Ye CPAR CPA REVIEW SCHOOL OF THE PHILIPPINES oo MAS 8008 MANAGEMENT ADVISORY SERVICES WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS WORKING CAPITAL MANAGEMENT ~ refers to the administration and control of current assets and current liabilities to_maximize the firm's value by achieving a balance between profitability and risk —— WORKING CAPITAL FINANCING POLICIES 1. Matching Policy (also called self-liquidating policy or hedging policy) - matching the maturity ofa financing source with an asset's useful life © short-term assets are financed with short-term liabilities. long-term assets are funded by long-term ‘inancing sources 2. Conservative (Relaxed) Policy ~ operations are conducted with too much working capital; involves financing aimost all asset investments with long-term capital 3. Aggressive (Restricted) Policy ~ operations are conducted on a minimum amount of working capital; uses short-term liabilities to finance, not only temporary, but also part or all of the permanent current asset requirement 4. Balanced Policy - balances the trade-off hetween risk and profitability in a manner consistent with its attitude toward bearing ri WAYS OF MINIMIZING WORKING CAPITAL REQUIREMENT 1, Managing cash and raw materials efficiently. 2. Having efficiency in making collections and in the manufacturing operations. 3. Implementing effective credit and colle-tion polices. 4, Reducing the time lag between corapition and delivery of finished goods. 5. Seeking favorable terms from suppliers and other creditors. FORECASTING FINANCIAL STATEMENT VARIABLES: ASSUMPTIONS: 1. Allvariables are tied directly with sales 2. The current levels of most balance shezt items are optimal for the current sales level. STEPS: 1, Identify assets and liabilities that vary spontaneously with sales 2. Estimate the amount of net income that will be retained. 3. Compute the amount of Evtemal Financing Needed (EFN) by subtracting increase in spontaneous liabilities and income retained from increase in total financing required (increase in assets due to increase in sales). EFN = AS x (SA/Sa) -AS x (SL/S0) ~ («ROS x Si> x <1 - Payout%>) ‘Where: SA/So = percentage relationship of spontaneous assets (varlable assets) to sales at period 0. SL/So = percentage relationship of spontaneous liabilities (variable liabilities) to sales at period 0. CASH MANAGEMENT (CASH MANAGEMENT — involves the maintenance of the appropriate level of cash and investment in marketable securities to meet the finm’s cash requirements and to maximize income on idle funds.AAS 8008 WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 2 of 18 REASONS FOR HOLDING CASH 41. Transaction Purposes — frm maintain cash balances that they can use to conduct the ordinary business transactions; cath hshinces == needed to meet cash outflow requirements for operational or financizi obligations. Compensating Balance Requirements ~ a certain amount of cash that a fim must leave, 0 fs checking account at al mes as part of a loan agreement. These balances ge banks additional compensation because they can be relent or used to satis reserve requirements. 3 Precautionary Reserves ~ fms hold cash balance in order to handle unexpected problems oF ‘contingencies due to the uncertain pattem of cash inflows and outflows. ; ‘4. Potential Investment Opportunies — excess cash reserved are allowed to build up in anticipation of a future investment opportunity such as a major capital expenditure project. 5. Speculation firms delay purchases and store up cash for use later to take advantage of possible changes in prices of materials, equipment, and securities, as well as changes in ‘currency exchange rates. ‘THE CONCEPT OF FLOAT IN CASH MANAGEMENT Float difference between the bank’s balance for a firm's account and the balance that the firm shows ‘on its own books. ‘TYPES OF FLOAT: 1. Mail Float — peso amount of customers’ payments that have been mailed by @ customer but not yet received by the seiler. 2. Processing Float — peso amount of customers’ payments that have been received by the seller but not yet deposited. 3. Clearing Fat ~ peso amount of customer’ checks that have been deposited but not yet red. (CASH MANAGEMENT STRATEGIES 1. accelerate cash collections — reduce negative (mall and processing) float 2. control (slow down) disbursements 3. reduce the need for precautionary cash balance Operating Cycle - The amount of time that elapses from the point when the firm inputs materials and labor into the production process to the point when cash is collected from the sale of the finished goods. Its two components are: average age of inventories and average collection period of receivables. When the average age of accounts payable is subtracted fro the operating cycle, the result is called cash conversion cycle. Economic Conversion Quantity (Optimal Transaction Size) ~ the amount of marketable securities that must be converted to cash (or vice versa), considering the conversion costs and ‘opportunity costs involved. fx conversion cost x annual deraand for cash ____ [2xconversion cost x annual demand for cash BCQ = Opportunity Cost Conversion Cost ~the cost of converting