabilities
P80,000 + P0 + P460,000
Acid-test ratio = = 1.04 to 1 (rounded)
P520,000
Requirement 3
a. Working capital would not be affected:
Current assets (P1,300,000 P100,000) .............................. P1,200,000

Current liabilities (P520,000 P100,000) ............................ 420,000
Working capital .................................................................... P 780,000
b. The current ratio would rise:

Current assets
Current ratio =
Current liabilities
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P1,200,000
Current rate = P420,000 = 2.9 to 1 (rounded)
Problem 9 (Selected Financial Ratios)
1. Gross margin percentage:

Gross margin P840,000
= = 40%
Sales P2,100,000
2. Current ratio:
Current assets P490,000
= = 2.45 to 1
Current liabilities P200,000
3. Acid-test ratio:
Quick assets P181,000
= = 0.91 to 1 (rounded)
Current liabilities P200,000
4. Accounts receivable turnover:
Sales P2,100,000
= = 14 times
Average accounts receivables P150,000
365 days
= 26.1 days (rounded)
14 times
5. Inventory turnover:
Cost of goods sold P1,260,000
= = 4.5 times
Average inventory P280,000
365 days
= 81.1 days to turn (rounded)
4.5 times
6. Debt-to-equity ratio:
Total liabilities P500,000
= = 0.63 to 1 (rounded)
Total equity P800,000
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7. Times interest earned:
Earnings before interest

and income taxes P180,000
Interest expense = = 6.0 times
P30,000
8. Book value per share:

Equity P800,000
= = P40 per share
Ordinary shares outstanding 20,000 shares*
* P100,000 total par value P5 par value per share = 20,000 shares
Problem 10 (Selected Financial Ratios for Ordinary Shareholders)
1. Earnings per share:

Net income to ordinary shares P105,000
= = P5.25 per share
Average ordinary shares 20,000 shares
outstanding
2. Dividend payout ratio:

Dividends paid per share P3.15
= = 60%
Earnings per share P5.25
3. Dividend yield ratio:

Dividends paid per share P3.15
= = 5%
Market price per share P63.00
4. Price-earnings ratio:
Market price per share P63.00
= = 12.0
Earnings per share P5.25
Problem 11 (Selected Financial Ratios for Ordinary Shareholders)
1. Return on total assets:
Return on Net income + [Interest expense x (1 Tax rate)]

=
total assets Average total assets
P105,000 + [P30,000 x (1 0.30)]

=
(P1,100,000 + P1,300,000)
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P126,000
= = 10.5%
P1,200,000
2. Return on ordinary shareholders equity:
Return on ordinary Net income preference dividends

shareholders equity =
Average ordinary shareholders equity
P105,000
=
(P725,000 + P800,000)
P105,000
= = 13.8% (rounded)
P762,500
3. Financial leverage was positive, since the rate of return to the ordinary
shareholders (13.8%) was greater than the rate of return on total assets
(10.5%). This positive leverage is traceable in part to the companys
current liabilities, which may carry no interest cost, and to the bonds
payable, which have an after-tax interest cost of only 7%.
10% interest rate (1 0.30) = 7% after-tax cost.
Problem 12 (Selected Financial Measures for Short-Term Creditors)
Requirement (1)
Current assets
(P80,000 + P460,000 + P750,000 + P10,000) .......................... P1,300,000
Current liabilities (P1,300,000 2.5) ........................................... 520,000
Working capital ............................................................................ P 780,000
Requirement (2)
Cash + Marketable securities

Acid-test + Accounts receivable + Short-term notes
=
ratio Current liabilities
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P80,000 + P0 + P460,000 + P0
= = 1.04 (rounded)
P520,000
Requirement (3)
a. Working capital would not be affected by a P100,000 payment on

accounts payable:
Current assets (P1,300,000 P100,000) .......................... P1,200,000

