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Outline
Financial Statements
FINANCIAL I.
II.
Financial Statements
Financial Statement Analysis
A. Limitations of FS Analysis

STATEMENTS B. Vertical Analysis

C. Horizontal Analysis
D. Financial Ratios
▪ are written records that convey the financial
activities and conditions of a business or entity and

ANALYSIS
1. Liquidity Ratios consist of four major components.
2. Asset Management Ratios
3. Debt Management Ratios
4. Profitability Ratios
5. Market Ratios
III. True or False
IV. MC Theories
/rcroque V. Problems

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Financial Statements Balance Sheet Assets - Balance Sheet

▪ Key Financial Statements:
▪ BALANCE SHEET ▪ Represents “snapshots” of its financial position at ▪ Current Assets ▪ Non-Current
▪ INCOME STATEMENT
a given point in time ▪ Cash Assets
▪ STATEMENT OF CHANGES IN EQUITY ▪ Known as Statement of Financial Position ▪ Marketable securities ▪ Long-term
▪ Accounts receivable investments
▪ STATEMENT OF CASH FLOWS
Assets = Liabilities + Shareholders‘ Equity ▪ Inventory ▪ Fixed Assets
▪ Prepaid expenses ▪ Intangible Assets

▪ NOTES TO FINANCIAL STATEMENTS

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Liabilities - Balance Sheet Income Statement

Shareholders’ Equity - Balance
Sheet
▪ Current Liabilities ▪ Non-Current ▪ provides a financial summary of the firm’s
▪ Current portion of long-term debt Liabilities ▪ Retained Earnings operating results during a specified period
▪ Bank indebtedness
▪ Interest payable
▪ Long-term debt ▪ Treasury Stock
▪ Rent, tax, utilities ▪ Pension fund liability ▪ Preferred Stock ▪ a summary of how the business generates its
▪ Wages payable
▪ Common Stock revenues and incurs its expenses through both
▪ Customer prepayments
operating and non-operating activities.
▪ Dividends payable and others ▪ Additional Paid In Capital

▪ also known as the profit and loss statement.

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Statement of Changes in Equity

Statement of Cash Flows
▪ Changes in stockholders’ equity during the accounting
period is reported in this statement
▪ provides aggregate data regarding all cash inflows a company
receives from its ongoing operations and external
▪ shows the beginning stockholders’ equity, any changes, investment sources, as well as all cash outflows that pay for
and the end-of-year stockholders’ equity. business activities and investments during a given period.
Cash flows that result
▪ May also refer to as the statement of retained earnings ▪ This merges the balance sheet and the income statement. Cash flows . from debt and equity
or statement of changes in partners’ equity or capital Cash flows directly associated with financing transactions;
related to sale and purchase and includes incurrence and
statement production of the sale of both repayment of debt, cash
firms products and fixed assets and inflow from the sale of
services. business stock, and cash outflows
interests. to pay cash dividends or
repurchase stock.

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Limitations of Financial Statement

Limitations of Financial Statement Analysis
Analysis
Differences in accounting methods Managers should look beyond the ratios.
FINANCIAL between companies sometimes make
comparisons difficult. Industry Consumer
STATEMENTS trends tastes

ANALYSIS
Technological Economic
changes factors

We use the LIFO method to We use the average cost

value inventory. method to value inventory.

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Statements in Common-Size and

Common-Size Statements
Comparative Form
Vertical analysis focuses
❶ Common-size on the relationships
Prepare and interpret statements among financial
financial statements in statement items at a
common-size and An item on a financial
❷Peso and percentage given point in time. A
statement has little common-size financial
comparative form. meaning by itself. The
changes on
meaning of the numbers
statements statement is a vertical
can be enhanced by analysis in which each
drawing comparisons. financial statement item
❸ Ratios is expressed as a
percentage.

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Common-Size Statements Common-Size Statements Common-Size Statements

In balance In income Let’s take a look at the information from

the income statements of Clover
sheets, all items statements, all Corporation for this year and last year.
usually are items usually
expressed as a are expressed
percentage of as a percentage Let’s prepare common-size statements.
total assets. of sales.

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Common-Size Statements Common-Size Statements Common-Size Statements

Sales is
usually the
base and is
expressed
as 100%.