marketable securities to cash Sonertanty Cost re met of holding cash rather than marketable securities (ate of interest that can be earned on marketable securities). MARKETABLE SECURITIES Ta aaed eerrcag | ahortiee money, metket NOCUTete Peretieee Hea acre cashMAS 8008 WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 3 of 18 REASONS FOR HOLDING MARKETABLE SECURITIES (MS): 1 MS serve as substut for cash (vansactons, precautionary, and speculate) balances. . MS serve as a temporary investment that yids retur while funds are Kile. 3. Cash Is invested in MS to meet known financial obligations such as tax payments and loan amortizations. RECEIVABLE MANAGEMENT ACCOUNTS RECEIVABLE MANAGEMENT — formulation and administration of plans and polices related to ‘ales on account and ensuring the maintenance of receivables at @ predetermined level and their colectibilty as planned. WAYS OF ACCELERATING COLLECTION OF RECEIVABLES Shorten credit terms. Offer special discounts to customers who pay thelr accounts within a specified period. ‘Speed up the mailing time of payments from customers to the firm. Minimize float, that is, reduce the time during which payments received by the firm remain uncollected funds. eee AIDS IN ANALYZING RECEIVABLES 1. Ratio of receivables to net credit sales 3. Average collection period 2. Recelvable turnover 4. Aging of accounts INVENTORY MANAGEMENT INVENTORY MANAGEMENT — formulation and administration of plans and policies to efficiently and ‘satisfactorily meet production and merchandising requirements and minimize costs relative to inventories. INVENTORY MODELS Abasic INVENTORY MODEL exists to assist in two inventory questions: 1. How many units should be ordered? 2. When should the units be ordered? Economic Order Quantity — the quantity to be ordered, which minimizes the sum of the ordering and carrying cost. «Economic Order Quantity may be computed 2s follows: where: a — cost of placing one order (or ordering cost) c00s fy aunts k ~ annual costs of carrying one nit in inventory for one year ‘Assumptions of the EOQ Mode! 1. Demand occurs at a constant rate throughout the year. 2. Lead time on the receipt of the orders is constant. 3. The entire quantity ordered is recelved at one time. 4. The unit costs of the items ordered are constant; thus, there can be no quantity discounts, 5. There are no limitations on the size of the inventory. > When applied to manufacturing operations, the EOQ formula may be used to compute the Economic Lot Size (ELS) where: a ~ set-up cost ase [= must rouctin : requirement k — annual costs of carrying one Unit in inventory for one yearMAS 8008 a WORKING CAPITAL MANAGEME! [AND FINANCIAL STATEMENTS ANALYSIS Page 4 of 18 > When the E0Q figure is available, the average Inventory is computed as follows: ‘Average Inventory = a > When to Reorder: When to reorder is a stock-out problem. Le., the objective Is to order at a point in time so as not to run out of stock before receiving the inventory ordered but not so early that an excessive quantity of safety stock is maintained Lead time — period between the time the order is placed and received ‘Normal time usage = Normal lead time x Average usage ‘Safety stock = (Maximum lead time ~ Normal lead time) x Average usage ‘Reorder point if there is NO safety stock required = Normal lead time usage | Safety stock + Normal lead time usage Reorder point If there is safety stock required { or | U mtaximum lead time x Average usage | ‘SHORT TERM FINANCING 1. ACCOUNTS PAYABLE — the major source of unsecured short-term financing. @. Credit terms: credit period, cash discount, cash discount period b. Analysis of credit terms: + Taking the cash discount ~ If cash discount is to be taken, a firm should pay on the last day of the discount period. + Giving up cash discount ~ Ifthe firm has to give up the cash discount, it should pay on the last day of the credit period. + Cost of giving up cash discount = [CD/(100% - CDj] x (360/N) Where: CD = cash discount percentage NV = ‘number of days payment can be delayed by giving up the cash discount above formula assumes that a fim gives up only one discount during the year. If a firm continually gives up the discount durin he year Re aualzed Costs calculated as follows: ‘Annualized cost of giving up cash discount = [1 + (CD/(100% - CD)" — 1] ‘c. Stretching Accounts Payable: A firm should pay the bils as late as possible without damaging its credit rating. When a firm can stretch the payment of accounts payable, the cost of foregoing the discount is reduced. os Sigle peyment notes ~ If the interest is payable upon maturity, the effective interest rate is ‘equal to the nominal rate. b. Discounted Note ~ The effective interest rte is higher than the nominal rate Interest Effective interest rate = principal amount-Discounted Interest tthe term is less than a year, the interest rate is annualized tw ‘Compensating Balance - an arrangement : Pormercentage of amount borrowed 28 com borrower. i a : hereby a borrower is required to maintain a certain ;pensating balance in the current account of theMAS 8008 ‘A. Importance of Stat WORKING CAPITAL MANAGEMENT ‘AND FINANCIAL STATEMENTS ANALYSIS ‘ANALYSIS OF FINANCIAL STATEMENTS it users in predicting the future, “Three techniques are commonly used to make comparisons and to detect trends. 