Manac Quiz 2 With Answers 6i6823

I.

THEORIES

1. When a balance sheet amount is related to an income statement amount in computing a ratio, a. The income statement amount should be converted to an average for the year. b. Comparisons with industry ratios are not meaningful. c. The balance sheet amount should be converted to an average for the year. d. The ratio loses its historical perspective because a beginningof-the-year amount is combined with an end-of-the-year amount. 2. How are financial ratios used in decision making? a. They can help identify the reasons for success and failure in business, but decision making requires information beyond the ratios. b. They remove the uncertainty of the business environment. c. They aren’t useful because decision making is too complex. d. They give clear signals about the appropriate action to take. 3. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? a. Evaluate financial statements of companies within a given industry of approximately the same value. b. Determine which companies in the same industry are at approximately the same stage of development. c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a

given industry without respect to relative size. d. Ascertain the relative potential of companies of similar size in different industries.

into an operating lease. The company's debt ratio as measured by the balance sheet will a. Increase whether the assets are purchased or leased. b. Increase if the assets are purchased, and remain unchanged if the assets are leased. c. Increase if the assets are purchased, and decrease if the assets are leased. d. Remain unchanged whether the assets are purchased or leased.

4. Which of the following is not revealed on a common size balance sheet? a. The debt structure of a firm. b. The capital structure of a firm. c. The peso amount of assets and liabilities. d. The distribution of assets in which funds are invested. 5. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if any, will occur in total assets? a. Assets will be increased. b. Assets will be decreased. c. No change in total assets. d. None of the above. 6. Minix Co. has a high sales-to-workingcapital ratio. This could indicate a. The firm is undercapitalized. b. The firm is likely to have liquidity problems. c. Working capital is not profitably utilized. d. The firm is not profitable. 7. When compared to a debt-to-assets ratio, a debt-to-equity ratio would a. Be about the same as the debt-toassets ratio. b. Be higher than the debt-toassets ratio. c. Be lower than the debt-to-assets ratio. d. Have no relationship at all to the debt-to-assets ratio. 8. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets either by using borrowed funds for the purchase or by entering

9. You observe that a firm’s profit margin and debt ratio are below the industry average, while its return on 10. equity exceeds the industry average. What can you conclude? a. Return on assets is above the industry average. b. Total assets turnover is above the industry average. c. Total assets turnover is below the industry average. d. Statements a and b are correct. 10. What is a limitation common to both the current and quick ratio? a. s receivable may not be truly liquid. b. Inventories may not be truly liquid. c. Marketable securities are not liquid. d. Prepaid expenses are potential sources of cash. 11.

In a single-period income statement, the (100%) is normally the a. Gross sales c. Net b. Net sales sales

common-size base amount cash sales d. Net credit

12. Which of the following statements is correct?

a. An increase in a firm’s inventories will call for additional financing unless the increase is offset by an equal or larger decrease in some other asset . b. A high quick ratio is always a good indication of a well-managed liquidity position. c. A relatively low return on assets (ROA) is always an indicator of managerial incompetence. d. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings stream. 13. The ratio that measures a firm's ability to generate earnings from its resources is a. Days' sales in inventory. b. Days' sales in receivables. c. Sales to working capital. d. Asset turnover. 14. Planners have determined that sales will increase by 25% next year, and that the profit margin will remain at 15% of sales. Which of the following statements is correct? a. Profit will grow by 25%. b. The profit margin will grow by 15%. c. Profit will grow proportionately faster than sales. d. Ten percent of the increase in sales will become net income. 15. Which one of the following ratios would provide a best measure of liquidity? a. Sales minus returns to total debt. b. Total assets minus goodwill to total equity. c. Current assets minus inventories to current liabilities. d. Net profit minus dividends to interest expense.

II.

