SMARTS CPA REVIEW SCHOOL

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October 2013 Examination

MANAGEMENT SERVICES – 11: FS ANALYSIS

Financial Statement Analysis - involves careful selection of data from financial statements for the primary purpose of
forecasting the financial health of the company.

Objective - to identify an organization’s financial strength and weaknesses

Steps in financial statement analysis

1. Establish objectives
2. Study the industry and relate its climate to current and projected economic development
3. Develop knowledge of the firm and the quality of management.
4. Evaluate financial statement using
a. Horizontal Analysis of Comparative statement (Increase-Decrease Method)
b. Trend percentage
c. Common-size financial statements
d. Financial ratios
e. Cash flow analysis
f. Gross profit variation analysis

5. Summarize findings based on analysis and reach conclusions.

Horizontal Analysis - involves comparison of figures shown in the financial statement of two or more consecutive periods.
The difference between the figures of the two periods is calculated, and the percentage change from
one period to the next is computed using the earlier period as the base.

Percentage change - Most Recent Value – Based Period Value

Base Period Value

Vertical Analysis - the process of comparing figures in the financial statement of a single period. It involves converting of
figures in the statements to a common base. This is accomplished by converting all the figures in the
statement as a percentage of an important item such as total assets (in the balance sheet and total or
net sales (in the income statement). These converted statements are called common size statement or
percentage composition statement.

Multiple Choice Questions

1. Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to
the management perspective?
a. Management is always interested in maximum profitability. Commented [V1]: A
b. Management is interested in the view of investors.
c. Management is interested in the financial structure of the entity.
d. Management is interested in the asset structure of the entity.

Vertical Analysis
2. Which of the following generally is the most useful in analyzing companies of different sizes?
A. Comparative statements C. Price-level accounting
B. Common-sized financial statements D. Profitability index Commented [V2]: B

3. Statements in which all items are expressed only in relative terms (percentages of a base) are termed:
A. Vertical statements C. Funds Statements
B. Horizontal Statements D. Common-Size Statements Commented [V3]: D

4. The percent of property, plant and equipment to total assets is an example of:
A. Vertical analysis C. Profitability analysis Commented [V4]: A
B. Solvency analysis D. Horizontal analysis
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5. Vertical analysis is a technique that expresses each item in a financial statement

a. In pesos and centavos.
b. As a percent of the item in the previous year.
c. As a percent of a base amount. Commented [V5]: C
d. Starting with the highest value down to the lowest value.

Horizontal analysis
6. The percentage analysis of increases and decreases in individual items in comparative financial statements is called:
a. Vertical analysis c. Profitability analysis
b. Solvency analysis d. Horizontal analysis Commented [V6]: D

7. Horizontal analysis is also known as

a. Linear analysis. c. Trend analysis. Commented [V7]: C
b. Vertical analysis. d. Common size analysis.

8. In which of the following cases may a percentage change be computed?

a. The trend of the amounts is decreasing but all amounts are positive. Commented [V8]: A
b. There is no amount in the base year.
c. There is a negative amount in the base year and a negative amount in the subsequent year.
d. There is a negative amount in the base year and a positive amount in the subsequent year.

9. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
a. That has been arranged from the highest number to the lowest number.
b. That has been arranged from the lowest number to the highest number.
c. To determine which items are in error.
d. To determine the amount and/or percentage increase or decrease that has taken place. Commented [V9]: D

10. Kline Corporation had net income of P2 million in 2010. Using the 2010 financial elements as the base data, net income
decreased by 70 percent in 2011 and increased by 175 percent in 2012. The respective net income reported by Kline
Corporation for 2011 and 2012 are:
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 Commented [V10]: A
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000

Ratio Analysis - involves the development of mathematical relationships between accounts in the financial statements.
Ratios calculated from these statements provide users and analysis with relevant information about the
business firm`s liquidity, solvency, profitability and growth.

