Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 2

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

Analysis and Interpretation of Financial Statements

Learning Objectives:
At the end of the modules, the student should be able to:
a. Perform vertical and horizontal analyses of financial statements of a single proprietorship;
b. Compute financial ratios.

Financial Statement Analysis

Financial Statement Analysis is a process of evaluating and interpreting an entity’s financial
statements to assess its financial health for the purpose of making better economic decisions.
Depending on the objective of the analysis, a financial statement analysis may involve
analyzing one or more of the following:
1. Industry and economic trend
2. Solvency and Capital structure
3. Operational efficiency
4. Profitability

Industry and Economic trend

This involves the analysis of the economic environment where the business operates. This is necessary
because the ability of business to thrive is affected by various external factors, such as economic
climate, competition, demand and supply market rates, government regulations, technological
changes, and the like.
For example, when analyzing a hotel business, one would need to analyze also the general condition
of the economy, the current state of the hotel industry, the demand and supply, and the like. If the
hotel industry is generally declining, there is a possibility that the future earnings of the business will
also decline. On the other hand, if the hotel industry is generally booming, there is a good chance
that the business will also prosper.
The financial statements of a business do not provide all the necessary information needed in
analyzing the industry and economic trend. Other information from external sources is needed, for
example, published industry averages, current events, statistical data, research papers, financial
data key players in the industry, and the like. The financial statements of the business are only one of
the many inputs needed in this analysis.

Solvency and Capital structure

Solvency refers to the ability of the business to pay its debts and remain as a going concern. Solvency
can be short-term (liquidity) or long-term (solvency).
Capital structure refers to how a business efficiently finances its operations using different sources of
funds, such as debt or equity. Solvency and capital structure relates to the stability of a business.

Operational efficiency
Operational efficiency refers to how well a business is managing its resources to maximize earnings.

Profitability
Profitability refers to the ability of the business to generate profit.

Methods of Financial Statement Analysis

The two methods used in analyzing financial statement s are as follows:
1. Horizontal and Vertical Analyses
2. Financial ratio analysis

Horizontal analysis
Horizontal analysis is the comparison of financial information over two or more reporting periods. The
purpose is to analyze if changes in amounts are unusually high or low, which may entail investigation
of the reason for unusual change.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 1 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

Illustration: Horizontal Analysis

The horizontal analyses of the comparative balance sheets and income statements of ABC Co. are
shown below:
ABC Co
Statement of Financial Position
As of December 31, 2019 and 2018
Increase/decrease Percent
ASSETS 2019 2018 (year 2-year1) [(year 2-year1)/year 1]
Cash and cash equivalents ₱ 30,000.00 ₱ 80,000.00 -₱ 50,000.00 -62.50%
Accounts receivable-net ₱ 1,672,000.00 ₱ 304,000.00 ₱ 1,368,000.00 450.00%
Inventory ₱ 500,000.00 ₱ 300,000.00 ₱ 200,000.00 66.67%
Prepaid assets ₱ 48,000.00 ₱ 50,000.00 -₱ 2,000.00 -4.00%
Total current assets ₱ 2,250,000.00 ₱ 734,000.00 ₱ 1,516,000.00 206.54%
Property, plant & equipment ₱ 780,000.00 ₱ 720,000.00 ₱ 60,000.00 8.33%
Total noncurrent assets ₱ 780,000.00 ₱ 720,000.00 ₱ 60,000.00 8.33%

TOTAL ASSETS ₱ 3,030,000.00 ₱ 1,454,000.00 ₱ 1,576,000.00 108.39%

LIABILITIES
Accounts payable-net ₱ 980,000.00 ₱ 420,000.00 ₱ 560,000.00 133.33%
Notes payable( current portion) ₱ 180,000.00 ₱ 180,000.00 ₱ - 0.00%
Total current liabilities ₱ 1,160,000.00 ₱ 600,000.00 ₱ 560,000.00 93.33%
Notes payable( noncurrent portion) ₱ 180,000.00 ₱ 360,000.00 -₱ 180,000.00 -50.00%
Total noncurrent liabilities ₱ 180,000.00 ₱ 360,000.00 -₱ 180,000.00 -50.00%
TOTAL LIABILITIES ₱ 1,340,000.00 ₱ 960,000.00 ₱ 380,000.00 39.58%
EQUITY
Owner's ca[ital ₱ 1,690,000.00 ₱ 494,000.00 ₱ 1,196,000.00 242.11%