1 Peso and percentage char 3 statement items. 2 Common eetage changes nena + Ratios, horizontal (trend) analysis and vertical (common-size) analysis. 1. Horizontal Analysis; pesos and percentage changes on statements - the financial statements are laced side-by-side. Two types of comparisons can then be made. a Trend percentages restate a time-series of financial data in terms of a base year. Particularly when plotted against time, this approach allows the analyst to quickly gauge the rate and direction of changes. b. The difference (Increase or dacrease) between two statements can be shown in separate ‘columns in both peso and percentage forms. Showing changes in peso form helps to zero in fon key factors that have materially affected profitability or financial position. Showing Page 5 of 18 itement Analysis. The purpose of financial statement analysis is to assist Statements in Comparative and Common-Size Form. Two basic approaches are often used to ‘Compare financial statements between companies or between different years forthe same company: ‘changes in percentage form helps to gain a fee! of how unusual the changes might be. 2. Vertical Analysis; Common-size Statements. A aommon-size statement is one that shows each Item as a percentage of a total rather than in peso form. These kinds of statements make it ‘much easier to compare firms of diferent sizes and to track balance sheet and income statement relationships within a company over time as ls size changes. ‘2 When preparing common-size statements for the balance sheet, the various items on the balance sheet are typically stated as percentages of total assets. b, When applying common-size techniques to the Income statement, all tems on the income statement are usually stated as a percentage of total sales pesos. C. Ratio Analysis 11. FORECASTING - As of December 31, 2016, the corporation's financial records show that it had total EXERCISES: assets of P14 milion and current liabilities of P3 milion, including Notes Payable of Pi milion, Sales in 2016 amounted to P50 milion. This is expected to increase by 25% in 2017, ‘The corporation is at full capecity, so its assets must grow in proportion to projected sales, The Projected after tax profit margin Is 10% and the forecasted proft retention ratio ls 20%, REQUIRED ‘What was the capital intensity ratic in 2015? How much Is the corporation’s additional fund: (AFN) needed for the coming yar? ‘2. OPTIMAL TRANSACTION SIZE ~ Assume that the ‘xed cost of selling marketable secur pper transaction and the interest rate on marketable securities is 6% per year. The company estimates ‘that it will make cash payrments of P12,000 over a one-month period, ‘RequimeD: Compute the a b. se a e Optimal transaction size the average cash balance ; the number of times (dul ig Year) the company has to convert marketable securities tocash 2O.FQ twee. whee the total cost of converting marketable securities to cash the total carrying cost of cash. é SE xe —20g 1350000 rites is P10 wsMAS 8008 WORKING CAPITAL MANAGEMENT ANDINANGIAL STATEMENTS ANALYSIS Page 6of 18 accounts receivable balance of P1,250,000, an average inventory bal k actounis eoyble bane of P6UD.00. tts annual sles are P'2,000,000 and ks cot of goods Se Toprosents Gb percent of annual sales, Anuel cred purchases amounted fo PE.400,000. Assume ‘are 360 days ina year, What is BMC’s operating cycle and cash conversion oycie?_JO7S., C4 5 4. WORKING CAPITAL INVESTMENT - The Alabang Isa leading manufacturer of dolls popularly known as "Alabang Gis, The corporation turns out 1,500 dolls a day at 2 cost of PS Per oll for materials and labor: Tt takes the fr 22 days to convert raw materials Into a dol. Alabang byabhanta ers 40 days in which to py for the dots, and the fm generally pays fs suppliers In lays. ‘2+, What is the length of Alabang's cash conversion cycle? 32 days rg SD Ata steady tate in which Alabang produces 1,50 dos day, what amount of working capital sexe ‘must it finance? 288,000 By what amount could Alabang reduce its wrking capital financing needs if it was able to stretch its payables deferral period to 35 days? P45,000 de Alabang’s management is trying to analyze the effect of a proposed new production process 0” the working capital investment. The new production process would allow Alabang to decrease its inventory conversion period to 20 days and to increase its dally production to 1,800 dolls, However, the new process would cause the cost of materials and labor to increase to P7. ‘Assuming the change does not affect the receivables collection period (40 days) or the payables deferral period (30 days), what will be the length ofthe cash conversion cycle and the otkng capital rancingrequrement the new pructon process is implemented? 