A. Liquidity Ratios
Current(Working Capital)Ratio)
Quick (Acid-Test)Ratio
Accounts Receivable Turnover
Age of Accounts Receivable
Inventory Turnover
Age of Inventory
Operating Cycle
Asset Turnover(ATO)
= Current Assets
Current Liabilities
= Quick Assets
Current liabilities
= Net Credit Sales
Ave. Accts Rec
= 360 / AR TO
= Cost of Goods Sold
Ave.Inventory
= 360
Invty.TO
= Ave age of receivable + Ave. age of Inventories
= Net Sales
Ave total Assets

Multiple Choice Questions

1. Mr. Kenobi, the owner of Galactic Company is arguing with his accountant as to the best measure of liquidity, He was
considering the following and you are to advise him which one is the best. Which one will you choose?
a. Current assets minus inventories to current liabilities Commented [V11]: A
b. Total assets minus goodwill to total liabilities
c. Net income minus dividends to interest expense

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d. Sales minus returns to total debt

2. Which ratio is most helpful in appraising the liquidity of current assets?

a. current ratio c. debt ratio
b. acid-test ratio d. accounts receivable turnover Commented [V12]: D

3. The days sales-in-receivable ratio will be understated if the company

a. Uses a natural business year for its accounting period Commented [V13]: A
b. Uses a calendar year for its accounting period
c. Uses average receivable in the ratio calculation
d. Has high sales at the end of the year

Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at the end of the current
year:
Accounts payable P145,000
Accounts receivable 110,000
Accrued liabilities 4,000
Cash 80,000
Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
Notes payable, short-term 85,000
Prepaid expenses 15,000

4. The amount of working capital for the company is:

a. P351,000 b. P361,000 c. P211,000 d. P336,000 Commented [V14]: A

5. The company’s current ratio as of the balance sheet date is:

a. P2.67:1 b. P2.44:1 c. P2.02:1 d. P1.95:1 Commented [V15]: B

6. The company’s acid-test ratio as of the balance sheet date is:

a. P1.80:1 b. P2.40:1 c. P2.02:1 d. P1.76:1 Commented [V16]: A

Receivables turnover
7. . Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for the year. The
Accounts Receivable balances at the beginning and end of the year were P600,000 and P700,000, respectively. The
receivables turnover was
a. 7.7 times b. 10.8 times c. 9.3 times d. 10 times Commented [V17]: D

8. Milward Corporation’s books disclosed the following information for the year ended December 31, 2007:
Net credit sales P1,500,000
Net cash sales 240,000
Accounts receivable at beginning of year 200,000
Accounts receivable at end of year 400,000
Milward’s accounts receivable turnover is
a. 3.75 times b. 4.35 times c. 5.00 times d. 5.80 times Commented [V18]: C

9. The Missouri Corporation sells on credit with terms of net 30 days. If the company's credit policy and collection activity is efficient, what
is the corporation's accounts receivable turnover?
A. 6 times C. 10 times
B. 8 times D. 12 times

10. If a company's accounts receivable turnover were 4.6 times per year, its collection activity would be acceptable if its terms of sale are:
A. Net 30 days C. Net 60 days
B. Net 45 days D. Net 90 days

Days receivable
9. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the year and a
balance of P410,000 at the end of the year. The net credit sales during the year amounted to P4,000,000. Using 360-
day year, what is the average collection period of the receivables?
a. 30 days b. 65 days c. 73 days d. 36 days Commented [V19]: D

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Cash collection
10. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in accounts receivable of P1,000,
increase in inventories of P4,000, and depreciation expense of P4,000. What was the cash collected from customers?
a. P31,000 b. P35,000 c. P34,000 d. P25,000 Commented [V20]: A

Inventory turnover
11. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007 was P900,000, and
the ending inventory at December 31, 2007 was P180,000. What was the inventory turnover for 2007?
a. 6.4 b. 6.0 c. 5.3 d. 5.0 Commented [V21]: B

12. Selected information from the accounting records of Petals Company is as follows:
Net sales for 2007 P900,000
Cost of goods sold for 2007 600,000
Inventory at December 31, 2006 180,000
Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is
a. 5.77 times b. 3.85 times c. 3.67 times d. 3.57 times Commented [V22]: D

13. The Moss Company presents the following data for 2007.
Net Sales, 2007 P3,007,124
Net Sales, 2006 P 930,247
Cost of Goods Sold, 2007 P2,000,326
Cost of Goods Sold, 2007 P1,000,120
Inventory, beginning of 2007 P 341,169
Inventory, end of 2007 P 376,526
The merchandise inventory turnover for 2007 is:
a. 5.6 b. 15.6 c. 7.5 d. 7.7 Commented [V23]: A

14. Based on the following data for the current year, what is the inventory turnover?
Net sales on account during year P 500,000
Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000
Inventory, end of year 110,000
a. 3.3 b. 8.3 c. 3.7 d. 3.0 Commented [V24]: A