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Common-Size Statements Common-Size Statements Horizontal Analysis

This Year’s Operating Expenses ÷ This Year’s Sales × 100%

The following slides illustrate a horizontal
What conclusions can we draw? ( ₱128,600 ÷ ₱520,000 ) × 100% = 24.8% analysis of Clover Corporation’s
comparative balance sheets and
comparative income statements for this
year and last year.

Last Year’s Operating Expenses ÷ Last Year’s Sales × 100%

( ₱126,000 ÷ ₱480,000 ) × 100% = 26.2%

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Peso and Percentage Changes on Statements Horizontal Analysis Horizontal Analysis

Calculating Change in Peso Amounts Calculating Change as a Percentage
Horizontal analysis (or trend analysis) shows the
changes between years in the financial data in
Percentage Peso Change
both Peso and percentage form. Peso
=
Current Year
–
Base Year
Change
=
Base Year Figure × 100%
Change Figure Figure

Quantifying peso Quantifying

changes over time percentage The Peso
serves to highlight changes over time
the changes that are amounts for
serves to highlight last year
the most important the changes that are
economically. become the
the most unusual.
“base” year
figures.

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Horizontal Analysis Horizontal Analysis Horizontal Analysis

₱12,000 – ₱23,500 = ₱(11,500)

(₱11,500 ÷ ₱23,500) × 100% = (48.9%)

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Horizontal Analysis Horizontal Analysis Horizontal Analysis

We could do this for the liabilities and

stockholders’ equity, but now let’s look at
the income statement accounts.

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Horizontal Analysis Horizontal Analysis Trend Percentages

There were increases in both cost of goods
sold (14.3%) and operating expenses (2.1%).
These increased costs more than offset the Trend percentages
increase in sales, yielding an overall
state several years’
decrease in net income.
financial data in terms
of a base year, which
Sales increased by 8.3%, yet equals 100 percent.
net income decreased by 21.9%.

Trend Analysis
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Trend Analysis Trend Analysis Berry Products

Income Information
For the Years Ended December 31

Trend = Current Year Amount Look at the income information for Berry
Percentage Base Year Amount
× 100% Products for the years 2010 through 2014. We
will do a trend analysis on these amounts to
see what we can learn about the company.
The base
year is 2010, and its amounts
will equal 100%.

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Trend Analysis Trend Analysis Trend Analysis

We can use the trend
Berry Products Berry Products percentages to construct
Income Information Income Information a graph so we can see the
For the Years Ended December 31 For the Years Ended December 31 trend over time.

By analyzing the trends for Berry Products, we

can see that cost of goods sold is increasing
faster than sales, which is slowing the increase
in gross margin.

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Outline
Quick Check ✔ Quick Check ✔ I. Financial Statements
II. Financial Statement Analysis
Which of the following statements describes Which of the following statements describes A. Limitations of FS Analysis
horizontal analysis? horizontal analysis? B. Vertical Analysis
a. A statement that shows items appearing a. A statement that shows items appearing C. Horizontal Analysis
D. Financial Ratios
on it in percentage and Peso form. on it in percentage and Peso form.
1. Liquidity Ratios
b. A side-by-side comparison of two or b. A side-by-side comparison of two or 2. Asset Management Ratios
more years’ financial statements. more years’ financial statements. 3. Debt Management Ratios
c. A comparison of the account balances on c.Horizontal
A comparison of the account 4. Profitability Ratios
analysis shows the balances
changes on 5. Market Ratios
the current year’s financial statements. the current
between yearsyear’s
in thefinancial
financialstatements.
data in both III. True or False
d. None of the above. d. NonePeso
of theand
above.
percentage form. IV. MC Theories
V. Problems

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PROBLEM #1 13-50
PROBLEM #1 13-51

Outline
I. Financial Statements
II. Financial Statement Analysis
A. Limitations of FS Analysis
B. Vertical Analysis
C. Horizontal Analysis
D. Financial Ratios
1. Liquidity Ratios
2. Asset Management Ratios
3. Debt Management Ratios
4. Profitability Ratios
5. Market Ratios
III. True or False
IV. MC Theories
V. Problems

PROBLEM #1 13-52 13-53 13-54

Liquidity Ratios
Additional information:
The data and ratios that managers use to assess
liquidity include
1. In both 2018 and 2019, costs of sales were 80%
variable while the operating expenses were 60% 1. working capital
fixed. 2. current ratio
3. acid-test (quick) ratio
4. Cash ratio

2. Common stocks are traded in the market at P20

per share.

