FINANCIAL MANAGEMENT I

MIDTERM EXAM
II. Multiple Choice. Show your solutions.
1. A company reported 10,000 of income for 2014, 12,000 for year 2015, and 13,000
for 2016. The percentage change in net income from 2015 to 2016 was:

a. 10.0% c. 7.7%
b. 8.3% d. 8.0%

2. The following gross margin data were taken from the income statements of a
retailing firm X and Y, Inc. for two periods.

Period A Period B
Sales Revenue 150,000 141,750
Cost of Sales 100,000 91,000
Gross Margin 50,000 50,750

If the sales volume declined by 10% on Period B, the percentage of change in selling
price is:
a. 10% increase c. 5% increase
b. 5.5% increase d. 5% decrease

3. A firm’s purchase of plant and equipment would be considered a

a. use of cash for financing activities
b. use of cash for operating activities
c. source of cash for investment activities
d. use of cash for investment activities

(Items 4 to 6) The following information is available for Ubbie’s Jewelry and Gift Store:

Net income 5,000

Depreciation expense 2,500
Increase in deferred tax liabilities 500
Decrease in cash 3,000
Increase in marketable securities 1,000
Decrease in accounts receivable 2,000
Increase in inventories 9,000
Decrease in accounts payable 5,000
Increase in accrued liabilities 1,000
Increase in property and equipment 14,000
Increase in short-term notes payable 19,000
Decrease in long-term notes payable 4,000

4. What is net cash flow from operating activities?

a. Php (3,000)
b. Php (1,000)
c. Php 5,000
d. Php 13,000

5. What is net cash flow from investing activities?

a. 14,000
b. (14,000)
c. 21,000
d. (16,000)

6. What is net cash flow from financing activities?

 a. 15,000
b. (15,000)
c. 17,000
d. (14,000)

7. Liquidity ratios are computed using information from the

a. balance sheet
b. income statement
c. statement of changes in financial position
d. both a and b

8. All of the following ratios measure the profitability of a company except:

a. rate of return on total assets.
b. earnings per ordinary share
c. price/earnings ratio.
d. rate of return on net sales

Items 9 and 10 are based on the following data:

2016 2015
Sales 208,000 200,000
Cost of Sales 175,500 150,000
Gross Margin 32,500 50,000

Unit selling price decreased by 20% in 2016

9. The net change in gross profit in 2016 due to quantity factor is:
a. 60,000 increase c. 15,000 increase
b. 40,000 increase d. 8,000 increase

10. The change in gross profit due to the decrease in selling price is:
a. 8,000 increase c. 52,000 decrease
b. 60,000 decrease d. 52,0000 increase

11. Beta is a measure of (18)

a. unsystematic risk c. preference share ownership
b. systematic risk d. corporate control
e. b and d

12. Which of the following statement is wrong? (17)

a. CEO resignation causes systematic risk
b. Changes in interest rate cause systematic risk
c. Changes in economic growth cause systematic risk
d. Board problems create systematic risk

13. A “secondary market” is a market: (16)

a. for equity issued by small or “secondary” companies
b. where investors can buy or sell existing financial instruments
c. where savers sell new financial claims to borrowers
d. where only government securities are bought and sold

14. Which of the ff. is not a feature of a preference share? (10)

a. Cumulative of non-cumulative
b. Redeemable or non-redeemable
c. Convertible or non-convertible
d. Issued with different rankings
e. None of the above
15. Which of the following is not a role of a stock exchange? (9)
a. Primary Market
b. Secondary Market
c. Tertiary Market
d. Managed Product
e. None of the above

16. Which of the following is not an advantage of the corporate form? (8)
a. Agency problem
b. Access to large amount of finance
c. Liquidity
d. Perpetual succession
e. Separation of ownership and control

17. Which of the following is a desired characteristics of a fund manager? (7)

a. Risk taker
b. Avoid risk
c. Do not gamble
d. Risk aversion

18. Which of the ff. is a role of a bank? (1)

a. achieve full employment level
b. facilitating the flow of funds from borrowers to lenders
c. facilitating the flow of funds from savers to borrowers
d. managing the level of interest rates

19. Which of the following is an attribute of a financial asset? (2)

a. risk
b. return
c. liquidity
d. timing of cash flow
e. all of the above

20. Which of the following can be categorized as a financial institution? (3)

a. Unit trust
b. Finance companies
c. Contractual savings institutions
d. Investment banks and merchant banks
e. All of the above
III. Essay:
1. What is the purpose of financial statements analysis?
Answer: The objective of financial statements analysis is to determine the extent
of a firm’s success in attaining its financial goals, namely:

