PROBLEM 1

1.

Twig Company

Horizontal Analysis-Balance Sheet

2007 2006 Peso Change % Change

Assets
Cash P 3,000 P 5,000 P -2,000 -40%
Accounts receivable 40,000 25,000 15,000 60%
Inventory 27,000 30,000 -3,000 -10%
Long-term investments 15,000 0 15,000 100%
Land, buildings and 100,000 75,000 25,000 33%
equipment (net)
Intangible assets 10,000 10,000 0 0
Other assets 5,000 20,000 -15,000 -75%
Total Assets P200,000 P165,000 35,000 21%

Liabilities
Current liabilities P30,000 P47,000 P -17,000 -36%
Long-term liabilities 88,000 74,000 14,000 19%
Total liabilities 118,000 121,000 3,000 -2%
Stockholder’s Equity
8% Preferred stock 10,000 9,000 1,000 11%
Common stock 54,000 42,000 12,000 29%
Additional paid-in 5,000 5,000 0 0
capital
Retained earnings 13,000 (12,000) 25,000 208.33%
Total stockholder’s 82,000 44,000 38,000 86%
equity
Total liabilities and P200,000 P165,000 35,000 21%
stockholder’s equity
2.

Twig Company

Vertical Analysis-Balance Sheet

2007 PERCENTAGE(%) 2006 PERCENTAGE(%)

Assets
Cash P 3,000 1.5% P 5,000 3%
Accounts receivable 40,000 20% 25,000 15.1%
Inventory 27,000 13.5% 30,000 18.2%
Long-term investments 15,000 7.5% 0 0
Land, buildings and 100,000 50% 75,000 45.5%
equipment (net)
Intangible assets 10,000 5% 10,000 6.1%
Other assets 5,000 2.5% 20,000 12.1%
Total Assets P200,000 100% P165,000 100%
Liabilities
Current liabilities P30,000 15% P47,000 28.48%
Long-term liabilities 88,000 44% 74,000 44.85%
Total liabilities 118,000 59% 121,000 73.33%
Stockholder’s Equity
8% Preferred stock 10,000 5% 9,000 5.45%
Common stock 54,000 27% 42,000 25.45%
Additional paid-in 5,000 2.5% 5,000 3.03%
capital
Retained earnings 13,000 6.5% (12,000) -7.27%
Total stockholder’s 82,000 41% 44,000 26.67%
equity
Total liabilities and P200,000 100% P165,000 100%
stockholder’s equity

3.

As of December 31, 2007, Twig Company has made a big leap in its finances from the
previous year to the current one. The total assets rose by 21%, which was the main reason for the
growth in the accounts receivable, long-term investments, and land, buildings, and equipment.
These increases mark the way for the future, and the fact of reallocation of the 40% cash to
investments or operational needs may be the reason for the decrease in cash. A 60% rise in accounts
receivable may show that the company has been selling goods more on credit, which is good if it
means the company is making more revenue, but it may be a problem if the company is not doing a
good job of collecting. The importance of long-term investments and a 33% increase in land,
buildings, and equipment along with the solid strategy of directing the capital to such investments
will help in the functioning of the company for the next several years.

Equity of Twig's stockholders whose capital has increased by 86% is the result of both new
equity contributions as well as the strong retained earnings growth which improved from a deficit of
P13,000 in 2006 to a positive balance of P12,000 in 2007. This move has seen the equity-to-assets
ratio rise from 26.67% to 41% thus a higher efficiency is attained in the financing of the acquisition of
assets so that finally a company will be less dependent on liabilities, which implies a higher
profitability. While the 2% decrease in total liabilities is a positive sign, the 19% increase in long-term
debt indicates a higher financial burden in the future. Twig's asset growth and strengthened equity
base are a sign of a stable and growth-friendly financial structure, however, liquidity holding will be
the key to the supporting of sustainability operations.