Current liabilities (P520,000 P100,000) ........................ 420,000
Working capital ................................................................ P 780,000
b. The current ratio would increase if the company makes a P100,000

payment on accounts payable:
Current assets
Current ratio =
Current liabilities
P1,200,000
= = 2.9 (rounded)
P420,000
Problem 13 (Effects of Transactions on Various Financial Ratios)
1. Decrease Sale of inventory at a profit will be reflected in an increase

in retained earnings, which is part of shareholders equity.
An increase in shareholders equity will result in a
decrease in the ratio of assets provided by creditors as
compared to assets provided by owners.
2. No effect Purchasing land for cash has no effect on earnings or on
the number of ordinary shares outstanding. One asset is
exchanged for another.
3. Increase A sale of inventory on account will increase the quick
assets (cash, accounts receivable, marketable securities)
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but have no effect on the current liabilities. For this reason,

the acid-test ratio will increase.
4. No effect Payments on account reduce cash and accounts payable by
equal amounts; thus, the net amount of working capital is
not affected.
5. Decrease When a customer pays a bill, the accounts receivable
balance is reduced. This increases the accounts receivable
turnover, which in turn decreases the average collection
period.
6. Decrease Declaring a cash dividend will increase current liabilities,
but have no effect on current assets. Therefore, the current
ratio will decrease.
7. Increase Payment of a previously declared cash dividend will
reduce both current assets and current liabilities by the
same amount. An equal reduction in both current assets
and current liabilities will always result in an increase in
the current ratio, so long as the current assets exceed the
current liabilities.
8. No effect Book value per share is not affected by the current market
price of the companys stock.
9. Decrease The dividend yield ratio is obtained by dividing the

dividend per share by the market price per share. If the
dividend per share remains unchanged and the market
price goes up, then the yield will decrease.
10. Increase Selling property for a profit would increase net income
and therefore the return on total assets would increase.
11. Increase A write-off of inventory will reduce the inventory
balance, thereby increasing the turnover in relation to a
given level of cost of goods sold.
12. Increase Since the companys assets earn at a rate that is higher
than the rate paid on the bonds, leverage is positive,
increasing the return to the ordinary shareholders.
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13. No effect Changes in the market price of a stock have no direct

effect on the dividends paid or on the earnings per share
and therefore have no effect on this ratio.
14. Decrease A decrease in net income would mean less income
available to cover interest payments. Therefore, the times-
interest-earned ratio would decrease.
15. No effect Write-off of an uncollectible account against the
Allowance for Bad Debts will have no effect on total
current assets. For this reason, the current ratio will
remain unchanged.
16. Decrease A purchase of inventory on account will increase current
liabilities, but will not increase the quick assets (cash,
accounts receivable, marketable securities). Therefore, the
ratio of quick assets to current liabilities will decrease.
17. Increase The price-earnings ratio is obtained by dividing the
market price per share by the earnings per share. If the
earnings per share remains unchanged, and the market
price goes up, then the price-earnings ratio will increase.
18. Decrease Payments to creditors will reduce the total liabilities of a
company, thereby decreasing the ratio of total debt to total
equity.
Problem 14 (Interpretation of Financial Ratios)
a. The market price is going down. The dividends paid per share over the
three-year period are unchanged, but the dividend yield is going up.
Therefore, the market price per share of stock must be decreasing.
b. The earnings per share is increasing. Again, the dividends paid per share
have remained constant. However, the dividend payout ratio is
decreasing. In order for the dividend payout ratio to be decreasing, the
earnings per share must be increasing.
c. The price-earnings ratio is going down. If the market price of the stock is
going down [see part (a) above], and the earnings per share are going up
[see part (b) above], then the price-earnings ratio must be decreasing.
d. In Year 1, leverage was negative because in that year the return on total
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assets exceeded the return on ordinary equity. In Year 2 and in Year 3,

leverage was positive because in those years the return on ordinary
equity exceeded the return on total assets employed.
e. It is becoming more difficult for the company to pay its bills as they
come due. Although the current ratio has improved over the three years,
the acid-test ratio is down. Also note that the accounts receivable and
inventory are both turning more slowly, indicating that an increasing
portion of the current assets is being made up of those items, from which
bills cannot be paid.
f. Customers are paying their bills more slowly in Year 3 than in Year 1.
This is evidenced by the decline in accounts receivable turnover.
g. Accounts receivable is increasing. This is evidenced both by a slowdown

in turnover and in an increase in total sales.
h. The level of inventory undoubtedly is increasing. Notice that the

inventory turnover is decreasing. Even if sales (and cost of goods sold)
just remained constant, this would be evidence of a larger average
inventory on hand. However, sales are not constant but rather are
increasing. With sales increasing (and undoubtedly cost of goods sold
also increasing), the average level of inventory must be increasing as
well in order to service the larger volume of sales.
IV. Cases
Case 1 (Common-Size Statements and Financial Ratios for Creditors)
Requirement 1
This Year Last Year

a. Current assets .............................................. P2,060,000 P1,470,000
Current liabilities ........................................ 1,100,000 600,000
Working capital ........................................... P 960,000 P 870,000
b. Current assets (a) ........................................ P2,060,000 P1,470,000