2. List the three (3) major financial statement user groups and describe what each group
hopes to learn from financial statement analysis.
Answer:
a. Creditors
b. Equity investors
c. Management
3. What are Common-Size Financial Statements?
Answer: Common-size financial statements translate peso amounts to percentages,
which indicate the relative size of an item in proportion to the whole. It shows assets,
liabilities and owner’s equity as a percentage of total assets while common-size income
statements express revenue and expenses as a percentage of sales revenues. Also known
as vertical analysis.
4. Describe briefly the conversion procedures in preparing the Common-Size Statement.
Answer:
a. For the statement of financial position, each item therein is converted to percent by
dividing it by total assets.
b. In the income statement, each item is restated as a percentage of net sales or net
operating revenue by dividing the former by the latter.

5. What is Horizontal Analysis?

Answer: Horizontal Analysis is a process of analyzing the firm’s financial data across two
(2) or more years by examining peso changes, percentage changes and a trend
percentage. This is done through the use of either:
 Comparative Financial Statements Analysis for two (2) years or more years
showing, peso or percentage changes for important financial items and totals. Peso
increases and decreases are divided by data from the base year to obtain
percentage changes. Significant changes should be analyze to determine the
reason for any change.
 Trend Analysis. To observe percentage changes over time in selected financial
data, trend percentages may be calculated for the past 5 or 10 years. Trend
Percentages are index number showing relative changes in financial data resulting
to the passage of time.
6. What is the primary purpose of a cash flow statement?
Answer: The primary purpose of a cash flow statement is to provide relevant
information about a company’s cash receipts and cash payments during an accounting
period that is useful in evaluating the preceding items.

7. What is Financial Liquidity and how is this determined?

Answer: Refers to the “measures of relationship of cash” to assets and liabilities.
Current Cash = Net Cash Provided by Operating Activities
Debt Coverage Ratio Average Current Liabilities

8. What is financial flexibility?

Answer: Refers to the company’s ability to respond and adapt to financial adversity
and unexpected needs and opportunities.

9. What does “Free Cash Flow” mean?

Answer: Is the amount of discretionary cash flow a company has. It can use this cash
flow to purchase additional investments, retire its debt, purchase treasury shares, or
simply add to its liquidity.

10. How are cash flow activities classified?

Answer: Classification of Cash Flow Activities

1. Operating Activities
2. Investing Activities
3. Financing Activities

11. What is the objective of Gross Profit Variation Analysis?

Answer: The amount of gross profits realized is critical for every business concern since
it is the excess of the selling price over the corresponding cost of goods sold. It must be
large enough to cover the operating and other expenses and to provide an adequate
net income in relation to net sales and the owner’s equity.

12. What are the factors that could brig about the change in the company’s gross
profit?

Answer: A change in gross profit can be traced directly to one combination of the
following factors:
1. Change in volume or quantity of product sold
2. Change in selling prices
3. Change in purchasing prices or product sold
4. Change in sales mix

Other factors:

1. Purchasing and merchandising policies

2. Markup and markdown, and
3. Credit extension policies

13. How may the change in gross profit be accounted for assuming that the business
firm buys and sells only one product?

Price factor (change in selling price x quantity sold this year)

Cost factor (change in unit cost x quantity sold this year)
Quantity factor (change in quantity x gross profit per unit last year)

14. What are financial ratios?

Answer: is a comparison in fraction, proportion, decimal or percentage form of two

significant figures taken from financial statements. It expresses the direct relationship
between two or more quantities in the statement of financial position and income
statement of a business firm.

15. Describe the limitations of ratio analysis.

Answer:
a. The greatest single limitation of ratio analysis is that people tend to place too much
reliance on the ratios. Information gathered from ratio analysis is only a part of what is
needed to make good economic decisions.
b. Attempting to predict the future using past results is problematic at best.
c. The financial statements used as the basis of the ratios are based on historical cost.
d. Figures from the balance sheet used in the calculation of the ratios are year-end
numbers.
e. Comparing the ratios of a company in on industry with those of a company in
another industry is difficult because industry peculiarities will cause the ratios to differ.
f. There are no hard-and –fast rules telling the analyst what numbers to use to calculate
the ratios.