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Working Capital Working Capital

The excess of current assets over

current liabilities is known as
working capital.

Working capital is not

free. It must be
financed with long-
term debt and equity.

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Current Ratio Current Ratio Acid-Test (Quick) Ratio

Current Current Assets Current = Current Assets Acid-Test Quick Assets
= =
Ratio Current Liabilities Ratio Current Liabilities Ratio Current Liabilities

The current ratio measures a

Current ₱201,000
company’s short-term debt paying = = 2.5125
Ratio ₱80,000
ability.

A declining ratio may be a Quick assets include Cash,

sign of deteriorating Marketable Securities, Accounts Receivable, and
financial condition, or it current Notes Receivable.
might result from eliminating This ratio measures a company’s ability to meet
obsolete inventories. obligations without having to liquidate inventory.

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Acid-Test (Quick) Ratio Cash Ratio

Acid-Test Quick Assets Cash Cash and Cash Equivalents

= =
Ratio Current Liabilities Ratio Current Liabilities

Acid-Test ₱79,500
= = 0.99375
Ratio ₱80,000

Quick assets include Cash, Cash and Cash Equivalents include

Marketable Securities, Accounts Receivable, and Cash, and Marketable Securities.
current Notes Receivable.
This ratio measures a company’s ability to meet
obligations without having to liquidate inventory.

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Cash Ratio

INCREASE
Cash Cash and Cash Equivalents
=
Ratio Current Liabilities

Acid-Test
Ratio
=
₱7,500
₱80,000
= 0.09375 DECREASE
Cash and Cash Equivalents include
NO EFFECT
Cash, and Marketable Securities.

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No
State the effect of the following Effect
State the effect of the following
transactions on the current ratio. Use Decreas transactions on the current ratio. Use
e
Decreas
increase, decrease, or no effect for your increase, decrease, or no effect for your
answer. e answer.
Increase
Increase
Decreas
Assume that the current e
No Assume that the current
ratio is presently greater than Effect
Decreas ratio is presently less than 1.
1. e
Increase
Increase

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No
Effect
Decreas Asset Management Ratios
e
Decreas
e 1. Inventory Turnover (Inv. TO) and
Increase Average Selling Period (ASP)
Decreas Compute and interpret
e
Decreas financial ratios that 1. Accounts Receivable Turnover (ARTO) and
Average Collection Period (ACP)
e
No managers use for asset
Effect management purposes. 1. Operating Cycle (OC)
Increase
1. Fixed Asset Turnover (FATO)
Increase
1. Total Asset Turnover (TATO)
Increase

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Inventory Turnover Inventory Turnover

Inventory Cost of Goods Sold
= Inventory Cost of Goods Sold
Turnover Average Inventory =
Turnover Average Inventory
This ratio measures how many times a
company’s inventory has been sold and Inventory ₱365,580
= = 3.2935 times
replaced during the year. Turnover (₱120,000 + ₱102,000) ÷ 2

If a company’s inventory
turnover Is less than its
industry average, it either
has excessive inventory or
the wrong sorts of inventory.

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Average Selling Period (ASP) Average Selling Period (ASP) Accounts Receivable Turnover (ARTO)
ASP 365 Days ASP 365 Days Accounts
= = Sales on Account
Inventory Turnover Inventory Turnover Receivable =
Average Accounts Receivable
Turnover

ASP 365 Days

= = 110.84 days or
3.2935 Times
111 days

This ratio measures how many This ratio measures how many This ratio measures how many
days, on average, it takes to sell days, on average, it takes to sell times a company converts its
the entire inventory. the entire inventory. receivables into cash each year.

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Accounts Receivable Turnover Average Collection Period (ACP)

Accounts
Sales on Account 365 Days
Receivable = ACP =
Average Accounts Receivable Accounts Receivable Turnover
Turnover

Accounts
₱522,000
Receivable = = 7.5652 times
(₱72,000 + ₱66,000) ÷ 2
Turnover

This ratio measures how many

This ratio measures, on average,
times a company converts its
how many days it takes to collect
receivables into cash each year.
an account receivable.