TOTAL LIABILITIES & EQUITY ₱ 3,030,000.00 ₱ 1,454,000.00 ₱ 1,576,000.00 108.39%

ABC Co
Statement of Financial Performance
For the years ended December 31, 2019 and 2018

Increase/decrease Percent
2019 2018 (year 2-year1) [(year 2-year1)/year 1]
Sales ₱ 4,000,000.00 ₱ 2,400,000.00 ₱ 1,600,000.00 66.67%
Cost of sales -₱ 1,400,000.00 -₱ 900,000.00 -₱ 500,000.00 55.56%
GROSS PROFIT ₱ 2,600,000.00 ₱ 1,500,000.00 ₱ 1,100,000.00 73.33%
Salaries expense -₱ 780,000.00 -₱ 780,000.00 ₱ - 0.00%
Utilities expense -₱ 120,000.00 -₱ 120,000.00 ₱ - 0.00%
Rent expense -₱ 156,000.00 -₱ 156,000.00 ₱ - 0.00%
Depreciation expense -₱ 240,000.00 -₱ 180,000.00 -₱ 60,000.00 33.33%
Bad debts expense -₱ 72,000.00 -₱ 16,000.00 -₱ 56,000.00 350.00%
Interest expense -₱ 36,000.00 -₱ 54,000.00 ₱ 18,000.00 -33.33%
PROFIT FOR THE YEAR ₱ 1,196,000.00 ₱ 194,000.00 ₱ 1,002,000.00 516.49%

Analysis and Interpretations:

Solvency and Capital Structure
 Liquidity (Short-term solvency): The liquidity of the business has improved in 2019. This is
reflected by the increase in total current assets at a higher percentage compared to the
increase in total current liabilities (206.54% vs. 933.33%)
However, the main cause of the increase in total current assets is the increase in accounts
receivable (450.00%). This means that the ability of the business to pay its current liabilities is

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 2 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

dependent on its ability to collect the accounts receivable. This is because despite the
increase in total current assets, cash has decreased (-62.50%).

 Solvency (Long-term solvency): The solvency of the business has also improved in 2019. This is
reflected by the decrease in noncurrent liabilities (-50.00%). The business was able to settle in
2019 the currently maturing loan of ₱180,000 from 2018. This is further analyzed below:
2019 2018 (Decrease) Percent
Current portion ₱ 180,000.00 ₱ 180,000.00 ₱ 0.00%
Noncurrent portion ₱ 180,000.00 ₱ 360,000.00 -₱ 180,000.00 -50.00%
Total notes payable ₱ 360,000.00 ₱ 540,000.00 -₱ 180,000.00 -33.33%

 Capital structure: The main source of business financing in 2019 is equity, primarily from
retained profits. These are reflected by the following:
a. The increase in equity is higher compared to the increase in total liabilities (242.11% vs.
39.58%).
b. The main cause of the increase in equity is retained profit, rather than additional
contribution by the owner.
The foregoing are further analyzed as follows:
2019 2018 (Decrease) Percent
Current portion ₱ 180,000.00 ₱ 180,000.00 ₱ - 0.00%
Noncurrent portion ₱ 180,000.00 ₱ 360,000.00 -₱ 180,000.00 -50.00%
Total notes payable ₱ 360,000.00 ₱ 540,000.00 -₱ 180,000.00 -33.33%

TOTAL ASSETS ₱ 3,030,000.00 ₱ 1,454,000.00 ₱ 1,576,000.00 108.39%

TOTAL LIABILITIES ₱ 1,340,000.00 ₱ 960,000.00 ₱ 380,000.00 39.58%
Owner's ca[ital ₱ 1,690,000.00 ₱ 494,000.00 ₱ 1,196,000.00 242.11%
TOTAL LIABILITIES & EQUITY ₱ 3,030,000.00 ₱ 1,454,000.00 ₱ 1,576,000.00 108.39%

PROFIT FOR THE YEAR ₱ 9,090,000.00 ₱ 4,362,000.00 ₱ 1,002,000.00 108.39%

Profitability
The profitability of the business has greatly improved in 2019 (516.49%).
a. Sales have increased at a higher rate than cost of goods sold (66.67% vs 55.56%). This could
mean that unit costs have either decreased or sale prices have increased.
b. Depreciation expense increased, which could have been brought by the acquisition of
additional depreciable assets during 2019, (i.e., PPE increased b 8.33%).
c. Bad debts expense increased with the increase in accounts receivable. This reflects the higher
risk that the business assumes as consequence of extending more credit to customers.
d. Interest expense decreased mainly because of the decrease in notes payable.

