FINMAN 1 VERTICAL AND HORIZONTAL ANALYSIS September 2020

PROBLEM. Show your solutions in good accounting form to support your answers. You may use the spaces below and at
the back as your answer sheet. Write legibly.

1. Robyn Company provides the following comparative income statement:

2019 2018
Sales P 570,000 P 680,000
Cost of goods sold 200,000 170,000
Gross profit P 370,000 P 510,000
Operating expenses 100,000 210,000
EBIT P 270,000 P 300,000
(A) Calculate the percentage of change using horizontal analysis, and (B) evaluate the results.

2. Robyn Company reported the following income statement data:

2019 2018
Net sales P 400,000 P 250,000
Cost of goods sold 280,000 160,000
Operating expenses 75,000 56,000

(A) Prepare a comparative income statement for 2019 and 2018 using vertical analysis, and (B) evaluate the results.

3. Robyn Company reports the following data relative to accounts receivable:

2019 2018
Average accounts receivable P 400,000 P 416,000
Net credit sales 2,600,000 3,100,000
The terms of sale are net 30 days. (A) Compute the accounts receivable turnover and the collection period, and (B)
evaluate the results.

4. You are the loan officer of Caterpillar, Inc., the world’s biggest heavy equipment dealer. Robyn, President and CEO of
Robyn Construction, is in your office. She is interested in a 10-year in-house loan to finance the heavy equipment the
company needs in its massive expansion. With the limited financial data she has given you, you have computed the
return on asset for Robyn Construction to be 7.8% and the debt to asset ratio as 78%. When you told her that you
would need additional information before making your decision, she acted offended and said, “What more could you
possibly want to know?” And she followed it up with a directive, “What can you say about those figures?” as she is
intently looking at your computations on your table. REQUIRED: (A) The industry average in construction for return
on assets being 15%, what would you initially say to Robyn as implications of the ratios you have just computed? Does
the information paint a favorable picture? Explain your answer. (B) List at least two other ratios that you would want
to calculate for Robyn Construction, and explain why you would use each.

5. Robyn Company has net income of P300 million, average shares of common stock outstanding of 50 million, at the
market price of P2, and preferred dividends for the period of P40 million. What is Robyn’s earnings per share of
common stock? Robyn, the President and CEO, believes that the computed EPS of the company is high. Comment.

6. Robyn Company is the producer and distributor of natural food additives in the Philippines. The company was started
several years ago a beautiful lady to develop software who felt there was a need for a producer that could provide
healthy food at reasonable prices. The result was Robyn Company. Since its inception the company has been
profitable with sales that last year totaled P700,000 and assets in excess of P400,000. The company now finds its
growing sales outstrip its ability to finance its inventory needs. The company now estimates that it will need a line of
credit of P100,000 during the coming year. To finance this funding requirement the management plans to seek a line
of credit with its bank.
The company’s most recent financial statements were provided to its bank as support for the company’s loan
request. You, a loan analyst trainee for Banco de Oro, Head Office, Ortigas Center, Pasig City, have been assigned the
task of analyzing the company’s loan request.

KING’S COLLEGE OF THE PHILIPPINES

FINANCIAL MANAGEMENT 1
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 ROBYN COMPANY
Income Statement
For the Year Ended December 31
Sales P 700,000
Cost of Goods Sold 500,000
Gross profit P 200,000
Expenses:
General and administrative P50,000
Interest 10,000
Depreciation 30,000 90,0000
Profit before taxes P 110,000
Less: Taxes (38%) 27,100
Profits after taxes P 82,900
Less: Cash dividends 31,800
To retained earnings P 51,100

ROBYN COMPANY
Balance Sheets
December 31
2019 2018
ASSETS
Cash P 16,000 P 17,000
Marketable securities 7,000 7,000
Accounts receivable, net 42,000 38,000
Inventory 50,000 93,000
Prepaid rent 1,200 1,100
Net plant, property and equipment 286,000 290,000
Total assets P 402,200 P 446,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable P 48,000 P 55,000
Notes payable 16,000 13,000
Accruals 6,000 5,000
Long-term debts 160,000 150,000
Total liabilities P 230,000 P 223,300
Common stockholders’ equity 172,200 223,300
Total liabilities and stockholders’ equity P 402,200 P 446,300

A. Compute the most crucial financial ratios in determining whether the bank should extend the line of credit.
B. What strengths and weaknesses are apparent from your analysis of Robyn’s financial ratios?
C. Based on the ratio analysis you performed in A, would you recommend approval of the loan request?

KING’S COLLEGE OF THE PHILIPPINES

FINANCIAL MANAGEMENT 1
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