FINANCIAL STATEMENTS ANALYSIS 7.
The operational objective often chosen for net
LONG QUIZ NO. 2
1. Which of the following management choices with
respect to short-term and long-term financing would
lead to a current ratio approximately equal to 1?
a. The principle of matching the maturities of the
firm’s assets and liabilities.
b. The extremely conservative approach.
c. The aggressive approach.
d. The maturity matching with a safety buffer.
2. Which of the following parties places the most
emphasis on liquidity ratios?
a. The firm’s financial managers.
b. The outside financial analysts.
c. The equity investors.
d. The short-term creditors.
3. Which of the following stakeholders pays particular
attention to a firm’s liquidity ratios?
a. Employee.
b. Financial analyst.
c. Potential investor.
d. Supplier.
4. Your firm received a Php1 million purchase order on
the last day of its fiscal year, which it immediately
filled with Php600,000 of inventory. The customer
paid Php250,000 in cash and your firm invoiced the
customer for the balance. Based on this information,
which of the following statements is true?
a. The firm’s current ratio will remain unchanged.
b. The firm’s current ratio will increase.
c. The firm’s current ratio will decrease.
d. The firm’s quick (acid test) ratio will decrease.
5. Which of the following statements about productivity
ratios is true?
a. Technically, it is preferable to use the year-end
inventory figure when calculating the inventory
turnover ratio.
b. Technically, it is preferable to use the sales
figure in the numerator when calculating the
inventory turnover ratio.
c. The fixed asset turnover ratio will vary based on
the age of the company and whether the
company is growing or not.
d. Technically, it is preferable to use the sales
figure in the numerator when calculating the
average collection period.
6. Which of the following statements about the cash
flow statement is true?
a. For the indirect method, to change the revenue
figure that is included in the net income to a
cash basis, increases in accounts receivable
over the period are added.
b. The net cash from the financing section is used
to calculate the changes in the 2 balance sheets
for the long-term liabilities.
c. For the indirect method, to change the expense
figure included in the net income to a cash
basis, increases in payables are always added
back.
d. For the indirect method, the cash from
operations is calculated by starting with net
income for the period and adding back any non-
cash expenses, deducting any non-cash
revenues, and adjusting for changes in net
working capital accounts.
working capital (NWC) management is to minimize
the firm’s investment in NWC, subject to having
sufficient NWC to meet the firm’s operational needs.
Which of the following is not an example of these
needs?
a. Inventory sufficient to not exceed a maximum
allowable probability of stocking out.
b. Trade terms competitive with the firm’s industry
rivals.
c. Sufficient cash to facilitate trade with customers
and suppliers.
d. Sufficient cash to avoid the risk of running a
cash deficit.
8. Which of the following statements about a cash flow
statement is true?
a. The cash used in or from the operating section
of the cash flow statement is used to calculate
the change in cash between two balance sheet
dates.
b. The cash flow statement allows the financial
executive to evaluate the firm’s relative reliance
on internal versus external sources of funds.
c. The cash used in or from the financing section
of the cash flow statement is used to calculate
the changes in long-term liabilities between two
balance sheet dates.
d. The cash used in or from the investing section
of the cash flow statement is used to calculate
the change in capital stock (equity) between two
balance sheet dates.
9. Which of the following is not a measure of asset
utilization?
a. Inventory turnover.
b. Average accounts receivable collection period.
c. Fixed asset turnover.
d. Debt to total assets.
10. What financial analysis technique would imply
benchmarking with other firms?
a. Horizontal analysis.
b. Vertical analysis.
c. Cross-sectional analysis.
d. Ratio analysis.
Items 11 through 17 are based on the following
information:
Tomatito Company is a manufacturer of industrial
products and employs a calendar year for financial
reporting purposes. These questions present several of
Tomatito’s transactions during the year. Assume that
total quick assets exceeded total current liabilities both
before and after each transaction described. Further
assume that Tomatito has positive profits during the year
and a credit balance throughout the year in its retained
earnings account.
11. Payment of a trade account payable of Php64,500
would
a. Increase the current ratio but the quick ratio
would not be affected.
b. Increase the quick ratio but the current ratio
would not be affected.
c. Increase both the current and quick ratios.
d. Decrease both the current and quick ratios.
12. The purchase of raw materials for Php85,000 on c. Php40,000
open account would d. Php100,000
a. Increase the current ratio.
b. Decrease the current ratio. 21. If a company has a return on assets (ROA) of
c. Increase net working capital. 12.5%, a gross profit margin of 60%, a net profit
d. Decrease net working capital. margin of 10%, and cost of goods sold (COGS) of
Php500,000, what is its asset turnover ratio?
13. The collection of a current accounts receivable of a. 0.750
Php29,000 would b. 0.800
a. Increase the current ratio. c. 0.833
b. Decrease the current ratio and the quick ratio. d. 1.250
c. Increase the quick ratio.
d. Not affect the current or quick ratios. 22. A company has sales of Php10 million and a gross
profit margin of 65%. It has Php1.2 million in current
14. Obsolete inventory of Php125,000 was written off assets, which consist of cash, marketable securities,
during the year. This transaction accounts receivable, and inventory. Its current ratio
a. Decreased the quick ratio. is 1.50 and its quick (acid test) ratio is 1.10. What is
b. Increased the quick ratio. its inventory turnover ratio?
c. Increased net working capital. a. 3.977
d. Decreased the current ratio. b. 7.386
c. 10.938
15. The issuance of new shares in a five-for-one split of d. 20.313
common stock
a. Decreases the book value per share of common 23. CMR Ltd. has a current ratio of 2 and a quick (acid
stock. test) ratio of 1.50. If it purchases inventory on credit
b. Increases the book value per share of common for Php500,000, its quick ratio will drop to 1. What
stock. will its current ratio be if it purchases the inventory
c. Increases total shareholders’ equity. on credit?
d. Decreases total shareholders’ equity. a. 1.333
b. 1.667
16. The issuance of serial bonds in exchange for an c. 2.000
office building, with the first installment of the bonds d. 2.500
due late this year,
a. Decreases net working capital. 24. GL Ltd. is a manufacturer of small appliances.
b. Decreases the current ratio. Following is a condensed income statement for the
c. Decreases the quick ratio. most recently completed fiscal period.
d. Affects all of the answers as indicated.
Sales Php 1,500,000
17. The early liquidation of a long-term note with cash Cost of goods sold (600,000)
affects the Gross profit Php 900,000
a. Current ratio to a greater degree than the quick Interest expense (125,000)
ratio. Amortization (275,000)
b. Quick ratio to a greater degree than the current Profit before income taxes Php 500,000
Income tax expense (200,000)
ratio.
Net profit Php 300,000
c. Current and quick ratio to the same degree.
d. Current ratio but not the quick ratio.
Based on this information, what is GL’s times-
interest-earned ratio?
18. A company has a beginning inventory balance of
a. 2.4
Php2 million, a quick ratio of 0.80, a current ratio of
b. 5.0
1.20, current liabilities of Php3 million, and sales of
c. 6.2
Php20 million with cost of goods sold equal to 70%
d. 7.2
of sales. What is its inventory turnover ratio?
a. 7.00
Items 25 and 26 are based on the following information:
b. 8.75
The Creek Corporation projects the following for the year
c. 11.67
2017:
d. 12.50
Earnings before interest and taxes Php 35 million
19. If a company has current assets of Php7 million, a Interest expense 5 million
current ratio of 1.75, and a quick ratio of 0.90, what Preferred stock dividends 4 million
is its inventory balance? Common stock dividend payout ratio 30%
a. Php2.556 million Common shares outstanding 2 million
b. Php3.400 million Effective corporate income tax rate 40%
c. Php6.775 million
d. It cannot be determined based on the 25. The expected common stock dividend per share for
information given. Creek Corporation for 2017 is
a. Php2.34
20. If a company has a net profit margin of 12%, an b. Php2.70
operating margin of 22%, sales of Php500,000, and c. Php3.90
a tax rate of 25%, what was its interest expense? d. Php2.10
a. Php20,000
b. Php30,000
26. If Creek Corporation’s common stock is expected to 31. The 2017 return on assets for Grumpy Company is
trade at a price/earnings ratio of eight, the market a. 0.261
price per share (to the nearest dollar) would be b. 0.148
a. Php125 c. 0.157
b. Php56 d. 0.166
c. Php72
d. Php68