Current liabilities (b) .................................. P1,100,000 P600,000
Current ratio (a) (b) ................................. 1.87 to 1 2.45 to 1
c. Quick assets (a) ........................................... P740,000 P650,000
5-19
Current liabilities (b) .................................. P1,100,000 P600,000

Acid-test ratio (a) (b) ............................... 0.67 to 1 1.08 to 1
d. Sales on account (a) .................................... P7,000,000 P6,000,000

Average receivables (b) .............................. P525,000 P375,000
Turnover of receivables (a) (b) ................ 13.3 times 16.0 times
Average age of receivables:

365 turnover ............................................ 27.4 days 22.8 days
e. Cost of goods sold (a) ................................. P5,400,000 P4,800,000

Average inventory (b) ................................. P1,050,000 P760,000
Inventory turnover (a) (b) ........................ 5.1 times 6.3 times
Turnover in days: 365 turnover ............... 71.6 days 57.9 days

f. Total liabilities (a) ....................................... P1,850,000 P1,350,000
Equity (b) .................................................... P2,150,000 P1,950,000
Debt-to-equity ratio (a) (b) ...................... 0.86 to 1 0.69 to 1
g. Net income before interest and taxes (a) .... P630,000 P490,000
Interest expense (b) ..................................... P90,000 P90,000
Times interest earned (a) (b) .................... 7.0 times 5.4 times
Requirement 2
a. METRO BUILDING SUPPLY

Common-Size Statements of Financial Position
This Year Last Year

Current assets:
Cash ........................................................ 2.3 % 6.1 %
Marketable securities.............................. 0.0 1.5
Accounts receivable, net......................... 16.3 12.1
Inventory ................................................ 32.5 24.2
Prepaid expenses .................................... 0.5 0.6
Total current assets ..................................... 51.5 44.5
Plant and equipment, net ............................ 48.5 55.5
Total assets ................................................. 100.0 % 100.0 %
5-20
Liabilities:
Current liabilities .................................... 27.5 % 18.2 %
Bonds payable, 12% ............................... 18.8 22.7
Total liabilities ............................................ 46.3 40.9
Equity:
Preference shares, P50 par, 8% .............. 5.0 6.1
Ordinary shares, P10 par ........................ 12.5 15.2
Retained earnings ................................... 36.3 37.9
Total equity................................................. 53.8 59.1
Total liabilities and equity .......................... 100.0 % 100.0 %
Note: Columns do not total down in all cases due to rounding.
b. METRO BUILDING SUPPLY

Common-Size Income Statements
This Year Last Year

Sales ............................................................ 100.0 % 100.0 %
Less cost of goods sold ................................ 77.1 80.0
Gross margin ............................................... 22.9 20.0
Less operating expenses .............................. 13.9 11.8
Net operating income .................................. 9.0 8.2
Less interest expense ................................... 1.3 1.5
Net income before taxes .............................. 7.7 6.7
Less income taxes ........................................ 3.1 2.7
Net income .................................................. 4.6 % 4.0 %
Requirement 3
The following points can be made from the analytical work in parts (1) and
(2) above:
The company has improved its profit margin from last year. This is
attributable to an increase in gross margin, which is offset somewhat by an
increase in operating expenses. In both years the companys net income as a
percentage of sales equals or exceeds the industry average of 4%.
Although the companys working capital has increased, its current position
actually has deteriorated significantly since last year. Both the current ratio
5-21
and the acid-test ratio are well below the industry average, and both are
trending downward. (This shows the importance of not just looking at the
working capital in assessing the financial strength of a company.) Given the
present trend, it soon will be impossible for the company to pay its bills as
they come due.
The drain on the cash account seems to be a result mostly of a large buildup
in accounts receivable and inventory. This is evident both from the common-
size statement of financial position and from the financial ratios. Notice that
the average age of the receivables has increased by 5 days since last year, and
that it is now 9 days over the industry average. Many of the companys
customers are not taking their discounts, since the average collection period
is 27 days and collection terms are 2/10, n/30. This suggests financial
weakness on the part of these customers, or sales to customers who are poor
credit risks. Perhaps the company has been too aggressive in expanding its
sales.
The inventory turned only 5 times this year as compared to over 6 times last
year. It takes three weeks longer for the company to turn its inventory than
the average for the industry (71 days as compared to 50 days for the
industry). This suggests that inventory stocks are higher than they need to be.
In the authors opinion, the loan should be approved on the condition that the
company take immediate steps to get its accounts receivable and inventory
back under control. This would mean more rigorous checks of
creditworthiness before sales are made and perhaps paring out of slow paying
customers. It would also mean a sharp reduction of inventory levels to a
more manageable size. If these steps are taken, it appears that sufficient
funds could be generated to repay the loan in a reasonable period of time.
Case 2 (Financial Ratios for Ordinary Shareholders)
Requirement 1
a. This Year Last Year