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Average Collection Period Operating Cycle (OC) Operating Cycle

365 Days Average Average Operating Average Average Operating

ACP = + = + =
Accounts Receivable Turnover Selling Period Collection Period Cycle Sale Period Collection Period Cycle

111 days + 49 days = 160 days

365 Days ASP + ACP = OC
ACP = = 48.25 or 49 days
7.5652 Times

This ratio measures the elapsed

time from when inventory is
This ratio measures, on average,
received from suppliers to when
how many days it takes to collect
cash is received from customers.
an account receivable.

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Fixed Asset Turnover (FATO) Fixed Asset Turnover (FATO)

Sales Sales
FATO = FATO =
Average Net Fixed Assets Average Net Fixed Assets

Total Asset ₱522,000

Turnover = (₱516,000 + ₱486,000) ÷ 2 = 1.0419

This ratio measures how efficiently a

company’s assets are being used to This ratio measures how efficiently a
generate sales. This ratio expands company’s fixed assets are being
beyond current assets to include used to generate sales.
noncurrent assets.

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Total Asset Turnover (TATO) Total Asset Turnover (TATO)

Sales Sales
TATO = TATO =
Average Total Average Total
Assets Assets
₱522,000
TATO = = 0.7537
(₱720,000 + ₱665,100) ÷ 2

This ratio measures how efficiently a This ratio measures how efficiently a
company’s assets are being used to company’s assets are being used to
generate sales. This ratio expands generate sales. This ratio expands
beyond current assets to include beyond current assets to include
noncurrent assets. noncurrent assets.

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Debt Management Ratios Accounts Payable Turnover (APTO)

1. Accounts Payable Turnover (APTO)

Purchases on Account
1. Debt to Asset Ratio (DTA) APTO =
Average Accounts Payable
Compute and interpret
financial ratios that 1. Debt to Equity Ratio (DTE)
managers use for debt
management purposes. 1. Equity Multiplier (EM)

This ratio measures how many

1. Times-Interest Earned Ratio (TIER) times a company settles its
accounts payable each year.

1. Fixed Charge Coverage Ratio (FCCR)

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Accounts Payable Turnover

Average Payment Period (APP)
(APTO)
APTO Purchases on Account 365 Days
= APP =
Average Accounts Payable Accounts Payable Turnover

₱383,580*
APTO = = 8.7876 times
(₱45,000 + ₱42,300) ÷ 2

*Purchases = COGS + Inventory, end – Inventory,beg This ratio measures, on average,

= P365,580 + P120,000 – P102,000 how many days it takes to pay an
accounts payable.

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Average Payment Period (APP) Cash Conversion Cycle (CCC) Cash Conversion Cycle (CCC)

365 Days Average Average - Average Cash ASP + ACP - APP = CCC
APP = + =
Accounts Payable Turnover Selling Collection Payment Conversion
Period Period Period Cycle
111 days + 49 days - 42 days = 118 days
365 Days ASP + ACP - APP = CCC
APP = = 41.54 or 42 days
8.7876 Times

This ratio measures the elapsed

time from when cash is paid to
This ratio measures, on average,
suppliers to when cash is
how many days it takes to pay an
received from customers.
accounts payable.

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Debt to Asset Ratio (DTA) Debt to Asset Ratio (DTA)

DT = Total Liabilities DT = Total Liabilities

Total Assets Total Assets
A A

DT ₱300,000
= = 0.4167
A ₱720,000

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Debt-to-Equity Ratio (DTE) Debt-to-Equity Ratio (DTE)

Debt–to– Debt–to–
Total Liabilities Total Liabilities
Equity = Equity =
Stockholders’ Equity Stockholders’ Equity
Ratio Ratio

This ratio indicates the relative proportions

₱300,000
of debt to equity on a company’s balance DTE =
₱420,000
= 0.7143
sheet.