PROBLEM 2

1. Net working capital

 Current assets- current liabilities
Solution:
P85,000 + 25,000 + 245,000 + 220,000 + 10,000 = P585,000 (current assets)
P165,000 + 25,000 + 10,000 = P200,000 (current liabilities)
P585,000 - P200,000 = P385,000
2. Current ratio
 Current assets / Current liabilities
Solution:
P85,000 + 25,000 + 245,000 + 220,000 + 10,000 = P585,000 (current assets)
P165,000 + 25,000 + 10,000 = P200,000 (current liabilities)
P585,000 / P200,000 = 2.92
3. Acid-test ratio
 Quick assets / Current liabilities
Solution:
P85,000 + 25,000 + 245,000 = P355,000 (Quick assets)
P165,000 + 25,000 + 10,000 = P200,000 (current liabilities)
P355,000 / P200,000 = 1.775
4. Accounts receivable turnover and average collection period
 Net credit sales / Average trade receivables
 360 days / Receivable turnover
Solution
Receivable turnover = 1,000,000 / 122,500 = 8 times
Collection period = 360 / 8 = 45 days
5. Inventory turnover and average days to sell inventory
 Cost of goods sold / Average inventory
 360 days / Inventory turnover
Solution:
Inventory turnover = 750,000 / 235,000 = 3 times
Inventory days = 360 / 3 = 120 days
6. Gross profit rate on sales
 Gross profit / Net sales
Solution:
250,000 / 1,000,000 = 0.25 x 100%
= 25%

7. Book value per common share

  Stockholders' equity / Average shares outstanding
Solution:
300,000 / (3,000/2)
= P200
8. Rate of return on sales
 Net income / Net sales
Solution:
90,000 / 1,000,000 = 0.09 x 100%
= 9%
9. Earnings per share
 Net income - Preferred dividends / Average common shares outstanding
Solution:
90,000 – 0 / (3,0000 / 2)
= P60

10. Rate of return on invested capital

 Operating Income / Average Total Asset
Solution:
90,000 / (600,000 / 2)
= 30%

11. Debt-to-equity ratio

 Total debt / Net stockholders' equity
Solution:
320,000 / 600,000 = 0.5333 x 100%
= 53.33%

12. Debt ratio

 Total debt / Total assets
Solution:
320,000 / 920,000 = 0.3478 x 100%
= 34.78%
 PROBLEM 3

1. Base year – 2006

Uptown Girl Corporation
Trend Analysis – 2006 base year
2010 2009 2008 2007 2006
Sales P8,775 P7,800 P7,475 P7,020 P6,500
Ratios 1.35 1.2 1.15 1.08 1.00
Indexes 135 120 115 108 100

Current assets 1,009 1,012 1,022 1,033 1,020

Ratios 0.99 0.99 1.00 1.01 1.00
Indexes 99 99 100 101 100

Current liabilities 475 450 350 325 250

Ratios 1.9 1.8 1.4 1.3 1.00
Indexes 190 180 140 130 100

2. . Base year – 2007

Uptown Girl Corporation
Trend Analysis – 2007 base year
2010 2009 2008 2007 2006
Sales P8,775 P7,800 P7,475 P7,020 P6,500
Ratios 1.25 1.11 1.06 1.00 0.93
Indexes 125 111 106 100 93

Current assets 1,009 1,012 1,022 1,033 1,020

Ratios 0.98 0.98 0.99 1.00 0.99
Indexes 98 98 99 100 99

Current liabilities 475 450 350 325 250

Ratios 1.46 1.38 1.08 1.00 0.77
Indexes 146 138 108 100 77
PROBLEM 4.

1. Debt ratio
 Total debt / Total assets
East Company West Company
200,000 / 500,000 300,000 / 500,000
=0.4 or 40% = 0.6 or 60%

2. Equity ratio
 Net stockholders' equity / Total assets
East Company West Company
300,000 / 500,000 200,000/ 500,000
=0.6 or 60% =0.4 or 40%

3. Debt-equity ratio
 Total debt / Net stockholders' equity
East Company West Company
200,000 / 300,000 300,000 / 200,000
=0.67 or 67% =1.5 or 150%

4. Equity multiplier
 Total assets (equity) / Net stockholders' equity
East Company West Company
500,000 / 300,000 500,000/ 200,000
=1.67 =2.5

5. Times interest earned

 EBIT / Interest expense
East Company West Company
10,000 / 2,000 12,000 / 6,000
= 5 times = 2 times

6. Financial leverage
 EBIT / (EBIT-Interest expense - Preferred dividend before tax)
East Company West Company
10,000/ 7,000 12,000 / 3,000
= 1.43 =4
PROBLEM 5