Net income ................................................. P324,000 P240,000
Less preference dividends .......................... 16,000 16,000
Net income remaining for ordinary (a) ...... P308,000 P224,000
Average number of ordinary shares (b)...... 50,000 50,000
Earnings per share (a) (b) ....................... P6.16 P4.48
5-22
b. Ordinary dividend per share (a)* ............... P2.16 P1.20

Market price per share (b) .......................... P45.00 P36.00
Dividend yield ratio (a) (b) ..................... 4.8% 3.33%
*P108,000 50,000 shares = P2.16;
P60,000 50,000 shares = P1.20
c. Ordinary dividend per share (a) ............... P2.16 P1.20

Earnings per share (b) .............................. P6.16 P4.48
Dividend payout ratio (a) (b) ................ 35.1% 26.8%
d. Market price per share (a) ........................ P45.00 P36.00

Price-earnings ratio (a) (b) .................... 7.3 8.0
Investors regard Metro Building Supply less favorably than other firms in
the industry. This is evidenced by the fact that they are willing to pay
only 7.3 times current earnings for a share of the companys stock, as
compared to 9 times current earnings for the average of all stocks in the
industry. If investors were willing to pay 9 times current earnings for
Metro Building Supplys stock, then it would be selling for about P55 per
share (9 P6.16), rather than for only P45 per share.
e. This Year Last Year
Equity ........................................................ P2,150,000 P1,950,000
Less preference shares .............................. 200,000 200,000
Ordinary equity (a).................................... P1,950,000 P1,750,000
Number of ordinary shares (b) .................. 50,000 50,000

Book value per share (a) (b) .................. P39.00 P35.00
A market price in excess of book value does not mean that the price of a
stock is too high. Market value is an indication of investors perceptions
of future earnings and/or dividends, whereas book value is a result of
already completed transactions and is geared to the past.
Requirement 2
a. This Year Last Year

Net income ................................................ P 324,000 P 240,000
Add after-tax cost of interest paid:
5-23
[P90,000 (1 0.40)] ........................... 54,000 54,000

Total (a) ..................................................... P 378,000 P 294,000
Average total assets (b) ............................. P3,650,000 P3,000,000

Return on total assets (a) (b) .................. 10.4% 9.8%
b. This Year Last Year

Net income ................................................ P 324,000 P 240,000
Less preference dividends ......................... 16,000 16,000
Net income remaining for ordinary
shareholders (a) ..................................... P 308,000 P 224,000
Average total equity* ................................ P2,050,000 P1,868,000

Less average preference shares ................. 200,000 200,000
Average ordinary equity (b) ...................... P1,850,000 P1,668,000
*1/2(P2,150,000 + P1,950,000); 1/2(P1,950,000 + P1,786,000).
Return on ordinary equity (a) (b) ........... 16.6% 13.4%
c. Financial leverage is positive in both years, since the return on ordinary

equity is greater than the return on total assets. This positive financial
leverage is due to three factors: the preference shares, which has a
dividend of only 8%; the bonds, which have an after-tax interest cost of
only 7.2% [12% interest rate (1 0.40) = 7.2%]; and the accounts
payable, which may bear no interest cost.
Requirement 3
We would recommend keeping the stock. The stocks downside risk seems
small, since it is selling for only 7.3 times current earnings as compared to 9
times earnings for the average firm in the industry. In addition, its earnings
are strong and trending upward, and its return on ordinary equity (16.6%) is
extremely good. Its return on total assets (10.4%) compares favorably with
that of the industry.
The risk, of course, is whether the company can get its cash problem under
control. Conceivably, the cash problem could worsen, leading to an eventual
reduction in profits through inability to operate, a reduction in dividends, and
5-24
a precipitous drop in the market price of the companys stock. This does not
seem likely, however, since the company can easily control its cash problem
through more careful management of accounts receivable and inventory. If
this problem is brought under control, the price of the stock could rise
sharply over the next few years, making it an excellent investment.
Case 3 (Comprehensive Ratio Analysis)
Requirement 1
This Year Last Year
a. Net income ................................................ P 280,000 P 168,000
Add after-tax cost of interest:
P120,000 (1 0.30)............................ 84,000
P100,000 (1 0.30)............................ 70,000
Total (a) ..................................................... P 364,000 P 238,000
Average total assets (b) ............................. P5,330,000 P4,640,000