Stockholders like a lot of Creditors prefer less debt

debt if the company’s and more equity because
rate of return on its equity represents a buffer
assets exceeds the rate of protection. In practice
of return paid to debt-to-equity ratios from
creditors. 0.0 to 3.0 are common

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Equity Multiplier (EM) Equity Multiplier (EM)

Equity = Average Total Assets Equity = Average Total Assets
Multiplier Average Stockholders’ Equity Multiplier Average Stockholders’ Equity*

(₱720,000 + ₱665,100) ÷ 2
EM = = 1.9110
(₱384,000 + ₱340,800) ÷ 2

This ratio indicates the portion of a company’s Stockholders’ Equity = Common Stock + APIC + RE
assets that are funded by equity.

It focuses on average amounts maintained

throughout the year rather than amounts at one point in
time.

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Times Interest Earned Ratio Times Interest Earned Ratio (TIER)

Earnings before Interest Expense Earnings before Interest Expense
Times and Income Taxes Times and Income Taxes
Interest = Interest Expense Interest = Interest Expense
Earned Earned

TIER P114,42
= = 4.732 times
0
P24,180
This is the most common This is the most common
measure of a company’s ability measure of a company’s ability
to provide protection for its long- to provide protection for its long-
term creditors. A ratio of less term creditors. A ratio of less
than 1.0 is inadequate. than 1.0 is inadequate.

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Fixed Charge Coverage Ratio (FCCR) Fixed Charge Coverage Ratio (FCCR)
Earnings before Interest Expense + Fixed Earnings before Interest Expense + Fixed
and Income Taxes and Income Taxes
FCCR = FCCR =
Interest Expense + Fixed Charge Charge Interest Expense + Fixed Charge Charge

FCCR EBIT + FC FCCR EBIT + FC

= =
Interest + FC Interest + FC

P114,420 + P98,316*
FCCR = = 1.7367 times
P24,180 + P98,316

FC = (P365,580 x 20%) + (P42,000 x 60%)

= P98,316

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1. Gross Profit Margin (GP Margin) Profitability Ratios Margins

1. Operating Profit Margin (OP Margin)

1. Profit Margin
1. Gross Profit Margin (GP Margin)

1. Return on Sales (ROS)

Compute and interpret
financial ratios that 1. Return on Assets (ROA)

managers use to assess 1. Operating Profit Margin (OP Margin)

1. Return on Equity (ROE)
profitability.
1. Earnings Per Share (EPS)

1. Dividends Per Share (DPS)

1. Profit Margin
1. Dividend Pay-Out ratio (DPOR)

Plus Dupont Formula

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Gross Profit Margin (GP Margin) Gross Profit Margin (GP Margin)

Gross Profit = Gross Profit Gross Profit = Gross Profit

Margin Sales Margin Sales

GP Margin = ₱156,420 = 29.97%

₱522,000

This measure indicates how much This measure indicates how much
of each sales Peso is left after of each sales Peso is left after
deducting the cost of goods sold to deducting the cost of goods sold to
cover expenses and provide a profit. cover expenses and provide a profit.
The percentage should be more stable for retailing
companies than for other companies.

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Operating Profit Margin (OP Margin) Operating Profit Margin (OP Margin)

Operating Profit = Operating Profit Operating Profit = Operating Profit

Margin Sales Margin Sales

OP Margin = ₱114,420 = 21.92%

₱522,000

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Profit Margin (PM) Profit Margin (PM)

Profit Margin = Net Income Profit Margin = Net Income

Sales Sales

PM = ₱67,680
= 12.97%
₱522,000

In addition to cost of goods sold, this In addition to cost of goods sold, this
ratio also looks at how selling and ratio also looks at how selling and
administrative expenses, interest administrative expenses, interest
expense, and income tax expense expense, and income tax expense
influence performance. influence performance.

