PHILIPPINE CHRISTIAN UNIVERSITY

1648 Taft Ave., Pedro Gil St., Manila

Center for Graduate Studies

Solutions to Problems 5-B4 and 5-B5

In partial fulfillment of the subject: Financial Management

Master’s Degree in Business Administration

Submitted by: Coreen Dianne R. Andrade

3rd trimester 2019 - 2020

Professor: Ms. Faustina C. Rana

Date Submitted: March 7, 2020

Problem 5-B4
Grace Park Company had the following amounts of current assets, inventory and net
working capital for each of the past five year:
19x1 19x2 19x3 19x4 19x5
Total Current Assets 10,500 9,300 8,700 6,900 6,750
Net Working Capital 3,600 3,950 3,550 3,750 3,300
Inventory 2,700 2,640 2,750 3,000 2,900

Required:
a) Calculate the current ratio and quick ratio of Avenue Co.

Answer:
19x1 19x2 19x3 19x4 19x5
Current Liabilities
Current Assets 10,500.00 9,300.00 8,700.00 6,900.00 6,750.00
Less: Net Working Capital 3,600.00 3,950.00 3,550.00 3,750.00 3,300.00
Current Liabilities 6,900.00 5,350.00 5,150.00 3,150.00 3,450.00

Current Ratio
Current Assets 10,500.00 9,300.00 8,700.00 6,900.00 6,750.00
Divided by Current Liabilities 6,900.00 5,350.00 5,150.00 3,150.00 3,450.00
Current Ratio 1.52 1.74 1.69 2.19 1.96

Working Capital
Current Assets 10,500.00 9,300.00 8,700.00 6,900.00 6,750.00
Less: Inventory 2,700.00 2,640.00 2,750.00 3,000.00 2,900.00
7,800.00 6,660.00 5,950.00 3,900.00 3,850.00
Divided by Current Liabilities 6,900.00 5,350.00 5,150.00 3,150.00 3,450.00
1.13 1.24 1.16 1.24 1.12

b) Evaluate Avenue Co’s liquidity over the period.

Answer: This indicates that Avenue Co is liquid enough since he has more than PHP 1
current asset to pay off every peso of current liability.

PROBLEM 5 – B6
Fill in the blanks in the financial statements and ratios of Dadiangas Prime Beef Corp.
 Dadiangas Prime Beef Corporation
Balance Sheet
As of December 31, 19x1

Cash 450,600.00 Accounts Payable 420,000.00

Accounts Receivable 537,610.00 Bank Loan 160,650.00
Inventory 174,390.00 Long Term Loan 959,450.00
Net Fixed Assets 1,917,680.00 Common Stock 665,040.00
Retained Earnings 875,060.00

Total Assets 3,080,200.00 Total Liabilities and Capital 3,080,200.00

Dadiangas Prime Beef Corporation

Income Statement
For the Year Ended December 31, 19x1

Sales 3,480,620.00
Cost of Goods Sold 2,262,403.00
Gross Profit 1,218,217.00
General and Administrative Expenses
Net Operating Income
Interest
Income Before Tax 355,408.00
Income Tax 124,393.00

Financial Ratios:
Current Ratio 2.00
Quick Ratio 1.70
Times Interest Earned 7.50
Net Working Capital 581,300.00
Accounts Receivable Turnover 6.47
Inventory Turnover 12.97
Total Debt to Equity Ratio 1.00
Fixed Asset Turnover 64%
Gross Profit Margin 0.35
Return on Equity 0.15

Answer:
Current Assets
Current Ratio = Current Assets
Current Liabilities
2.00 = Current Assets
581,300.00
Current Assets = 581,300.00 x 2.00
Current Assets = 1,162,600.00

Cost of Goods Sold (COGS)

Gross Profit Margin = Revenue - COGS
Revenue
0.35 = 3,480,620 - COGS
3,480,620.00
0.35 x 3,480,620.00 = 3,480,620 - COGS
1,218,217.00 = 3,480,620 - COGS
COGS = 3,480,620 - 1,218,217
COGS = 2,262,403.00
Net Working Capital
Net Working Capital = Current Assets - Current Liabilities
= 1,162,600 - 581,300
= 581,300.00

Net Fixed Assets

Net Fixed Assets = Total Assets - Current Assets
= 3,080,200 - 1,162,600
= 1,917,600.00

Fixed Asset Turnover (FAT) Ratio

Net Sales
FAT Ratio =
Fixed Assets
1,218,217.00
FAT Ratio =
1,917,600.00
FAT Ratio = 64%

Quick Ratio
Quick Ratio = Cash + Accounts Receivable
Current Liabilities
1.7 = 450,600 + Accounts Receivable
581,300
1.7 x 581,300 = 450,600 + Accounts Receivable
988,210.00 450,600 + Accounts Receivable
Accounts Receivable = 988,210 - 450600
Accounts Receivable = 537,610.00
Retained Earnings
Retained Earnings = (Total Liab and Capital/2) - Common Stock
= (3,080,200/2) - 665,040
= 875,060.00

Long Term Liability

Long Term Liability = (Total Liab and Capital/2) - Current Liabilities
= (3,080,200/2) - 581,300
958,800.00

Inventory Turnover
Inventory Turnover = Cost of Goods Sold
Average Inventory
= 2,262,400.00
174,390.00
= 12.97
Return on Equity
Return on Equity = Net Income
Stockholder's Equity
0.15 = Net Income
1,540,100.00
0.15 x 1,540,100 = Net Income
Net Income = 231,015.00

Times Interest Earned (TIE)

Earnings before Interest and Taxes
TIE =
Total Interest Payable on Bonds and other Debt
7.5 = Earnings before Interest and Taxes

Income before Tax = Net Income / 0.65

= 231,015/0.65
= 355,408

Income Tax = 355,408 - 231,015

= 124,393.00
Accounts Receivable Turnover
A/R Turnover = Net Credit Sales
Average A/R
0.15 = 3,480,620.00
537,610.00
Net Income = 6.47