378,000 5, Wasting Resource Co. has annual credit sales of P4 milion. Its average collection period is 40 days ‘and bad debts are 5% of sales, The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%, REQUIRED: Assuming a tax rate of 30% and 360 days a year, | % or lis cr = [Be How much the Incremental contribution margin? "4p 32 ss _2000Co Denase aude 02) How much is the decrease in investment on accounts receivable? How mhuch Ts the Savings Tr ‘capital cost? (SEARS —— Wes | 466% * 000 paltebs! 3. How much is the savings in delinquency cost? (20 — = ~ 4) How much is the incremental proft from the revised policy? coy x = 4j,3 10. $B INVENTORIES 6. Pakyawan Company isa wholesaler. It purchases 60,000 units of Product X per month for sale to rear ne cost of placing an order is P00, The cost of holding one unit of inventory for one year is 4, REQUIRED: ‘Compute the economic order quantity. % 4p 2. How many orders would Pakyawan wy, Gave. ‘the EOQ policy? Vp eee [ Compute the annual ordering cost forthe EOQ. [227 J00 7 we 4. Compute the annual carrying cost for the EOQ. vf, x42 9-000 add) f ConPie the total inventory elated cost atte OQ. oez- 5 Come rakyawan had been purchasing 5,000 uns Of product X per order, What the ordering ‘ ye na annual carrying cost? How much money does using cos per Year un mpany over te pac of purchasing 5,000 units per order? ini soap bars per year. The average purchase lead time “The company works 360 days per year.MAS 8( | 3008 WORKING CAPITAL MANAGEMENT | AND FINANCIAL STATEMENTS ANALYSIS — Page 7 of 18 | 2. Units of safety stock that the | ‘Company should e The reorder pot fr leaching so” oP 3 | * the cometh the lead time is always 5 days a in delivery has been experienced by pany. What isthe reorder point? How many units of safety stock must be kept by the company in this case? oO : Pm 7 2elsn Commo ny sells educational toys. One raw material that It orders is plastic. The plastic is melted laced in molds to be used for the production. of various toys. Information pertaining to the plastic raw material is as follows: Economic order quantity 150,000 pounds Average dally usage 10,000 pounds Maximum daily usage 12,000 pounds Lead time ‘4 days Recume: | 1. What is the reorder point assuming no safety stock is cored? | 2. Should the company decide to carry safety stock, how many units should that be? 3000 3. What is the reorder point assuming that safety stock is carried? 42 0OO. | #18000 } 9. Economic order quantity for retailer. Olympians, Inc. operates @ megastore featuring sports ‘merchandise, Tt uses an, £0Q decision model to make inventory decisions. It is now considering inventory decisions for its Los Ashkals football jerseys product line. This is a highly popular item. Data for 2014 are as follows: | / equa onal dean asta nae 735 (Ordering cost per purchase order 200 Carrying cost per year 6 per jersey Each jersey costs Olympians P40 and sells for P80. The P6 canying cost per jersey per year i comprises the required return on investment of P4.80 (12% of P40 purchase price) plus P1.20 in qT relevant insurance, handling, and theft-related costs. The average purchasing lead time is 7 days. { Olympians is open 365 days a year. Calculate the EOQ. 700 jerseys Calculate the number of orders that willbe placed each year. 14 orders Calculate the total carrying tost and ordering cost per year. 2.100; 2,100 Calculate the reorder point. 141 jerseys As stated, the average purchasing lead time is 7 days. Assume that there are times hen this lead time reaches a maximum of 10 days. How many units of safety stock must the company have, and what should be the reorder point? 61 jerseys; 202 jerseys | REQUIRED: vaeye - 10, FOREGOING DISCOUNTS ON PURCHASES. Sakana Sayad Company purchases raw materials on terms of 3/10, net 60. ‘A review of the company’s records by the owner, Mr. Sakana, revealed that payments are usually made 30 days after purchases are received. When asked why the firm did not take advantage of its discounts, the bookkeeper, Mr. Tinidor de Libro replied that ft costs only 3% for these funds, whereas the bank loan would cost the firm 12 percent. (Use 360 days in a year), LY soe fin days | 1 | dg ba nel ‘be What is the real cost of not taking a | 7 Ifthe fim could not borrow from the bank and was forced to resort tothe use of sate trade credit funds, what suggestion might be made to de Libro that would | 4 1] mee reduce the annual Interest COs? pay og hy Oh dey zum 5 HN ‘REQUIRED: 2, What mistake Is de Libro making? wislake of catering 9&1 ipo making? il tne dacsune? Wiltiile 2U:77 ) 55-69%ae oe WORKING CAPITAL MANAGEMENT. AND FINANCIAL STATEMENTS ANALYSIS 09° of 18 one-year an. 11, COST OF BANK LOANS. King Company Is negotiating with EnBank for 2 re mal phientd Enank has offered King Company the folowdng ateatves, Calcuate the rate for each alternative. Which alternative is the most attractive? balance required and wee os annual rte on 2 simple Ineest joan, with no compensating Ierest due atthe end ofthe year. e i Pus L> b, An? percent ennial rats on simple inerest Jods, wth «20% compensating balance requ = andineestaiestteendottheyoar. A SEB, date iff Lo © (€) An 8% annual rate on a discounted loan, with a 25% compensating balance. 