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Returns Dupont Formula

Return on Sales (ROS)
1. Return on Sales (ROS) Net Income Available to Common
1. Return on Assets (ROA) Stockholders
Return on Sales =
Sales

= NIcs
Return on Sales
1. Return on Assets (ROA) Sales

1. Return on Equity (ROE)

1. Return on Equity (ROE)

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Return on Sales (ROS) Return on Total Assets (ROA)

Net Income Available to Common Net Income Available to Common
Stockholders Return on Stockholders
Return on Sales = =
Sales Total Average Total Assets
Assets
= NIcs = NIcs
Return on Sales ROA
Sales Average Total Assets

₱64,800*
Return on Sales = = 12.41%
P522,000

*Net Income Available to Common Stockholders (NIcs)

= Net Income – Preferred Stock Dividends
= P67,680 – P2,880
= P64,800

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Return on Total Assets (ROA) DuPont Formula

Net Income Available to Common
Return on Stockholders NIcs NIcs Sales
= ROA = =
Total Average Total Assets TA ave Sales TA ave
Assets
= NIcs
ROA ROA = ROS TATO
Average Total Assets

₱64,800* ROA = 12.41% 0.7537 = 9.35%

ROA = = 9.36%
(₱720,000 + ₱665,100) ÷ 2
If there are no preferred stocks,
*Net Income Available to Common Stockholders (NIcs)
= Net Income – Preferred Stock Dividends ROA = Profit Margin x Total Asset Turnover
= P67,680 – P2,880 ROA = PM x TATO
= P64,800

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Return on Equity (ROE) Return on Equity (ROE)

Net Income Available to Common Net Income Available to Common
= Stockholders = Stockholders
Return on Equity Return on Equity
Average Stockholders’ Equity Average Stockholders’ Equity

= NIcs = NIcs
ROE ROE
Average Stockholders’ Equity Average Stockholders’ Equity

₱64,800
ROE = = 17.88%
(₱384,000 + ₱340,800)÷2

This measure indicates how well the This measure indicates how well the
company used the owners’ company used the owners’
investments to earn income. investments to earn income.

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DuPont Formula Return on Total Assets (ROA) Per Share

Return on = NIcs NIcs Sales TA ave
Equity TE ave Sales TA ave TE ave Return on Net Income + [Interest Expense × (1 – Tax Rate)]
1. Earnings Per Share (EPS)
= =
Total Average Total Assets
ROE = ROS TATO EM Assets

ROE = 12.41% 0.7537 1.911

₱67,680 + [₱24,180 × (1–0.25)]
1. Dividends Per Share (DPS)
ROA = = 12.39%
ROE = 17.87% (₱720,000 + ₱665,100) ÷ 2

If there are no preferred stocks,

Adding interest expense back to net income 1. Dividend Pay-Out ratio (DPOR)
enables the return on assets to be compared
ROE = Profit Margin x Total Asset TO x for companies with different amounts of debt
Equity Multiplier or over time for a single company that has
changed its mix of debt and equity.
ROE = PM x TATO x EM

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Earnings Per Share (EPS) Earnings Per Share (EPS)

Net Income Available to
Common Stockholders NIcs
Earnings per Share = EPS =
Average Number of Common Average Number of Common
Shares Outstanding Shares Outstanding

Whenever a ratio divides an income statement Earnings per Share = ₱64,800 = ₱4.41
balance by a balance sheet balance, the average (15,000 + 14,400)÷2
for the year is used in the denominator.
This measure indicates how much
Earnings form the basis for dividend payments income was earned for each share of
and future increases in the value of shares of common stock outstanding.
stock.

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Dividends Per Share (DPS) Dividends Per Share (DPS)

Dividends to Common Dividends to Common
DPS = Stockholders DPS = Stockholders
Average Number of Common Average Number of Common
Shares Outstanding Shares Outstanding

DPS = ₱28,800 = ₱1.96

(15,000 + 14,400)÷2

This measure indicates how much This measure indicates how much
income was/will be distributed for income was/will be distributed for
each share of common stock each share of common stock
outstanding. outstanding.

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Dividend Payout Ratio (DPOR) Dividend Payout Ratio (DPOR)

Dividend Dividends Per Share Dividend Dividends Per Share

= =
Payout Ratio Earnings Per Share Payout Ratio Earnings Per Share
Compute and interpret
DPOR =
₱1.96
= 44.44% financial ratios that
₱4.41
managers use to assess
market performance.
This ratio gauges the portion of current This ratio gauges the portion of current
earnings being paid out in dividends. Investors earnings being paid out in dividends. Investors
seeking dividends (market price growth) would seeking dividends (market price growth) would
like this ratio to be large (small). like this ratio to be large (small).