PROBLEMS

Solution

A. The condensed balance sheet as of December 31, 2014 of San Matias Company is given below. Figures shown by a question mark (?) may be computed from the additional information given: ASSETS Cash Trade receivable-net Inventory Fixed assets-net

P 60,000 ? ? 252,000

Total Assets P 480,000 LIAB. & STOCKHOLDERS’ EQUITY s payable P ? Current notes payable 40,000 Long-term payable ? Common stock 140,000 Retained earnings ? Total L & SHE P 480,000 Additional information: Current ratio (as of Dec. 1.9 to 31, 2014) 1 Ratio of total liabilities to 1.4 total stockholders’ equity Inventory turnover based 15 on sales and ending times inventory Inventory turnover based 10 on cost of goods sold times and ending inventory Gross margin for 2014 P500,0 00 1. The balance of s payable of San Matias as of December 31, 2014 is P80,000 2. The balance of retained earnings of San Matias as of December 31, 2014 is P60,000 3. The balance of inventory of San Matias as of December 31, 2014 is P100,000

Current assets = 480,000 – 252,000 = 228,000 Current liabilities = 228,000/1.9 = 120,000 s payable = 120,000 – 40,000 = 80,000 1.4 = Total liabilities/ total equity Total liabilities = 140% Total equity = 100% Total liabilities & shareholders’ equity = 140% + 100% = 240% Total equity = 480,000 / 240% = 200,000 Retained earnings = 200,000 – 140,000 = 60,000 Sales = 15/10 = 150% COGS = 10/10 = 100% Sales 150% 1,500,000 COGS 100% 1,000,000 Gross margin 50% 500,000 Ending inventory = 1.5M/15 = 100,000 Ending inventory = 1M/10 = 100,000 B. You are requested to reconstruct the s of Angela Trading for analysis. The following data were made available to you: Gross margin for 2014 P472,5 00 Ending balance of P300,0 merchandise inventory 00 Total stockholders’ equity P750,0 as of December 31, 2014 00 Gross margin ratio 35% Debt to equity ratio 0.8: 1 Times interest earned 10 Quick ratio 1.3: 1 Ratio of operating expenses 18% to sales Long-term liabilities 20% consisted of bonds payable with interest rate of

Based on the above information, 1. What was the operating income for 2014? P229,500 2. How much was the bonds payable? P114,750 3. Total current liabilities would amount to P485,250 4. Total current assets would amount to P930,825 Solution Sales 100% 1,350,00 0 COGS 65% 877,500 GM 35% 472,500 Operating expenses 18% 243,000 Operating income / 17% 229,500 EBIT Interest expense 1.7% 22,950 Earnings before tax 25.3 206,550 % Times interest earned = EBIT/interest expense Interest expense = 229,500 / 10 = 22,950 Bonds payable = 22,950 / 20% =114,750 Debt or total liabilities = 750,000 * .8 = 600,000 Total liabilities = current liabilities + long term liabilities Current liabilities = 600,000 – 114,750 = 485,250 Total assets = 750,000 + 600,000 = 1,350,000 Quick assets = 485,250 * 1.3 = 630,825 Total current assets = 630,825 + 300,000 = 930,825 C. Selected data from the year-end financial statements of World Cup Corp. are presented below. The

difference between average and ending inventories is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities P600,00 0 Inventory turnover (based 8 times on cost of sales) Gross profit margin 40% World’s net sales for the year were? P4.0 million Solution Current assets = 600,000 * 2.0 = 1,200,000 Quick assets = 600,000 * 1.5 = 900,000 Inventory = 1,200,000 – 900,000 = 300,000 COGS = 300,000 * 8 = 2,400,000 Sales 100% 4,000,000 COGS 60% 2,400,000 GM 40% 1,600,000 D. For the year 2014, Drey Company’s income statement shows operating expenses of P20,480. The following information is also available: Prepaid expenses, January P1,100 1, 2014 Accrued expenses payable, 3,680 January 1, 2014 Operating Prepaid expensesexpenses, 20,480 1,200 Prepaid expenses, 1/1 (1,100 December 31, 2014 ) Accrued expenses payable, 2,500 Accrued expenses, 3,680 December 31, 20141/1 Prepaid expenses, 12/31 1,200 Accrued expenses, (2,500 12/31 ) Cash payment for 21,760 operating expenses How much was the cash paid for operating expenses? 21,760 E. In 2014, Audrey

Company’s land

decreased by P90,000 because of a cash sale for the same amount. Its equipment increased by P40,000 as a result of a cash purchase, and its bonds payable increased by P35,000 due to an issuance for cash at face value. How much is the net cash provided/used by investing activities? 50,000 Sale of equipment 90,000 Acquisition of equipment (40,000) Net cash provided in investing 50,000