11.09% PR R6% add-on annual interest, payable in equal monthly installments. ¢,-), 12, A company obtained a short term bank loan of PSmilion at an annual interest rate of 895 AS, 2 | condition of the loan, the company is required to maintain 2 20% compensoung SHOE ac >| Grecking acount. Te chedng account coms ineest of 1% per annum. Before the los? we ‘granted, the company maintained a balance of P100,000 in its checking account. Compu effective interest rate for this loan. 9 <7", ast se F/S ANALYSIS. 33, Kaemi n reported ing figures: il Corporation reported the following figures: ‘bers Cash and cash equivalents P 2,450 P 2,094 Receivables 1813 4611 Inventory 1,324 1,060 Prepaid expenses 1,209 220 Total current assets P 7,296 P 6,885 Other assets 18.500 15.232 Total assets 25.296 Pe2.g22 Total current liabilities 7,230 8467 Long-term liabilities 4,798 3,792 ‘Common stock 6,568 4,363 Retained earnings i 7.200 6.000 Total liabilities and equity 25,796 P2262 Sales | 20,941 Cost of sales | 7,055 Operating expenses | 7065 Operating income P6821 Interest expense 210 Income tax 2.563 Net income 4.048 Required: 1. Horizontal analysis of Kaemils balance sheet for 2016 would report cat 259.5% of oa aes ‘c.current ratio of 1.01 4. 1786 increase in cash | 4. inventory turnover of 6 times 2. Vertical analysis of Keemi’s balance sheet for 2016 would report 2. cash as 9.5% of total assets current ratio of 1.01 b. inventory turnover of 6 times . 17% increase in cash 3, Acommonrsize income statement for Kaemil would report (amounts rounded) a. net income of 19% cost of sales at 34% b. sales of 100% a. allof the above 4. Which statement best describes Kaemils acid test ratio? ‘a. gfeater than 1 cc Less than 1 b. Edel wi d._ none of the above 5, Kaemil's inventory tumover during 2026 was (amount rounded) a 6himes c. Btimes b. 7 times d. not determinable from the given data >»NT IAS 8008 CAPITAL MANAGEME! a ir its rounded) 6. During 2016, Kaemit's days’ sales in receivables rai, efemoun aaa © ane ae ded) I's med ratio? (amounts roun 7 Leelee ‘expresses Kaemil’s tines here es b. 19 times: d. 32 times : cutstanding. What & Koer The company has 2,500 shares of common stocks taming per hae? "een & pis Gi, 263 tes Use your answer to stock as traded are. recently around P48 per 3 er 2 9 Koes, ck hae ee companys price earings ato. (Round to the whole number) < 48 2 LOL cs 2 30 housands): 14, A skeleton of Juan Companiys income statement appears as fotiows (amounts int : Net sales ea Cost of goods sold 2,905 2 Selling and admin expenses = Interest expense 990 150 Other expenses et Income before taxes 32 Income ts © . Net income 792 @ : Other data: { Inventory turnover 3.50 a Beginning inventory P50 i Ending inventory Peto Rate of retum on net sales oat 4 ‘Requikeo: Complete Juan Company's income statement. f 15. A skeleton of Rosario Connpany’s balance sheet apnears as follows (amounts in thousands) cash P75 Total current iabilties P 1,900 Reosivables 685 (a) Long-term note payable 1,595 ) Inventories 725 Other long-term Kabiities 980 Prepaid expenses 35 te) Total current assets 1520 (©) Stockholders’ equity 2.325 Plant assets net 3,260 (@) Other assets 2000 Total abilties and Tota assets 25.809 stockholders’ equity 6,800 P_(f) Rosario's current ratio fs 0.80 and its acid test ratio 0.40, ‘Requinep: Complete Rosario Company's balance sheet, 16. We are given the folowing information for the Coleman Machine Tools Corporation. Sales (creat) 7,200,000 — 300,000, Inventory 2,150,000 ‘Current liabilities 7,400,000 Asset tumover sgo4000 Current ratio. oe Debt-to-assets ratio An Receivables turnover aneAAS 8008 WORKING CAPITAL MANAGEMENT [AND FINANCIAL STATEMENTS ANALYSIS Page 100f 18 Curent assets are composed of cash, marketle saci, ‘accounts receivable, and Inventory. ‘cakulate the following balance sheet items. a. Accounts receivable. 900 b. Marketable securities. 150 c. Fixed assets. 25M Long-term debt. 14 147. Easter Egg and Poultry ‘Company has 4,000,000 in assets ‘and P3,000,000 of debt. It reports: net income of P600,000. Br What ithe return on stockholders’ equity? ocd 2 Fr the firm has an asset turnover ratio ofS times seis tne rent magi (return on sles)?_3 Jance sheet and key rato report n his 8, A, Zaruck of Z Company found these pieces of his avera9e bal gerbil cage: ‘Cash $53 2 Gross margin percentage ‘Accounts receivable 67 2 Debt to equity ratio Inventory 80 Current ratio Fixed assets (net) 200 > Tnventory turnover Current labilties 400 Days sales in recelvables ‘Common stock $00 (based on 360 days) Retained earings 300 2 REQUIRED: ea oe much to alone sect 25 pssble om te data OVS ret income was P5000: No othe information f knew ‘except the following: 10% 4% 19, Assume that Retum on equity Return on sales {Gross margin percentage 60% Income tax rate 40% Current ratio ek Return on assets 5% 4 Days sales in receivables 90 Inventory turnover Long-term debt to equity 23 pequmen: Using the preceding rats, balance sheet with as much detail as possible. sales Cost of goods sold Gross profit (Operating expenses (Operating income Ineome tax Net income ‘current labittes Long-term debt ‘Total labiities| Gash ‘Accounts receWvable Inventory ‘Total current assets Fixed assets Total assets Equity ‘Fra bites and enuty Biz0.900rel -» banebe ’ MAS 8008 | WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 11 of 18 GROSS PROFIT VARIANCE ANALYSIS 20, The president of -Appejess Company, which makes a single produc, requests an explanation forthe Bo + ach Abel ‘9TOSs profit increase for 2016. The following information is avallable: 322 F * i SA « sex eagle — ae, ati st 928 py cle Pe Castot goods soll —anam0 RTRE ay Be 08s prof pam |= Bem : Unts sls | 2400 23160 . ee peor) 47 eee : 7 408) x Rohe nme \ sv 2 (letk-405) Bod 4 The 2015 income statement of the Zlucki Company showed: CAV m (Io 4%) 7 20000 Sales (90,500 units) | 760,200 OW = ((@0-a08) x 5 BOD Cost of goods sold Gross profit | Baz z For 2016, the management forecast sles lume of 100,000 uns ata sales pric of P8.29 Pe roa ae ty, the vrabe cit ck good 0 i etimatd tobe P4.80 per unt. No fed cost I Included inthe cost of goods sap. | Required: an ans ne orator wen he ers neni te es of changes i sales prices, sales volume, cost price, and cost volume ' Son 5 73,00, 20000; CW 73000 Wo. resend baer ai cts om the nat ssent’ oe Company forthe ers ened ie oh ben December 31, 2016 and 2015: y, - 2015 2016 ae Sales 1P640,000 633,600 as | Cost of goods sold 384,000 SLE + Gross profit 256,000 PB 261.888 ov “The 2016 seling price was 10% lower than in 2025. required: Compute the peroentage changes in units and in Cost per unt 'SPV.70,400U; SVV 64,000F; CPV 50,588F; CVV 38,4000 Se charge n nts = 10% increase; & change in cost per unt = 129% decrease i | Other Financial Management Topics «mtn rie campy meta 3riin ses stn | Vind Ten eco na ee D0 cso 720 ere the cepa rl oe pe rensk te? aor mi i i ype on pons of sk La re i oberon tae based on earnings per share? es, new 5 2D l a as ey a pts ete cen | ie nr sk dots ert share? Wa, rewePs AS income of P20 milion end 8 milion shares outstanding, Its common hare, Wonder plans to sell common stock to set up @ major Company, an investment banking firm, plans to spread of 5 percent. st be sold to net P34,200,000? vuret ‘sling the stock at less than its current market price? CE feck nove Heeadie ‘2. How many shares of stock mus Why s the investment banker| i 1 | | | | | | MAS 8008, | woRKING CAPITAL MANAGEMENT AND PRAnCIAL ‘STATEMENTS ANALYSIS Page 12 of 18 ‘c What are the eatnings per share (EPS) and the price-earnings ratio before the Issue (based Ura stock price of P35)? What wile the pict per share Immediately after the sale of stock if the P/E stays ant (based on iuding the additional shares computed in part a)? 30/43. d. Compute the and the price (7F = --«ant) after the new production facility begins tw producea proft. 2162 y 34168 | 13, The Spears Corporation is about to go public. It curently has after-tax eamings of P7.5 milion and 25 milion shares are owned by the present stockholders (the Spears family). ‘The new public ssue ‘ll represent 600,000 new shares. The new shares will be priced to the public at P20 per share, vith 35 percent spread onthe ofring price, There wil aso be P200,000 In cut pocket cots to the corporation. | compute the net proceeds tothe Spears Corporation 1,200,000 ‘Compute the earings per share before the stock issue. 75725 =3 Compt the earings per share inmate after the stock sue. 78/31 =242 Determine what rate of return must be eamed on the net procseds to the corporation so thr rot be dion eins per shar cag te ya ef ira pub. it = 160% | i ' Determine what rate of return must be earned on the proceeds to the corporation so there See ese riers areas ST oe sss = 20 ] aoe WINDING UP WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS on ‘Smith Company presents the following data for 2016. Inventories, beginning of year P 310,150 Inventories, end of year 340,469 Cost of Goods Sold 2,103,696 Net Sales 8,690,150, ‘The number of days' sales in inventory is: a. 658 b. 608 594 4) 58.1 Shaffer Company presents the following data for 2016. ‘Net Sales, 2017 | Net Sales, 2016 3,007,124 93,247 Cost of Goods Sold, 2017 Cost of Goods Sold, 2016 Inventory, beginning of 2017 Inventory, end of 2017 2,000,326 | 1,000,120 341,169, 376,526 “The merchandise inventory tumover for 2017 is: a 56 b. 15.6 5. )ingram Dog Kennels had the flowing facial statis Long-term debt (average rate of interest is 8%) for 2016: 400,000, D = Interest expense Net income Income tax Operating income 35,000 48,000 46,000 107,000MAS 8008 WORKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 13 of 18 ‘What is the times interest eared for 2016? a. 11.4 times c. 3.1 times b. 3.3 times 4. 