126. Zero-base budgeting requires managers to
A justify expenditures that are increases over the prior period’s budgeted amount.
B. justify all expenditures, not just increases over last year’s amount.
C. maintain a full-year budget intact at all times.
D. maintain a budget with zero increases over the prior period.
Production Budget
127. Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a growth in sales of 5 percent per month.
The target ending inventory in units of the product is 80 percent of the next month’s estimated sales. There are 150,000 units in inventory as of the end of September. The production requirement in units of Batik for the quarter ending December 31 would be
A. 670,560 C. 665,720
B. 691,525 D. 675,925
Cash Budget
128. The Mango Company is preparing its cash budget for the month of May. The following information is available concerning its accounts payable:
Estimated credit sales for May P200,000 Actual credit sales for April 150,000
Estimated collections in May for credit sales in May 20%
Estimated collections in May for credit sales in April 70%
Estimated collections in May for credit sales prior to April P12,000 Estimated write-offs in May for uncollectible credit sales8.000 Estimated provision for bad debts in May for credit sales in May
7,000 What are the estimated cash receipts from accounts receivable collections in May?
A. P142,000 C. P150,000
B. P149,000 D. P157,000
129. At the beginning of the current month, Rose had P100,000.
Cash disbursements were P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money market fund and has a line of credit to cover cash deficiencies.
If Rose wishes to start the next month with P150,000, Rose must A. invest P200,000 C. invest P350,000
B. borrow P400,000 D. do nothing FINANCIAL STATEMENT ANALYSIS
Horizontal Analysis
130. Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0 million. Using year 1 as the base year, the respective percentage increase in sales in year 2 and 3 are
A. 115% and 125% C. 115% and 130%
B. 115% and 109% D. 87% and 80%
Solvency Ratio
131. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity*
132. The ratio that measures a firm’s ability to generate earnings is A. times interest earned. C. days’ sales in receivables.
B. sales to working capital. D. operating asset turnover.
Other Ratio
133. Taylor company paid out one-half of its 2002 earnings in dividends. Taylor’s earnings increased by 20%, and the amount of
its dividends increased by 15% in 2003. Taylor’s dividend payout ratio for 2003 was
A. 75.0% C. 47.9%
B. 52.3% D. 41.7%
134. Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The dividend payout rate is 60%.
Beginning stockholders’ equity was P850,000 and current liabilities are projected to be P300,000 at the end of 2002.
What are the total equities available if the ratio of long-term debt to stockholders’ equity is 60%?
A. P1,788,000 C. P2,046,000
B. P1,980,000 D. P858,000
135. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2003
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
A. 0.50 C. 0.12
B. 0.40 D. 0.08
Integrated Ratios
136. Selected data from Maui Company’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
Maui’s net sales for the year were
A. P800,000 C. P672,000
B. P480,000 D. P1,200,000
137. Assume you are given the following relationships for the Bryan Company:
Sales/total assets 1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
The Bryan Company’s debt ratio is
A. 40% C. 60%
B. 35% D. 65%
138. The following data were obtained from the records of Trend, Inc.:
Current ratio (at year end) 1.5 to 1
Inventory turnover based on sales and ending inventory15 times Inventory turnover based on cost of goods sold and ending
inventory 10.5 times
Gross margin for 2002 P315,000
What was Trend, Inc.’s December 31, 2002 balance in the Inventory account?
A. P138,000 C. P140,000
B. P 70,000 D. P135,000
139. The board of directors of Contemporary Company was unhappy with the current return on common equity. Though the return on sales (profit margin) was impressively good at 12.5 percent, the asset turnover was only 0.75. The present debt ratio is 0.40.
Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
• Profit margin should be raised to 15 percent.
• The new capital structure will be revised by raising debt component.
• The asset turnover will be maintained at 0.75.
The proposed adjustment is estimated to raise return on equity by 50 percent.
What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150 percent of the present level?
A. 0.52 C. 0.61
B. 0.68 D. 0.72
Sensitivity Analysis
140. Annette Company uses the direct write-off method to account for uncollectible accounts receivable. If the company subsequently collects an account receivable that was written off in a prior accounting period, the effect of the collection of the account receivable on Annette’s current ratio and total working capital would be
A. B. C. D.
Current None Increase Decrease None
Ratio Working
Capital None Increase Decrease Increase
141. The days’ sales-in-receivable ratio will be understated if the company
A. uses a natural business year for its accounting period*
B. uses a calendar year for its accounting period C. uses average receivable in the ratio calculation D. has high sales at the end of the year
WORKING CAPITAL MANAGEMENT