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Market Ratios Price-Earnings Ratio (PER) Market-Book Ratio (MBR)

1. Price-Earnings Ratio (PER) Price-Earnings Market Price Per Share Market-Book Market Price Per Share
= =
Ratio Earnings Per Share Ratio Book Value Per Share

PER MPS
=
EPS MPS
1. Market Book Ratio (MBR) MBR =
P20.00 BVPS
PER = = 4.54
P4.41
MBR P20.00
=
???
1. Dividend Yield Ratio (DYR) A higher price-earnings ratio means that
investors are willing to pay a premium
for a company’s stock because of
optimistic future growth prospects.

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Book Value Per Share Book Value Per Share Market-Book Ratio (MBR)

Book Value Common Stock + APIC + RE Book Value Common Stock + APIC + RE Market-Book Market Price Per Share
= = =
per Share Number of Common Shares Outstanding per Share Number of Common Shares Outstanding Ratio Book Value Per Share

Book Value ₱384,000 Book Value ₱384,000

= = ₱25.60 = = ₱25.60 MPS
per Share 15,000 per Share 15,000 MBR =
BVPS
This ratio measures the amount that would be Notice that the book value per share of ₱25.60 does
distributed to holders of each share of common stock if MBR P20.00 = 0.78125
not equal the market value per share of ₱20. This is =
all assets were sold at their balance sheet carrying P25.60
because the market price reflects expectations
amounts after all creditors were paid off. about future earnings and dividends, whereas the
book value per share is based on historical cost.

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Dividend Yield Ratio (DYR) Dividend Yield Ratio (DYR)

Dividend Dividends Per Share Dividend Dividends Per Share

= =
Yield Ratio Market Price Per Share Yield Ratio Market Price Per Share

DYR =
P1.96
P20.00
= 9.80% TRUE or FALSE
This ratio identifies the return, in terms This ratio identifies the return, in terms
of cash dividends, on the current of cash dividends, on the current
market price of the stock. market price of the stock.

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2. One limitation of vertical

1. Common-size statements 1. Common-size statements
analysis is that it cannot be used
are financial statements of are financial statements of
to compare two companies that
companies of similar size. companies of similar size.
are significantly different in size.

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2. One limitation of vertical

3. The sale of used equipment 3. The sale of used equipment
analysis is that it cannot be used
at book value for cash will at book value for cash will
to compare two companies that
increase earnings per share. increase earnings per share.
are significantly different in size.

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4. An increase in the number 4. An increase in the number

of shares of common stock of shares of common stock
5. If a company's acid-test ratio
outstanding will decrease a outstanding will decrease a
increases, its current ratio will
company's price-earnings ratio if company's price-earnings ratio if
also increase.
the market price per share the market price per share
remains unchanged. remains unchanged.

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5. If a company's acid-test ratio

6. Short-term borrowing is not 6. Short-term borrowing is not
increases, its current ratio will
a source of working capital a source of working capital
also increase.

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7. Profitability ratios are 7. Profitability ratios are

frequently used as a basis for
evaluating management's
frequently used as a basis for
evaluating management's MC THEORIES
operating effectiveness operating effectiveness

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1. Which of the following below generally is 1. Which of the following below generally is
2. A balance sheet that displays only
the most useful in analyzing companies of the most useful in analyzing companies of
component percentages is called
different sizes? different sizes?
a. trend balance sheet
a. comparative statements a. comparative statements
b. comparative balance sheet
b. common-sized financial statements b. common-sized financial statements
c. condensed balance sheet
c. price-level accounting c. price-level accounting
d. common-size balance sheet
d. audit report d. audit report
e. trend analysis
e. trend analysis e. trend analysis

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2. A balance sheet that displays only 3. In horizontal analysis each item is 3. In horizontal analysis each item is
component percentages is called expressed as a percentage of the expressed as a percentage of the
a. trend balance sheet a. base year figure a. base year figure
b. comparative balance sheet b. retained earnings figure b. retained earnings figure
c. condensed balance sheet c. total assets figure c. total assets figure
d. common-size balance sheet d. net income figure d. net income figure
e. trend analysis e. all of the above e. all of the above