Return on total assets (a) (b) .................. 6.8% 5.1%
b. Net income ................................................ P 280,000 P 168,000

Less preference dividends ......................... 48,000 48,000
Net income remaining for ordinary (a) ..... P 232,000 P 120,000
Average total equity .................................. P3,120,000 P3,028,000

Less average preference shares ................. 600,000 600,000
Average ordinary equity (b) ...................... P2,520,000 P2,428,000
Return on ordinary equity (a) (b) ........... 9.2% 4.9%
c. Leverage is positive for this year, since the return on ordinary equity
(9.2%) is greater than the return on total assets (6.8%). For last year,
leverage is negative since the return on the ordinary equity (4.9%) is less
than the return on total assets (5.1%).
Requirement 2
This Year Last Year

a. Net income remaining for ordinary (a)..... P 232,000 P 120,000
5-25
Average number of ordinary shares (b) .... 50,000 50,000

Earnings per share (a) (b) ...................... P4.64 P2.40
b. Ordinary dividend per share (a)................ P1.44 P0.72

Market price per share (b) ........................ P36.00 P20.00
Dividend yield ratio (a) (b) ................... 4.0% 3.6%
c. Ordinary dividend per share (a)................ P1.44 P0.72

Dividend payout ratio (a) (b)................. 31.0% 30.0%
d. Market price per share (a) ........................... P36.00 P20.00

Earnings per share (b) ................................. P4.64 P2.40
Price-earnings ratio (a) (b) ....................... 7.8 8.3
Notice from the data given in the problem that the average P/E ratio for
companies in Helixs industry is 10. Since Helix Company presently has
a P/E ratio of only 7.8, investors appear to regard it less well than they do
other companies in the industry. That is, investors are willing to pay
only 7.8 times current earnings for a share of Helix Companys stock, as
compared to 10 times current earnings for a share of stock for the
average company in the industry.
e. Equity ....................................................... P3,200,000 P3,040,000

Less preference shares .............................. 600,000 600,000
Ordinary equity (a) ................................... P2,600,000 P2,440,000
Number of ordinary shares (b) ................. 50,000 50,000

Book value per share (a) (b) .................. P52.00 P48.80
Note that the book value of Helix Companys stock is greater than the
market value for both years. This does not necessarily indicate that the
stock is selling at a bargain price. Market value is an indication of
investors perceptions of future earnings and/or dividends, whereas book
value is a result of already completed transactions and is geared to the
past.
f. Gross margin (a) ....................................... P1,050,000 P860,000

Sales (b).................................................... P5,250,000 P4,160,000
Gross margin percentage (a) (b) ............ 20.0% 20.7%
5-26
Requirement 3
This Year Last Year
a. Current assets ........................................... P2,600,000 P1,980,000
Current liabilities...................................... 1,300,000 920,000
Working capital ........................................ P1,300,000 P1,060,000
b. Current assets (a) ...................................... P2,600,000 P1,980,000

Current liabilities (b) ................................ P1,300,000 P920,000
Current ratio (a) (b) ............................... 2.0 to 1 2.15 to 1
c. Quick assets (a) ........................................ P1,220,000 P1,120,000

Current liabilities (b) ................................ P1,300,000 P920,000
Acid-test ratio (a) (b) ............................ 0.94 to 1 1.22 to 1
d. Sales on account (a) ................................. P5,250,000 P4,160,000

Average receivables (b) ............................ P750,000 P560,000
Accounts receivable turnover (a) (b) .... 7.0 times 7.4 times
Average age of receivables,
365 turnover ...................................... 52 days 49 days
e. Cost of goods sold (a) .............................. P4,200,000 P3,300,000
Average inventory (b) .............................. P1,050,000 P720,000
Inventory turnover (a) (b) ..................... 4.0 times 4.6 times
Number of days to turn inventory,
365 days turnover (rounded) ............. 91 days 79 days
f. Total liabilities (a) .................................... P2,500,000 P1,920,000

Equity (b) ................................................. P3,200,000 P3,040,000
Debt-to-equity ratio (a) (b).................... 0.78 to 1 0.63 to 1
g. Net income before interest and taxes (a) .. P520,000 P340,000