3.7 times Jordan Manufacturing reports the following capital structure: Current liabilities 100,000 Long-term debt 400,000 Deferred income taxes 10,000 Preferred stock 180,000 ‘Common stock 100,000 Premium on common stock 180,000 Retained earnings 470,000 What is the debt ratio? a. 0.48 0.93 b. 0.49 d. 0.96 Cy 5 The following data were gathered from the annua report of Desk Product. == ‘Market price per share 30.00 Number of common shares 10,000 Preferred stock, 5% 100 par 10,000 ‘Common equity P140,000 ‘The book value per share is: ‘a, P30.00 c, P1400 b, P15.00 , P1375 (QUESTION NOS. 6 THROUGH 10 ARE BASED ON THE FOLLOWING INFORMATION: ‘The data presented below show actual rgures for selected accounts of McKeon Company for the focal year ended May 31, 2016, and selected budget figures forthe 2017 fiscal year McKeon's. fiscal yea nthe. proones of reviewing the 2016 budget. McKeon Company monitors yield oF carters using the average financial poston of the company. (Round all calculations tO three decimal places if necessary) S32 Current assets 210,000 180,000 Noncurrent assets 275,000 255,000 Current liabilities 78,000 185,000 Long-term debt 75,000 30,000 ‘Common stock (P30 par valve) 300,000 300,000 Retained earnings 32,000 20,000 2017 Operations Sales(all credit) 350,000 Cost of goods sold 160,000 Interest expense 3,000 Income taxes (40% tax rate) 48,000 Dividends declared and paid in 2011 60,000 ‘Administrative expenses 67,000MAS 8008 RKING CAPITAL MANAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 14 of 18 Current Assets SGI? __ S316 Cash P 20,000 P10,000 Accounts receivable 100,000 70,000 inerny 70,000 80,000 other 20,000 20,000 3. McKeon Company's debt-to-total-asset ratio for 2017 is a. 0.352 b. 0.315. c 0.264 d, 0.237 T)_ 7. The 2017 accounts receivable tumover for McKeon Company is: a. 1.882 b, 3.500 c. 5.000 d. 4.118 ‘8. Using a 365-day year, McKeon’s inventory tumover is: ar a. 2.133 b. 2.281 1.995 d. 4.615, \,B_ ¢/. een company’s total ase umover for 2017 NS CASS , 0.761 © 0722 4. 0348 \ "Cf (/10, The 2017 return on asses for McKeon Company i = a, 0.261 d, 0.148 c 0.157 d. 0,166 (QUESTION NOS. 11 THROUGH 17 ARE BASED ON THE FOLLOWING INFORMATION: Duval Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. These questions present several of Duval’ transactions during the Year. Assume that total quick assets exceed total current liabilities both before and after each transaction described. Further assume that Duval has positive profits during the year and a ‘credit balance throughout the year in its retained earnings account, a. Increase the current ratio but the quick ratio would not be affected, 'b. Increase the quick ratio but the current ratio would not be affected. OW (Sees of a trade account payable of P64,500 would \ Increase both the current and quick ratios. . Decrease both the current and quick ratios, C7" (53, The purchase of raw materi for PSS,000 cn open account would ] a Increase the current ratio ‘©. Decrease the current ratio . Increase net working capital . Decrease a. increase the current ratio b. Decrease the current ratio and the quick ratio . increase the quick ratio . Not affect the current or quick ratios — ‘net working capital 13. The collection of a current accounts receivable of P29,000 would D> 44 Obsolete inventory of P125,000 was writen off during the year. This transaction erm debt paying abilty? 2. working capt c. current ratio b. acd test 4. cash ratio 1p [23] Which of te following ratios dons not represent some form of comparison between accounts in ‘eurrent assets and accounts in current abilities? a. working capital ¢. current ratio b. acid-test ratio d. merchandise Inventory turnover 73) Which of the following ratios would generally be used to measure @ firm's overall liquidity B Zs position? ‘a. working capital c. current ratio , cash ratio b. acid-test ratio D fi Which of the following woul bes indicate thatthe fim Is carrying excess Inventory? = a. a decline in sales nl b. a decline in the current ratio Ca decline in days' sales in inventory d. stable current ratio with declining quick ratios U 25. Total asset turnover measures the ability of a firm to: — 4 a. generate profits on sales ‘c. generate sales through the use of assets 1 b, buy new assets d. move inventory 26. Return on assets cannot fall under which of the following circumstances? ‘Net Profit Mangin Total Asset Turnover rise —— a decline b. rise decline c rise rise qa. dectine declineMAS 8008 WORKING CAPITAL MANAGEMENT [AND FINANCIAL ‘STATEMENTS Lysis Page 76°F 18 \ RB ‘27. The price/earnings ratio: ‘a. measures the past earning ability of the firm b. isa gauge ‘of future earning ‘as seen bY Investors c. relates price ‘to dividends d._relates price to total net income 28. Which of the following ratios usually reflects investors opinions OF the future prospects for the == fim? a. dividend yield ‘c. book value per share b._price/earnings ratio 4. eamings per share | ‘p23: Which of the following | = 2 ‘Tnventory turnover | 2 average accounts receivable collection period cc. Fixed asset tumover 8. Debt to total assets 1 | y | 4 a financial analysis technique ‘would imply benchmarking with other firms? i a. ‘c. Vertical analysis rot a measure of asset utilzation? Horizontal analysis b. Cross-sectional analysis d. Ratio analysis ee > om ‘comparing the current ratios of WO companies, why is it invalid tO assume th 1 vith the higher current ratio fs the better company? i a. The current ratio includes assets ‘other than cash. i Bb. Ahigh current ratio may indicate ‘adequate inventory on hand. efficient use of various assets and liabilities. Oe Aahigh current ratio may indicate in vNefine working capital in different terms. at the company An i 4. The two companies may ROE of 15 percent, a debt ratio of 40 percent, and a profit margin ty 32, Shepherd