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5. A company with P60,000 in current

assets and P40,000 in current liabilities pays a
4. The acceleration in the collection of 4. The acceleration in the collection of P1,000 current liability. As a result of this
receivables will tend to cause the accounts receivables will tend to cause the accounts transaction, the current ratio and working
receivable turnover to receivable turnover to capital will
a. decrease a. decrease a. both decrease
b. remain the same b. remain the same b. both increase
c. either increase or decrease c. either increase or decrease c. increase and remain the same,
d. increase d. increase respectively
d. remain the same and decrease,
respectively

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5. A company with P60,000 in current

6. Roselyn Corp has a 2 to 1 current ratio. 6. Roselyn Corp has a 2 to 1 current ratio.
assets and P40,000 in current liabilities pays a
This ratio would increase if This ratio would increase if
P1,000 current liability. As a result of this
a. The company wrote off an uncollectible a. The company wrote off an uncollectible
transaction, the current ratio and working
receivable receivable
capital will
b. The company purchased inventory on b. The company purchased inventory on
a. both decrease
open account open account
b. both increase
c. The company sold merchandise on open c. The company sold merchandise on open
c. increase and remain the same,
account that earned a normal gross margin account that earned a normal gross margin
respectively
d. A previously declared stock dividend d. A previously declared stock dividend
d. remain the same and decrease,
were distributed were distributed
respectively

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8. Financial ratio, which assess the

7. A measure of the company’s long term 7. A measure of the company’s long term
profitability of a company, include all of the
debt paying ability is debt paying ability is
following except:
a. Return on assets a. Return on assets
a. Dividend yield ratio
b. Dividend out ratio b. Dividend out ratio
b. Gross profit rate
c. Times interest earned ratio c. Times interest earned ratio
c. Earnings per share
d. Operating cycle d. Operating cycle
d. Return on sales

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9. Kevin Inc. has a current ratio of 0.65 to 1. 9. Kevin Inc. has a current ratio of 0.65 to 1.
8. Financial ratio, which assess the A cash dividend declared last month is paid A cash dividend declared last month is paid
profitability of a company, include all of the this month. What is the effect of this dividend this month. What is the effect of this dividend
following except: payment on the current ratio and working payment on the current ratio and working
a. Dividend yield ratio capital respectively? capital respectively?
b. Gross profit rate a. Rise and decline a. Rise and decline
c. Earnings per share b. Rise and no effect b. Rise and no effect
d. Return on sales c. Decline and no effect c. Decline and no effect
d. No effect on both ratios d. No effect on both ratios

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10. A high receivable turnover ratio indicates 10. A high receivable turnover ratio indicates
a. Many customers are not paying the a. Many customers are not paying the
company’s receivables
b. Customers are making payments quickly
company’s receivables
b. Customers are making payments quickly
PROBLEMS
c.
d.
The company’s sales have increased
A large portion of the company’s sales
c.
d.
The company’s sales have increased
A large portion of the company’s sales
#2 to #11
are on credit are on credit

Problem #3 Problem #4
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Problem #2
Erica Trading Corp had net income of P2
million in 2017. Using the 2017 financial
elements as the base data, net income
decreased by 40% in 2018 and increased by
125% in 2019.

1. The net income reported by the company for

2018 is ____________________

2. The net income reported by the company for

2019 is ____________________

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Problem #5 Problem #5
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Problem #6
During 2019, Salas Company purchased P520,000 of inventory. The
cost of goods sold for 2019 was P480,000, and the inventory on December 3. The times interest earned ratio of Salas Company was 3.25 times. The
31, 2019 was P180,000. interest expense for the year was P30,000 and the company’s tax rate is
P40%. What was company’s net income?
1. What was the inventory turnover for 2019?
2. Days in inventory was ______.

Problem #7
13-202

Problem #8
13-203
Problem #9 13-204

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Problem #10 Problem #11

Abokoutah Company reported cost of goods sold of
Cedric Corp has a current ratio of 3:1. The minimum P250,000 and operating expenses of P150,000 (including
desired ratio is 5:1. At present, the net working capital is depreciation of P20,000). Income taxes are 35%. The after-tax
P40,000. How much current liabilities must be paid to return on sales is 23.4%. How much was the sales revenue?
achieve the minimum current ratio?

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