Interest expense (b) .................................. P120,000 P100,000
Times interest earned (a) (b) ................. 4.3 times 3.4 times
Requirement 4
As stated by Meri Ramos, both net income and sales are up from last year.
The return on total assets has improved from 5.1% last year to 6.8% this
year, and the return on ordinary equity is up to 9.2% from 4.9% the year
before. But this appears to be the only bright spot in the companys operating
5-27
picture. Virtually all other ratios are below the industry average, and, more
important, they are trending downward. The deterioration in the gross
margin percentage, while not large, is worrisome. Sales and inventories have
increased substantially, which should ordinarily result in an improvement in
the gross margin percentage as fixed costs are spread over more units.
However, the gross margin percentage has declined.
Notice particularly that the average age of receivables has lengthened to 52

daysabout three weeks over the industry averageand that the inventory
turnover is 50% longer than the industry average. One wonders if the
increase in sales was obtained at least in part by extending credit to high-risk
customers. Also notice that the debt-to-equity ratio is rising rapidly. If the
P1,000,000 loan is granted, the ratio will rise further to 1.09 to 1.
In the authors opinion, what the company needs is more equitynot more
debt. Therefore, the loan should not be approved. The company should be
encouraged to make another issue of ordinary stock in order to provide a
broader equity base on which to operate.
Case 4 (Statement Reconstruction Using Ratios)
Bulacan Company
Income Statement
For the Year Ended December 31, 2013
Sales P140,800
Less: Cost of Sales (4) 84,480
Gross Profit P 56,320
Less: Expenses 46,320
Net Income (1) P 10,000
Bulacan Company
Statement of Financial Position
December 31, 2013
Assets
Current Assets:
Cash P 27,720
Accounts Receivable (5) 28,160
Merchandise Inventory (3) 21,120
5-28
Total Current Assets (2) P 77,000

Fixed Assets (8) 55,000
Total Assets P132,000
Liabilities and Equity
Current Liabilities:
Accounts Payable (2) P 44,000
Equity:
Share Capital (issued 20,000 shares) (6) P40,000
Retained Earnings 48,000 88,000
Total Liabilities and Equity P132,000
Supporting Computations:
Net Income
(1) Earnings Per Share =
Ordinary Shares Outstanding
X
P0.50 =
20,000
X (Net Income) = P10,000
(2) Current Assets Pxx 1.75

Current Liabilities xx 1
Working Capital P33,000 0.75
Current Liabilities = P33,000 0.75
= P44,000
Current Assets
(3) Current Ratio =
Current Liabilities
X
1.27 =
44,000
X (Current Assets) = P77,000
5-29
Quick Assets
Quick Ratio =
Current Liabilities
X
1.27 =
44,000
X (Current Assets) = P55,880
Current Assets P77,000

Quick Assets 55,800
Inventory P21,120
Cost of Sales
(4) Inventory turnover = Ave. Inventory
X
4 =
P21,120
X (Cost of Sales) = P84,480
Quick Assets
(5) Average age of outstanding =
Accounts Receivable Current Liabilities
365
= 73 days (Average age of
5
receivables)
Net Sales
Average Receivables = 5
P140,800
X = 5
X (Receivables) = P28,160
Another Method:
P140,800
365
5-30
= 73 days = P28,160 Accounts receivable
(6) Earnings for the year as a percentage of Share Capital

P10,000
= 25%
Share Capital
Share Capital = P40,000
(7) Current Fixed Current Liabilities +

Assets + Assets = Equity
P77,000 + 0.625X = P44,000 + X
0.375X = P33,000
X = P88,000 Equity
(8) Fixed Assets to Equity
Fixed Assets
= 0.625
Equity
X
= 0.625
P140,800
X (Fixed Assets) = P55,000
Case 5 (Ethics and the Manager)
Requirement 1
The loan officer stipulated that the current ratio prior to obtaining the loan
must be higher than 2.0, the acid-test ratio must be higher than 1.0, and the
interest on the loan must be no more than four times net operating income.
These ratios are computed below:
Current assets
Current ratio =
Current liabilities
P290,000
Current rate = P164,000 = 1.8 (rounded)
Cash + Marketable securities + Accounts receivable

Acid-test ratio =
Current liabilities
P70,000 + P0 + P50,000
Acid-test ratio = 5-31 = 0.70 (rounded)
P164,000
Net operating income P20,000