Trend Analysis
A variation to the horizontal analysis is trend analysis. Under a trend analysis, the comparison of
financial information extends beyond two periods, normally five or more. The computational
procedures in a trend analysis are similar to a horizontal analysis.

Vertical Analysis
Vertical analysis involves the analysis of the financial statements of one reporting period. It is a
proportional analysis whereby each amount in the financial statements is shown as a percentage of
another item.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 3 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

For example, each amount in the balance sheet is stated as a percentage of total assets; each
amount in the income statement is stated as a percentage of gross sales. Financial statements
stated in this manner are also called “common-size financial statements.”
Sample Problem: Vertical Analysis
Vertical analysis of the balance sheet and income statement of ABC Co. are shown below:
ABC Co
Statement of Financial Position
As of December 31, 2019
Percent
ASSETS 2019
Cash and cash equivalents ₱ 30,000.00 0.99%***
Accounts receivable-net ₱ 1,672,000.00 55.18%
Inventory ₱ 500,000.00 16.50%
Prepaid assets ₱ 48,000.00 1.58%
Total current assets ₱ 2,250,000.00 74.26%
Property, plant & equipment ₱ 780,000.00 25.74%
Total noncurrent assets ₱ 780,000.00 25.74%
TOTAL ASSETS ₱ 3,030,000.00 100.00%
LIABILITIES
Accounts payable-net ₱ 980,000.00 32.34%**
Notes payable( current portion) ₱ 180,000.00 5.94%
Total current liabilities ₱ 1,160,000.00 38.28%
Notes payable( noncurrent portion) ₱ 180,000.00 5.94%
Total noncurrent liabilities ₱ 180,000.00 5.94%
TOTAL LIABILITIES ₱ 1,340,000.00 44.22%
EQUITY
Owner's ca[ital ₱ 1,690,000.00 55.78%
TOTAL LIABILITIES & EQUITY ₱ 3,030,000.00 100.00%

*** =(30,000/total assets)

**=(980,000/total liabilities and equity)
ABC Co
Statement of Financial Performance
For the years ended December 31, 2019

20x1 Percent
Sales ₱ 4,000,000.00 100.00%
Cost of sales -₱ 1,400,000.00 -35.00%
GROSS PROFIT ₱ 2,600,000.00 65.00%
Salaries expense -₱ 780,000.00 -19.50%
Utilities expense -₱ 120,000.00 -3.00%
Rent expense -₱ 156,000.00 -3.90%
Depreciation expense -₱ 240,000.00 -6.00%
Bad debts expense -₱ 72,000.00 -1.80%
Interest expense -₱ 36,000.00 -0.90%
PROFIT FOR THE YEAR ₱ 1,196,000.00 29.90%

Financial Ratio Analysis

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 4 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

Financial ratio analysis involves the computation of percentages, fractions or proportions using
certain formulas. This analysis is designed to emphasize the meaningful relationships between
financial data.
Financial ratios are broadly classified into the following:
1. Liquidity ratios
2. Activity ratios (Asset management ratios)
3. Leverage ratios (Debt management ratios)
4. Profitability ratios

Liquidity Ratios
Liquidity ratios provide a measure of the ability of a business to pay its liabilities. Examples include:
a. Current ratio- the most commonly used ratio in measuring the ability of a business to pay its
short-term debts.
Formula:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
b. Quick ratio- a much stricter ratio used to measure the ability of a business to pay its short-term
debts.