Days inventory
15. Selected information from the accounting records of Eternity Manufacturing Company follows:
Net sales P3,600,000
Cost of goods sold 2,400,000
Inventories at January 1 672,000
Inventories at December 31 576,000
What is the number of days’ sales in average inventories for the year?
a. 102.2 b. 94.9 c. 87.6 d. 68.1 Commented [V25]: B

16. Merck's quick ratio is 0.9, its current ratio is 1.5, and its current liabilities are P30 million. The value of Merck's inventory
is:
a. P27 million c. P18 million Commented [V26]: C
b. P15 million d. P20 million

B. Leverage(Financing/ Solvency)Ratios
Debt Ratio = Total Liabilities
Total assets
Equity Ratio = Total stockHolders` Equity
Total Assets
Debt-Equity Ratio = Total Liabilities
Total Stockholders`Equity
Equity Multiplier = Total Assets
Total Stockholders`Equity

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Times Interest Earned = EBIT
Interest expense
Solvency Ratios
1. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios
characterizes the firm with the greatest amount of financial risk?
a. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
b. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
c. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
d. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity Commented [V27]: D

2. Long-term creditors are usually most interested in evaluating

a. Liquidity b. Marketability c. Profitability d. Solvency Commented [V28]: D

3. The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets
is sometimes referred to as:
a. Leverage b. Solvency c. Yield d. Quick assets Commented [V29]: A

4. The ratio that indicates a company’s degree of financial leverage is the

a. Cash debt coverage ratio. c. Free cash flow ratio.
b. Debt to total assets. d. Times-interest earned ratio. Commented [V30]: B

5. The set of ratios that is most useful in evaluating solvency is

a. Debt ratio, current ratio, and times interest earned
b. Debt ratio, times interest earned, and return on assets
c. Debt ratio, times interest earned, and quick ratio
d. Debt ratio, times interest earned, and cash flow to debt Commented [V31]: D

6. The debt ratio indicates:

a. A comparison of liabilities with total assets Commented [V32]: A
b. The ability of the firm to pay its current obligations
c. The efficiency of the use of total assets
d. The magnification of earnings caused by leverage

Leverage Ratios
7. When compared to a debt-to-asset ratio, a debt-to-equity ratio would
a. Be lower than the debt-to-asset ratio
b. Be higher than the debt-to-asset ratio Commented [V33]: B
c. Be about the same as the debt-to-asset ratio
d. Have no relationship at all to the debt-to-asset ratio

Debt ratio
8. Jordan Manufacturing reports the following capital structure:
Current liabilities P100,000
Long-term debt 400,000
Deferred income taxes 10,000
Preferred stock 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000
What is the debt ratio?
a. 0.48 b. 0.49 c. 0.93 d. 0.96 Commented [V34]: B

9. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of P500,000 on P5,000,000 of total debt
outstanding. Its tax rate is 40 percent. If the firm’s ROA is 6 percent, by how many percentage points is the firm’s ROE
greater than its ROA?
a. 0% b. 3% c. 5.2% d. 7.4% Commented [V35]: B

Times interest earned

10. House of Fashion Company had the following financial statistics for 2006:
Long-term debt (average rate of interest is 8%) P400,000
Interest expense 35,000

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Net income 48,000
Income tax 46,000
Operating income 107,000
What is the times interest earned for 2006?
a. 11.4 times b. 3.3 times c. 3.1 times d. 3.7 times Commented [V36]: D

11. During 2002, Fly-Us-Again, Inc had total interest expense of P10,000, sales of P1,000,000, income taxes of P40,000, and a
net profit margin of 6%. What is the company's times-interest-earned ratio for 2002?
A. 6 times C. 11 times
B. 10 times D. 25 times

12. For the fiscal year ended 20X2, Thomas Industries reported Gross Profit, Operating Income, Earnings Before Interest and
Taxes (EBIT), and Net Income of P85,000, P50,000, P60,000, and P24,000, respectively. Assuming Interest Expense of
P10,000, Times Interest Earned for 20X2 was:
A. 8.5 times C. 6.0 times
B. 5.0 times D. 2.4 times

C. Profitability Ratios
Return on Sales(ROS)
Gross Profit Rate
Return on Investment(ROI)
Return on assets (ROA)
Return on Equity
Earnings per Share(EPS)
= Net income
Net Sales
= Gross profit
Net Sales
= Operating Income
Average Total Assets
= Net Income + Interest expense, net of tax
Average Total assets
= Net Income
Average stockholders` Equity
Net Income-preferred Dividends
= Average Common Shares Outstanding