= = 5.0
Interest on the loan P80,000 x 0.10 x (6/12)
The company would fail to qualify for the loan because both its current ratio
and its acid-test ratio are too low.
Requirement 2
By reclassifying the P45 thousand net book value of the old machine as
inventory, the current ratio would improve, but there would be no effect on
the acid-test ratio. This happens because inventory is considered to be a
current asset but is not included in the numerator when computing the acid-
test ratio.
Current assets
Current ratio =
Current liabilities
P290,000 + P45,000
Current rate = P164,000 = 2.0 (rounded)
Cash + Marketable securities + Current receivables

Acid-test ratio =
Current liabilities
P70,000 + P0 + P50,000
Acid-test ratio = = 0.70 (rounded)
P164,000
Even if this tactic had succeeded in qualifying the company for the loan, we
strongly advise against it. Inventories are assets the company has acquired
for the sole purpose of selling them to outsiders in the normal course of
business. Used production equipment is not considered to be inventory
even if there is a clear intention to sell it in the near future. Since the loan
officer would not expect used equipment to be included in inventories, doing
so would be intentionally misleading.
Nevertheless, the old equipment is an asset that could be turned into cash. If
this were done, the company would immediately qualify for the loan since
the P45 thousand in cash would be included in the numerator in both the
current ratio and in the acid-test ratio.
Current assets
Current ratio =
Current liabilities
P290,000 + P45,000
P164,000
5-32
Current rate = = 2.0 (rounded)
Cash + Marketable securities + Current receivables

Acid-test ratio =
Current liabilities
P70,000 + P0 + P50,000 + P45,000
Acid-test ratio = = 1.00 (rounded)
P164,000
However, other options may be available. After all, the old machine is being
used to relieve bottlenecks in the plastic injection molding process and it
would be desirable to keep this standby capacity. We would advise Rome to
fully and honestly explain the situation to the loan officer. The loan officer
might insist that the machine be sold before any loan is approved, but he
might instead grant a waiver of the current ratio and acid-test ratio
requirements on the basis that they could be satisfied by selling the old
machine. Or he may approve the loan on the condition that the equipment is
pledged as collateral. In that case, Rome would only have to sell the machine
if he would otherwise be unable to pay back the loan.
Case 6 (Financial Ratios for Ordinary Shareholders)

[pesos in thousands]
Requirement (1)
Calculation of the gross margin percentage:

Gross margin
Gross margin percentage =
Sales
P23,000
= = 34.8%
P66,000
Requirement (2)
Calculation of the earnings per share:

Net income Preference dividends
Earnings per share =
Average number of ordinary shares outstanding
P1,980 P60
= = P3.20 per share
600 shares
Requirement (3)
Calculation of the price-earnings ratio:
5-33
Market price per share

Price-earnings ratio =
Earnings per share
P26
= = 8.1
P3.20
Requirement (4)
Calculation of the dividend payout ratio:

Dividends per share
Dividend payout ratio =
Earnings per share
P0.75
= = 23.4%
P3.20
Requirement (5)
Calculation of the dividend yield ratio:

Dividends per share
Dividend yield ratio =
Market price per share
P0.75
= = 2.9%
P26.00
Requirement (6)
Calculation of the return on total assets:
Net income + [Interest expense x (1 Tax rate)]

Return on total assets =
Average total assets
P1,980 + [P800 x (1 0.40)]
= = 3.7%
(P65,810 + P68,480) / 2
Requirement (7)
Calculation of the return on ordinary shareholders equity:
Beginning balance, shareholders equity (a) P39,610

Ending balance, shareholders equity (b) 41,080
Average shareholders equity [(a) + (b)]/2 40,345
Average preference shares 1,000
5-34
Average ordinary shareholders equity P39,345

Return on ordinary Net income Preference dividends
=
shareholders equity Average ordinary shareholders equity
P1,980 P60
= = 4.9%
P39,345
Requirement (8)
Calculation of the book value per share:

Book value Total shareholders equity Preference shares
=
per share Number of ordinary shares outstanding
P41,080 P1,000
= = P66.80 per share
Case 7 (Financial Ratios for Short-Term
600 shares Creditors)
Requirement (1)
Calculation of working capital:
Working capital = Current assets Current liabilities

= P22,680 P19,400 = P3,280
Requirement (2)
Calculation of the current ratio:

Current assets
Current ratio =
Current liabilities
P22,680
= = 1.17
P19,400
Requirement (3)
Calculation of the acid-test ratio:

Cash + Marketable securities
+ Accounts receivable + Short-term notes
Acid-test ratio =
Current liabilities
P1,080 + P0 + P9,000 + P0
Acid-test ratio = = 0.52
P19,400
5-35
Requirement (4)
Calculation of accounts receivable turnover:
Accounts receivable Sales on account