1. Calculate the following ratios for horizons inc., for the year ended December 31, 2007:
a. Return on sales
 Net income / Net sales
Solution:
7,000 / P350,000
= 0.02 or 2%

b. Return on assets
 Net income + Interest expense, net of tax / Average total assets
Solution:
7,000 + 2,000 + 3,000 / 20,000
= 12,000 / 20,000
= 0.6 or 60%

c. Return on stockholder’s equity

 Net income / Average stockholders' equity
Solution:
7,000 / 8,400
= 0.83 or 83%

d. Return on common stockholders’ equity

 Earnings available to common stockholders / Average common stockholders’ equity
Solution:
P6,880 / 8,400
= 0.82 or 82%

e. Times preferred dividend earned

 Net income / Preferred dividend
Solution:
7,000 / 120
= 58 times

f. Earnings per share

 Net income – Preferred dividends / Average common shares outstanding
Solution:
7,000 – 120 / (8,000/2)
= 6,880/4,000
= 1.72
g. Degree of operating leverage
 Contribution margin / EBIT
Solution:
40,000 / 12,000
= 3.33
 2. Asset Turnover
Net Sales/ Average Total Assets
Solution:
350,000/ 20,000
= 17.5 times

3. Debt Ratio
Total Debts/ Total Assets Debt Ratio
Solution:
11,600/ 20,000
= 58%

PROBLEM 6

1. Price- earnings ratio

 Market price per share / Earnings per share
Mindoro Corporation Tarlac Corporation
P200 / 50 P90 / 30
= P4 = P3

2. Payout ratio
 Dividend per share / Earnings per share
Mindoro Corporation Tarlac Corporation
P20 / P50 P25 / P30
= 0.4 or 40% = 0.83 or 83%

3. Yield ratio
 Dividend per share / Market price per share
Mindoro Corporation Tarlac Corporation
P20 / P200 P25 / P90
= 0.1 or 10% =0.28 or 28%

4. Book value per preferred share

 Total Preferred Equity / Number of Preferred Shares Outstanding
Mindoro Corporation Tarlac Corporation
4,200,000/ 40,000 4,000,000 / 40,000
= P105 =P100

5. Book value per common share

 Total Stockholders’ Equity−Preferred Equity /
Number of Common Shares Outstanding
Mindoro Corporation Tarlac Corporation
(10,000,000 – 4,200,000) / 0 (12,000,000 – 4,000,000) / 0
=0 =0
PROBLEM 7

1. Calculate the following ratios for JS Corporation and DV Corporation in 2006 (use a 360-day
year):
a. Inventory turnover and inventory days
 Inventory turnover = Cost of goods sold / Average inventory
Solution:
JS Corporation DV Corporation
110,000 / 2,750 180,000 / 7,200
=40 times =25 times

 Receivables turnover = Net credit sales / Average trade receivables

Solution:
JS Corporation DV Corporation
360 / 40 360 / 25
=9 days = 14 days

b. Receivables turnover and collection period

 Receivables turnover = Net credit sales / Average trade receivables
Solution:
JS Corporation DV Corporation
190,000 / 9,500 240,000 / 16,000
=20 times = 15 times

 Collection period = 360 days / Receivable turnover

Solution:
JS Corporation DV Corporation
360 / 20 360 / 15
=18 days = 24 days

c. Payables turnover and payment period

 Payables turnover = Net credit purchases / Average trade payables
Solution:
JS Corporation DV Corporation
96,000 / 2,400 112,000 / 3,500
=40 times = 32 times

 Payment period = 360 days / Payable turnover

Solution:
JS Corporation DV Corporation
360 / 40 360 / 32
= 9 days = 11.25 or 11 days
d. Operating cycle
 Collection period + Inventory days
Solution:
JS Corporation DV Corporation
18 + 9 24 + 14
= 27 = 38
 e. Net cash cycle
 Operating Cycle- Payable Outstanding
Solution:
JS Corporation DV Corporation
27 – 9 38 – 11
= 18 days = 27 days

f. Net working capital

 Current assets - current liabilities
Solution:
JS Corporation DV Corporation
600 + 2,750 + 9,500 800 + 7,200 + 16,000
=12,850(current assets) = 24,000(current assets)
=12,850 – 2,400 = 24,000 – 3,500
=P 10,450 =P20,500

g. Working capital turnover

 Net sales / Average working capital
Solution:
JS Corporation DV Corporation
190,000+10,000/(10,450/2) 240,000+45,000/(20,500/2)
=P38 =P28

h. Cash turnover and days/ in operating expenses

 Cash turnover = Cash operating expenses / Average cash balance
Solution:
JS Corporation DV Corporation
18,000 / 600 17,600 / 800
=30 times =22 times