Items 27 through 31 are based on the following

information:
The data presented below show actual figures for
selected accounts of Grumpy Company for the fiscal year
ended December 31, 2017. Grumpy’s controller is in the
process of reviewing the 2017 results. Grumpy Company
monitors yield or return ratios using the average financial
position of the company. (Round all calculations to three
decimal places if necessary.)

Dec 31 2017 Dec 31 2016

Current assets Php 210,000 Php 180,000
Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock 300,000 300,000
(Php30 par value)
Retained earnings 32,000 20,000

2017 Operations
Sales* Php 350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in 2017 60,000
Administrative expense 67,000
* All sales are credit sales.

Current Assets
Dec 31 2017 Dec 31 2016
Cash Php 20,000 Php 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000

27. Grumpy Company’s debt-to-total-asset ratio at

December 31, 2017 is
a. 0.352
b. 0.315
c. 0.264
d. 0.237

28. The 2017 accounts receivable turnover for Grumpy

company is
a. 1.882
b. 3.500
c. 5.000
d. 4.118

29. Using a 365-day year, Grumpy’s inventory turnover

is
a. 2.133
b. 2.281
c. 1.995
d. 4.615

30. Grumpy Company’s total asset turnover for 2017 is

a. 0.805
b. 0.761
c. 0.722
d. 0.348