= Average accounts receivable balance
turnover
P66,000
(P6,500 + P9,000) / 2
Requirement (5)
Calculation of the average collection period:
Average collection 365 days

= Accounts receivable turnover
period
365 days = 42.9 days
Acid-test ratio =
8.5
Requirement (6)
Calculation of inventory turnover:
Inventory Cost of goods sold

= Average inventory balance
turnover
P43,000
(P10,600 + P12,000) / 2
Requirement (7)
Calculation of the average sale period:
Average sale 365 days

= Inventory turnover
period
365 days
Acid-test ratio = = 96.1 days
3.8
5-36
Case 8 (Financial Ratios for Long-Term Creditors)
Requirement (1)
Calculation of the times interest earned ratio:
Times interest Earnings before interest expense

= and income taxes
earned ratio
Inventory expense
P4,100
P800
Requirement (2)
Calculation of the debt-to-equity ratio:
Debt-to-equity Total liabilities

= Shareholders equity
ratio
P27,400
P41,080
V. Multiple Choice Questions
1. A 11. C 21. B 31. C 41. C

2. C 12. A 22. D 32. D
3. D 13. C 23. A 33. C
4. B 14. B 24. C 34. A
5. A 15. D 25. A 35. A
6. D 16. B 26. C 36. C
7. C 17. A 27. D 37. A
8. D 18. C 28. A 38. A
9. A 19. A 29. D 39. C
10. B 20. C 30. A 40. C
5-37

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MANAGEMENT ACCOUNTING - Solutions Manual

FINANCIAL STATEMENTS ANALYSIS - II

1. By looking at trends, an analyst hopes to get some idea of whether a

2. Ratios highlight relationships, movements, and trends that are very

3. Price-earnings ratios are determined by how investors see a firms future

4. A managers financing responsibilities relate to the acquisition of assets

5. Financial leverage, as the term is used in business practice, means

8. A company in a rapidly growing technological industry probably would

9. It is more difficult to obtain positive financial leverage from preference

14. From the viewpoint of the companys shareholders, this situation

15. The length of operating cycle of the two companies cannot be

II. True or False

1. True 3. True 5. True 7. True 9. False

Problem 1 (Common Size Income Statements)

Common size income statements for 2013 and 2014:

Problem 2 (Measures of Liquidity)

The current ratio is 2.8 to 1. It is computed by dividing the current assets of

The company appears to be in a strong position as to short-run debt-paying

Problem 3 (Common-Size Income Statement)

Gross margin................................................................... 36.8 40.0

Problem 4 (Comparing Operating Results with Average Performance in

Problem 5 (Common-Size Statements)

The income statement in common-size form would be:

The statement of financial position in common-size form would be:

Total current assets ..................... 48.1 31.6

Problem 6 (Solvency of Alabang Supermarket)

Merchandise inventories 1,191.8

(1) Current ratio:

(2) Quick ratio:

(3) Working capital:

No. It is difficult to draw conclusions from the above ratios. Alabang

Due to characteristics of the industry, supermarkets tend to have smaller

In evaluating Alabang Supermarkets liquidity, it would be useful to review

Problem 7 (Statement of Financial Position Measures of Liquidity and

(1) Quick assets:

(2) Current assets:

(3) Current liabilities:

Accounts payable 5,912

(1) Quick ratio:

(2) Current ratio:

(3) Working capital:

(4) Debt ratio:

(1) From the viewpoint of short-term creditors, Bonbon Sweets appear

(3) From the viewpoint of shareholders, Bonbon Sweets appears overly

Problem 8 (Selected Financial Measures for Short-term Creditors)

Current assets (P80,000 + P460,000 + P750,000 +

a. Working capital would not be affected:

Current assets (P1,300,000 P100,000) .............................. P1,200,000

b. The current ratio would rise:

Problem 9 (Selected Financial Ratios)

1. Gross margin percentage:

4. Accounts receivable turnover:

7. Times interest earned:

Earnings before interest

8. Book value per share:

Problem 10 (Selected Financial Ratios for Ordinary Shareholders)

1. Earnings per share:

2. Dividend payout ratio:

3. Dividend yield ratio:

Problem 11 (Selected Financial Ratios for Ordinary Shareholders)

1. Return on total assets:

Return on Net income + [Interest expense x (1 Tax rate)]

P105,000 + [P30,000 x (1 0.30)]