 Days in operating expenses = 360 days / Cash turnover

Solution:
JS Corporation DV Corporation
360 / 30 360 / 22
= 12 days = 16.36 or 16 days

i. Assets turnover.
 Net sales / Average total assets
Solution:
JS Corporation DV Corporation
200,000 / 80,000 285,000 / 95,000
=2.5 =3

2. Comment on the corporation’s ability to meet their suppliers’ credit terms

JS Corporation and DV Corporation are both, according to the calculated ratios,
capable of paying off the suppliers' credit terms of 2/10, n/30, which describes that there
are payments made within 10 days that earn a discount, while the full payment must be
made within 30 days. JS Corporation possesses a payable turnover of 40% with a payment
period of 9 days. In this case, it demonstrates that it is making its suppliers to be paid by
them within 10 days of delivery, on average, and thereby gaining early payment discounts.
DV Corporation has a payable turnover of 32% and a payment period of approximately 11
days. In this case, it is important to note that although the time period is slightly longer, DV
Corporation still is able to make its suppliers' payments well within the 30-day deadline and
close to the 10-day period, thus, indicating the good liquidity management.

JS Corporation is faster in translating its inventories and receivables into cash,

operating with a cash cycle of 18 days compared to the 27 days of DV Corporation. The
shorter cash cycle, therefore, means that JS Corporation has less money tied in operations
compared to DV Corporation. This efficiency is the reason why JS Corporation is able to meet
credit terms because it has more stable cash flows. DV Corporation, despite being a little
slower, has still a manageable operating and cash cycle. However, it may gain from the
improving of collections or inventory turnover to further lessen its cash cycle and thus the
meeting of the credit terms consistently. Both companies show financial soundness in the
managing of their payables, but JS Corporation shows a little higher rate in cash flow
efficiency.
PROBLEM 8

1. Materials inventory turnover and materials inventory days

 Materials used / Average materials inventory
Solution:
2006 2007
10,000 / (1,000/2) 10,800/ (1,200/2)
= 20 times =18 times

 360 days / Inventory turnover

Solution:

2006 2007
360 / 20 360 / 18
= 18 days = 20 days

2. Work-in-process inventory turnover and WIP inventory days

 Cost of goods manufactured / Average Work-in-process inventory
Solution:
2006 2007
26,000 / (800/2) 42,000 / (1,400/2)
=65 times =60 times

 360 days / Work-in-process inventory turnover

Solution:
2006 2007
360 /65 360 / 60
= 5.54 or 6 days = 6 days

3. Finished goods inventory turnover and FG inventory days

 Cost of goods sold / Average finished goods inventory
Solution:
2006 2007
30,800 / (2,200 / 2) 40,000 / (2,500 /2)
=28 times =32 times

 360 days / Finished goods inventory turnover

Solution:
2006 2007
360 / 28 360 / 32
= 12.85 or 13 days =11.25 or 11 days

4. Cash turnover and days in cash operating expenses

 Cash operating expenses / Average cash balance
Solution:
 2006 2007
4,320 / (500/2) 3,240 / (400/2)
= 17.28 times =16.2 times

 360 days / Cash turnover

Solution:
2006 2007
360 / 17.28 360 / 16.2
=20.83 or 21 days = 22.22 or 22 days

5. Current assets turnover

 Net sales excluding depreciation and amortization / Average current assets
Solution:
2006 2007
(56,400 -1,200) / (9,200/2) (53,720 -1,200) / (10,100/2)
55,200 / 4,600 52,520 / 5,050
=12 times = 10.4 times

6. Quick-assets ratio
 Quick assets / Current liabilities
Solution:
2006 2007
Quick assets:
P500+1,200+3,400=5,100 P400+1,600+2,800= 4,800
5,100 / 2,100 4,800 / 1,200
=2.43 =4

7. Defensive-interval ratio
 Defensive assets / Average daily expenditures
Solution:
2006 2007
P500+1,200+3,400= 5,100(Defensive assets) P400+1,600+2,800= 4,800(Defensive assets)
5,100 / 4,320 4,800 / 3,240
=1.18 =1.48