Profitability Ratios
1. Which of this ratios are measures of a company’s profitability
1. Earnings per share 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Return on sales 7. Receivable turnover
4. Debt-equity ratio 8. Price earnings ratio

a. All eight ratios

b. 1, 3, 5 and 8 only
c. 1, 3, 5, 6, 7 and 8 only
d. 1, 3 and 5 only Commented [V37]: D

2. Selected financial data for May on Company appear below:

Account Balances
Beginning of Year End of Year
Preferred stock P125,000 P125,000
Common stock 300,000 400,000
Retained earnings 75,000 185,000
During the year, the company paid dividends of P10,000 on its preferred stock. The company's net income for the year
was P120,000. The company's return on common stockholders' equity for the year is closest to:
a. 17% b. 19% c. 23% d. 25% Commented [V38]: C

3. If the return on total assets is 10% and if the return on common stockholders’ equity is 12% then Commented [V39]: D – because if the return on assets is
less than the return on common stockholders’ equity, it
a. The after-tax cost of long-term debt is probably greater than 10% means that the leverage is positive and the business is
b. The after-tax cost of long-term debt is 12% successful in maximizing the return on equity by using a low-
c. Leverage is negative cost debt financing. A positive financial leverage results to a
d. The after-tax cost of long-term debt is probably less than 10% ROA higher than the return on debt. Since the ROA is 10%,
and ROCSE is 12%, then the return on debt must be lower
than ROA.

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4. Real Estates Corporation has stockholders’ equity equal to 60% of total liabilities and stockholders’ equity of P120
million. If the return on total assets invested registers at 9% what is the return on stockholders’ equity
a. 10% b. 6% c. 15% d. 12% Commented [V40]: C – agamata # 30 (2007 edition)

5. A fire has destroyed many of the financial records of R. Son & Company. You are assigned to put together a financial
report. You have found the return on equity to be 12% and the debt ratio was 0.40. What was the return on assets?
a. 5.35% b. 8.4% c. 6.60% d. 7.20% Commented [V41]: D – agamata # 35 (2007 edition)

6. For the fiscal year ended September 30, 2003, Extron Company had sales, operating income, and net income of P400.0
million, P85.0 million, and P25.0 million, respectively. Assuming the Company had a financial leverage ratio of 5 and total
assets of P1.0 billion, what is Extron's return on equity for the fiscal year ended September 30, 2003?
A. 2.5% C. 42.5%
B. 6.3% D. 12.5%

7. The Acme Corporation has published the following summary data for the past year:
Sales P50,000
Assets 100,000
Total Debt 20,000
Pretax Income 10,000
Effective Income Tax Rate 40%
Acme's return on equity is:
A. 7.5% C. 6.0%
B. 12.5% D. 10.0%

8. Karcher Refineries had an operating profit margin of 20% and a net profit margin of 15% in 2001. Assuming the firm had
net sales of P20,000,000 in 2001 and total assets were P18,000,000 and P27,000,000 at year-end 2000 and 2001,
respectively, what was the company's return on assets for 2001?
A. 11.1% C. 14.8%
B. 13.3% D. 17.8%

D. Growth Ratios
Price-earnings(P/E)Ratio
Dividend Yeild ratio
Dividend Payout Ratio
Book Value per Share
Internal Growth Rate
= Market Price per share
Earnings per Share
= Dividends per Share
Market Price per Share
= Dividends per Share
Earnings per Share
= Stockholders`equity
Average Shares Outstanding
= Amount Retained
Assets Base

1. Recto Co. has a price earnings ratio of 7, earnings per share of P2.20, and a pay out ratio of 80%. The dividend yield is
a. 80% b. 39.3% c. 11.4% d. 31.4% Commented [V42]: C

2. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2003
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
a. 0.50 b. 0.40 c. 0.12 d. 0.08 Commented [V43]: D

3. The Delta Company projects the following for the upcoming year:
Earnings before interest and taxes P40 million
Interest expense P 5 million

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Preferred stock dividends P 4 million
Common stock dividend payout ratio 20%
Average number of common shares outstanding 2 million
Effective corporate income tax rate 40%
The expected dividend per share of common stock is
a. P1.70 b. P1.86 c. P2.10 d. P1.00 Commented [V44]: A

