I. THEORY. A. Multiple choice. Encircle the letter of the best answer. (10 minutes) 1. Increase in current assets and current liabilities by the same amount will result to a. an increase in current ratio b. a decrease in current ratio keep the current ratio constant d. all of the above are possible 2. Which of the following are useful in evaluating the effectiveness with which the company uses its assets: .a. liquidity ratios b. efficiency ratios c. solvency ratios d. profitability ratios 3. The primary objective of vertical analysis is: a. to highlight changes and assess trends in individual items over time b. 4. C. to highlight relationships between two or more line items on the financial statements to highlight relationships between components of the financial statements . d. all of the above In a horizontal analysis, each item is expressed as a percentage of the: a. net income amount. b. stockholders' equity amount. C. total assets amount d. base year amount 5. Which of the following is generally not considered to be a limitation of financial analysis? a. Use of ratio analysis b. Use of estimates C. Use of cost d. Use of alternative accounting method 6. Homer Simpson is interested in assessing both the efficiency and liquidity of Burns Inc. Simpson has collected the following data for Burns. 2013 2012 2011 Days Sales in Average Inventory Average Collection period 31 35 45 27 24 20 Average Payment Period 42 37 34 Based on this data, what is Simpson least likely to conclude? Inventory management has contributed to improved liquidity a. b. Management of payables has contributed to improved liquidity Management of receivables has contributed to improved liquidity d. None of the Above C. For nos. 7 & 8 Stock Earnings per share Price earnings ratio Dividend Yield Dividend Foxtrot Corp. P20.25 8 5.00% Pay-out ratio 40% Tango Inc. P13.20 10 4.80% 48% 7. If you were an investor looking to purchase the cheapest stock that yields the best earnings, which stock would you choose? . a. Foxtrot Corp b. Tango Inc. C. Foxtrot Corp. and Tango Inc. stocks would yield the same results Insufficient information to answer the question d. 8. If you are to purchase stocks that would provide the highest dividend you can get per year, which stock would you choose? a. Foxtrot Corp b. Tango Inc. C. Foxtrot Corp. and Tango Inc. stocks would yield the same results d. Insufficient information to answer the question Measures the peso difference between current assets and current liabilities 9. a. b. . C. Current ratio Acid test ratio Working capital d. Total Assets turnover 10. Measures the efficient use of owner's capital to earn income. a. Net profit margin b. Return on equity C. Total assets turnover - d. Return on investments 123 B. Matching Type: Write the letter of the best answer(s) on the blanks provided. You must identify all effects or no points will be given for that number. A effects for that item. If there is no appropriate response among the effects listed, write "e" For each of the following numbered items, you are to give the lettered financial statement for NO EFFECT. If more than one effect is applicable to a particular item, be sure to list all applicable letters. Financial Statement effects: (write only the letter in the left space provided below). a. Reduces working capital b. Increases working capital C. Reduces current ratio d. e. Increases current ratio No effect 1. Declaration of a cash dividend due in one month on preferred stock. 2. Issuance of new common shares in a 5-for-1 stock split A D 3. Receipt of cash from sale of equipment. P E 5. 4. Collection of accounts receivable. Receipt of a cash dividend, not previously recorded, on stock of another corporation. C. True or False. Write (before the statement) TRUE if the statement is true and write FALSE if the statement is false. (Caution: Right minus wrong) TRUE FALSE FALSE FALSE FALSE TRUE FALSE TRUE FALSE FALSE 1. A current ratio of 2 to 1 always indicates that a company can easily meet its current debts. 2. Accounts receivable turnover of 6.4 times in 20X2 and 8.2 times in 20X1 indi- cates that a company is collecting its accounts receivable more rapidly in 20X2 3. 4. 5. than in 20X1. If accounts receivable is P150,000 and net credit sales is P1,000,000, days' sales uncollected is 15. On a common-size income statement, the amount of net sales is assigned a value of 100%. sales. To calculate merchandise turnover, cost of goods sold is divided by gross 6. The ratios and turnovers of a selected group of competitive companies normally are the best bases of comparison for analyzing financial statements. 7. Return on total assets summarizes the two components of operating efficiency -profit margin and total asset turnover. 8. Current ratio, acid test ratio, accounts receivable turnover, and merchandise turnover are tools for evaluating short-term liquidity. 9. The margin of safety is the excess of current sales over expected sales. 10. Cash flows statement is a tool in analyzing the financial status of a company