Enterprises has an meres mpany’s total asets equal PBOO rin. ‘what are the company's sales? of 5 percent (Assume that the company has no preferred stock.) a. P1,440,000,000 ‘c. P2,400,000,000 b. P360,000,000 d._ P120,000,000 : and a profit margin of 10%. ident is unhappy with ity, and he thinks it could be doubled. MYod (1) by increasing the profit margin tO 14% and (2) increasing debt Uv Xs Deb & Co. has a debt ratio it not change. What new debt ratio, along with the 14% The This could be accomplis utilization, Total assets turnover vi b. P56 profit margin, is required to ‘double the return on equity? a. 0.75 b. 0.70 c. 0.65 d. 0.55 * QUESTION NOS. “34 and 35 ARE BASED ON THE FOLLOWING INFORMATION: ‘The Dawson Corporation projects the following for the year 2016. Earnings before interest and taxes P35 million Interest expense P Smillion Pr dividends P 4million Pésnmon stock dividend payout ratio 30% ‘Common shares outstanding 2 million Effective corporate income tax rate 40% 34, The expected ‘common stock dividend per share by Dawson Corporation for 2016 is Dd a. P2.34 b, P2.70 c. P1.80 d. P2.10 eee - 35. If Dawson corporation's common stock F to trade at a price-eamings ratio of eight, ® rice per share (to the nearest peso) should be = ™ market price Pe © P72 3d. PES a. P104MAS 8008 WORKING CAPITAL MAT NAGEMENT AND FINANCIAL STATEMENTS ANALYSIS Page 17 of 18 rlion in sa les and sustains an inventory turnover of 8.0, what are the firm's current assets? Ks. Beatnik Com, dD pany has @ current ratio of 2.5 and a quick ratio of 2.0. Ifthe firm experienced P2 —. Be A b A. 1,000,000 8. 500,000 cc. P1,500,000 D. 1,250,000 37. IC Goods, Unhopey as 2 toalasetstumover of 0.30 and a poft margin of 10%. The presents accomplished (1) rent return on assets, and he thinks It could be doubled. This could be Gammelshed (1) by Increasing the prof margin to 15% and (2) by Increasing tot ees double th new asset turnover ratio, along with the 15% profit margin, is required to the return on assets? = b. 45% 40% 4, 50% (QUESTION NOS, 38 THROUGH 40 ARE BASED ON THE FOLLOWING INFORMATION: “The condensed balance sheet as of December 31, 2016 of San Matias Company is given below. Figures shown by a question mark (2) may be computed from the additional information given: ASSETS LIAB, & STOCKHOLDERS’ EQUITY Cash P 60,000 Accounts payable Pp “Trade receivable-net ? Current notes payable 40,000 Inventory ? Long-term payable A Fixed assets-net 252,000 Common stock 140,000 Retained earnings 2 Total Assets P 480,000 Total L & SHE 480,000 Additional information: Current ratio (as of Dec. 31, 2016) 1.9to1 Ratio of total iabllties to total stockholders’ equity 1.4 Inventory turnover based on sales and ending 15 times inventory Inventory turnover based on cost of goods sold and 10 times ending inventory Gross margin for 2016 500,000 +38. The balance of accounts payable of San Matias as of December 31, 2016 is a, P40,000 , 80,000 ‘c.P95,000 d,P280,000 39, The balance of retained earnings of San Matias as of December 31, 2016 is ‘2. P60,000 . P140,000 200,000 d.P360,000 No, tre balance of inventory of Son Matias as of December 31,2016 1s a. P68,000 . 100,000 c. P168,000 4. P228,000 SF QUESTION NOS. 41 THROUGH #4 ARE BASED OV THE FOLLOWING INFORMATION: La Bekha Corporation asked you to interpret the following ratios provided by its accountant. ‘Acid-test ratio 12 ‘Times interest earned 8 Gross margin ratio 40% Inventory turnover 6 times Debt to equity ratio 0.9:1 Ratio of operating expenses to sales 15% Total stockholders’ equity on December 31, 2016 was P900,000. Gross margin for 2016 amounted to P600,000. Beginning balance of merchandise inventory was P200,000, | The company’s long-term liabilities consisted of bonds payable with interest at 15%. You decided to reconstruct the company’s financial statements based on the limited information given to serve as basis for further analysis.ITAL. MANAGEMENT A 1S Page 18. of 16 | MAS 8008 | wort KING CAPI | we ORANGIAL STATEMENTS ANALYS! | %, C7, Operating income vas puted at on a. P525,000 @! P375) B: 00'000 Gi Anawer cannot be determined 42, Bond payable totaled A a. P312,500 | c, 400,000 =— _ b, 350,000 § Anawer cannot be determined. 43. The total current liabil would be B a. 462,500 c) P504,500 - b. P497,500 dj Answer cannot be determined. 44, The company’s total arent assets amouited to ECHOAS vee werrer 6 TS) __& ™."ps17,000 697,000 ted 197,000 d. Answer cannot be determined 5) A company has just ben taken over by new management that believes it can raise earnings before taxes (EBT) 'P600 to P1,000, merely by ‘cutting overtime pay and reducing cost of iz ‘goods sold, Prior to the change, the folowing data applied: i Total assets: PB, | pebtratio: 45% |) —— Tax rate: aa BER ratio: 13.3125% \4 Br: 0 Sales: —_-P5,000 | -These data have been onstant for several years, and all Income paid out as dividends. Sales, | Fares Ait and the balance sheet will remain constant. What isthe ‘company’s cost of debt? | a. 12.92% | db. 13.23% a 13.51% da 13.75% ] To c 2A mn 3..D C 4.8 —D " 3 LB iD 6.B D 7._D Cc] B.A B | 9. B A 10. C 8 7 | | |e pep Posy envalige Power Fao “END - Eprr. ~ Tobe est