4. Strada Corporation was organized on January 1 with the following capital structure:
 10% cumulative preferred stock, par and liquidation value of P110; authorized, issued and outstanding 2,000 shares
– P200,000
 Common stock, par value, P5; authorized 40,000 shares;
 Issued and outstanding 20,000 shares – 100,000
Adventure’s net income for the first year ended December 31 was P1,880,000, but no dividends were declared. How
much was Adventure’s book value per common share at December 31?
a. P97 b. P98 c. P99 d. P120 Commented [V45]: A

5. The Dawson Corporation projects the following for the year 2003.
Earnings before interest and taxes P35 million
Interest expense P 5 million
Preferred stock dividends P 4 million
Common stock dividend payout ratio 30%
Common shares outstanding 2 million
Effective corporate income tax rate 40%
The expected common stock dividend per share by Dawson Corporation for 1995 is
a. P2.34 b. P2.70 c. P1.80 d. P2.10 Commented [V46]: D

Integrated Ratios
6. Calumpang Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The president is unhappy
with the current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the
profit margin to 12 percent, and (2) by increasing the total assets turnover. What new asset turnover ratio, along with
the 12 percent profit margin, is required to double the return on assets?
a. 25% b. 36% c. 50% d. 60% Commented [V47]: C

7. JayR has debt ratio of 0.50, a total asset turnover of 0.25, and a profit margin of 10%. The president is unhappy with the
current return on equity, and he thinks it could be doubled. This could be accomplished: (1) by increasing the profit
margin to 14%; and, (2) by increasing debt utilization. Total asset turnover will not change.
What new debt ratio, along, with 14% profit margin is required to double the return on equity?
a. 0.75 b. 0.70 c. 0.65 d. 0.55 Commented [V48]: C

8. Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The dividend payout rate is 60%.
Beginning stockholders’ equity was P850,000 and current liabilities are projected to be P300,000 at the end of 2002.
What are the total equities available if the ratio of long-term debt to stockholders’ equity is 60%?
a. P1,788,000 b. P1,980,000 c. P2,046,000 d. P858,000 Commented [V49]: A

9. Assume you are given the following relationships for the Marhya Company:
Sales/total assets 1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
The Marhya Company’s debt ratio is
a. 40% b. 60% c. 35% d. 65% Commented [V50]: A

10. Selected data from Shyr Company’s year-end financial statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
Shyr’s net sales from the year were
a. P800,000 b. P1,200,000 c. P480,000 d. P672,000 Commented [V51]: A

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11. Salami Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The president is unhappy with the
current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit
margin to 15 percent, and (2) by increasing the total assets turnover. What new asset turnover ratio, along with the 15
percent profit margin, is required to double the return on assets?
a. 35% b. 45% c. 40% d. 50% Commented [V52]: C

12. Delo Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%. The president is unhappy
with the current return on equity, and he thinks it could be doubled. This could be accomplished (1) by increasing the
profit margin to 14% and (2) increasing debt utilization. Total assets turnover will not change. What new debt ratio,
along with the 14% profit margin, is required to double the return on equity?
a. 0.75 b. 0.70 c. 0.65 d. 0.55 Commented [V53]: C

FINANCIAL FORECASTING – used to compute for the Additional Funds Needed to finance the expected growth of sales in the
future

Formula: AFN = A/S ( S) – L/S( S) - PS2 (1-D)

Straight Problem
The marketing staff of Vallee Corporation has forecast a 20% increase in sales for 2012. Assist the firm’s financial manager in
projecting the required external financing to support the increase in sales. Use the relationships below to forecast funds
Variable assets / sales = 40%
Net profit margin = 3%
Payout ratio = 40%
2011 sales = 60,000,000
Spontaneous liabilities / sales = 25%

a. Will Vallee Corporation need additional external financing to support the anticipated sales increase?
b. Will Vallee need to arrange external financing if the spontaneous liabilities / sales = 30%?

FINANCIAL FORECASTING
1. The beginning step in financial forecasting is the projection of
a. Net profit d. Liabilities
b. Sales e. Equity Commented [V54]: B
c. Cash flows

2. The percent of sales method is a shortcut approach to constructing

a. Pro forma income statement
b. Cash budget
c. Balance sheet
d. Pro forma balance sheet Commented [V55]: D
e. Statement of cash flows

3. As an estimate of the financing required to support an asset expansion, the firm must
a. Add spontaneous assets and retention of earnings
b. Add variable assets and spontaneous financing
c. Subtract variable assets from the addition to retained earnings
d. Subtract spontaneous financing and projected retention of earnings from the projected increase in assets Commented [V56]: D
e. None of the above are correct

4. Spark Company has plants in 3 major cities. Sales for last year were P100 million, and the balance sheet at year-end is
similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed
assets) and current liabilities will vary directly with sales. Spark Company is already using assets at full capacity.
Balance Sheet (in million pesos)
Assets Liabilities and Stockholders’ Equity
A/P and accruals P25
Current assets P50 N/P – long term 30
Fixed assets 40 Common stock 15
Retained earnings 20
Total P90 Total P90
Spark Company has an after-tax profit margin of 5% and a dividend payout ratio of 30%.

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If sales grow by 10 percent next year, the required new financing (RNF) to finance the expansion is
a. P4,850,000 b. P3,000,000 c. P2,650,000 d. P5,000,000 Commented [V57]: C

Percent-of-sales method
Total assets requirements
5. Lamp has projected sales of P100,000, a gross profit margin of 45%, a return on sales of 15%. Accounts receivable has
been 25% of sales while inventory has been 10% of cost of sales. Lamp has minimum cash balance of P10,000 and fixed
assets are projected to be P75,000. Total assets requirements would be
a. P40,500 b. P240,000 c. P115,500 d. P270,000 Commented [V58]: C
Total assets
5. 6. Calculate the total assets of Premiere Company given the following information:
Sales this year P3,000,000
Sales increase projected for next year 20 percent
Net income this year P 250,000
Dividend payout ratio 40 percent
Projected excess funds available next year P 100,000
Accounts payable P 600,000
Notes payable P 100,000
Accrued wages and taxes P 200,000
Except for the accounts noted, there were no other current liabilities. Assume that the firm’s profit margin remains constant
and that the company is operating at full capacity.
a. P3,000,000 b. P2,200,000 c. P2,000,000 d. P1,200,000 Commented [V59]: D

Addition to retained earnings

7. Almond Corporation recently reported the following income statement for 2006 (in P’000):
Sales P7,000
Operating costs 3,000
EBIT P4,000
Interest 200
Earnings before taxes (EBT) P3,800
Taxes (40%) 1,520
Net income to common shareholders P2,280
The company forecasts that its sales will increase by 10 percent in 2007 and its operating costs will increase in proportion to
sales. The company’s interest expense is expected to remain at P200,000, and the tax rate will remain at 40 percent. The
company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained
earnings. What is the forecasted addition to retained earnings for 2007?
a. P1,140 b. P1,260 c. P1,440 d. P1,790 Commented [V60]: B

Additional financing needed

8. If a firm uses external financing as a plug item, has a new capital budget of P2 million, a net income of P3 million, and a
plowback ratio of 40%, how much should be raised in external funds?
a. P200,000 b. P600,000 c. P800,000 d. P1,200,000 Commented [V61]: C

9. Patio Company recently reported sales of P100 million, and net income equal to P5 million. The company has P70
million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company
is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20
percent, spontaneous liabilities will increase by P2 million. If the company’s sales increase, its profit margin will remain
at its current level. The company’s dividend payout ratio is 40 percent. Based on the RNF formula, how much additional
capital must the company raise in order to support the 20 percent increase in sales?
a. P2,000,000 b. P6,000,000 c. P8,400,000 d. P9,600,000 Commented [V62]: C

10. Leverage Company’s December 31, 2006 balance sheet (in P’000,000) is given below:
Cash P 10 Accounts payable P 15
Accounts receivable 25 Notes payable 20
Inventories 40 Accrued expenses 15
Long-term debt 30
Net fixed assets 75 Common stock 70
Total assets P150 Total Liab & equity P150

Sales during the past year were P100,000,000 and they are expected to rise by 50 percent to P150,000,000 during 2007. Also,
during last year fixed assets were being utilized to only 85 percent of capacity, so Leverage Company could have supported

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MANAGEMENT SERVICES SMARTS CPA REVIEW
P100,000,000 of sales with fixed assets that were only 85 percent of last year’s actual fixed assets. Assume that Leverage’s
profit margin will remain constant at 5 percent and that the company will continue to pay out 60 percent of its earnings as
dividends. What amount of non spontaneous, required new financing (RNF), will be needed during the next year?
a. P55,500,000 b. P52,500,000 c. P49,500,000 d. P40,125,000 Commented [V63]: D

11 of 11 MS/STANDARD COSTING/Oct-13 “Together, we place your title.”