𝑄𝑢𝑖𝑐𝑘 𝑎𝑠𝑠𝑒𝑡𝑠 ∗∗
𝑄𝑢𝑖𝑐𝑘(𝐴𝑐𝑖𝑑 − 𝑡𝑒𝑠𝑡)𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
**Quick assets=( cash + Marketable securities + Accounts receivable, net)
c. Working capital- similar to current ratio but measures the ability of a business to pay its short-
term debts by the excess or deficiency of current assets over current liabilities.
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠) − (𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)

Activity Ratios (Asset Management Ratios)

Activity ratios provide a measure of how efficient a business is utilizing its resources. Examples include:
a. Inventory turnover- is a measure of the number of items inventory is sold and replenished
during a period. Generally, the higher the ratio, the better. However, an unusually high
inventory turnover could also indicate inventory shortages due to shortage in raw materials,
production inefficiency, underinvestment, poor inventor planning, and loss of sales.
Formula:
𝐶𝑜𝑠𝑡 𝑜𝑓𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
{(𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦,𝑏𝑒𝑔.)+(𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦,𝑒𝑛𝑑)}
Where: 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 2
b. Days of inventory (Average sale period)- is a measure of measure of the number of days
inventory is held before it is sold.

365 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

c. Accounts receivable turnover- is a measure of the number of times accounts receivable have
been collected during a period. It is an indication of the efficiency in collection.
𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒,𝑏𝑒𝑔+𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒,𝑒𝑛𝑑.
Where: 2
d. Days of receivable (Average collection period) – is a measure of the average time to collect
receivable.
365 𝑑𝑎𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 =
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Leverage Ratios (Debt management ratios)
Leverage ratios (Debt management ratios) provide a measure of the extent a business uses debt
financing or “leverage.”
a. Debt ratio (Debt-to-asset ratio) – measures the proportion of assets finance through debt.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 5 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑑𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

b. Equity ratio- measures the proportion of assets financed through equity.

𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
c. Debt-to-equity ratio- indicates how much debt is used to finance the assets relative to the
amount pertaining to the owners.
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑑𝑒𝑏𝑡 − 𝑡𝑜 − 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Profitability ratios
Profitability ratios provide a measure of the performance of a business in terms of its ability to
generate profit from its resources.
a. Gross profit ratio- shows the relationship between sales and cost of goods sold.
Formula:
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

b. Net profit ratio- measures profitability after considering all income and expenses.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

c. Return on assets- measures the profit generated in relation to total resources available to the
business.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
d. Return on equity (return on net assets)- measures the profit generated in relation to the
resources invested by (or attributable to) the owners of the business.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
Sample Problem: The comparative statement of financial position and statement of comprehensive
income of Entity A on December 31, 2019 are shown below:
Entity A
Statement of Financial Position
As of December 31, 2019

ASSETS 2019 2018

Cash and cash equivalents 440,000 200,000
Accounts receivable 130,000 120,000
Inventory 120,000 480,000
Prepaid assets 40,000 160,000
Total current assets 730,000 960,000

Property, plant & equipment 760,000 440,000

Total noncurrent assets 760,000 440,000

TOTAL ASSETS 1,490,000 1,400,000

LIABILITIES
Trade and other payables 620,000 560,000

EQUITY
Owner’s capital 870,000 840,000

TOTAL LIABILITIES & EQUITY 1,490,000 1,400,000

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 6 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

Entity A
Statement of Comprehensive Income
For the year ended December 31, 20x1

Sales 1,000,000
Cost of sales (600,000)
GROSS PROFIT 400,000
Rent income 150,000
Depreciation expense (240,000)
Insurance expense (120,000)
Bad debts expense (30,000)
Loss on sale of equipment (40,000)
PROFIT FOR THE YEAR 120,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YR. 120,000

Requirements: Compute for the following financial ratios for the year 2019: (round-off answers to two
decimal places)
a. Current ratio
b. Quick (Acid-test) ratio
c. Working capital
d. Inventory turnover
e. Days of inventory (use 365 days)
f. Accounts receivable turnover (assume all sales are on credit)
g. Days of receivable (use 365 days)
h. Debt ratio
i. Equity ratio
j. Debt-to-equity ratio
k. Gross profit ratio
l. Net profit ratio
m. Return on assets
n. Return on equity

SOLUTIONS TO QUIZ:
I. Liquidity ratios:

a. Current Current assets

=
ratio Current liabilities
730,000 ÷ 620,000 = 1.18 : 1
b. Quick "Quick assets"
(Acid-test) = (Cash + Marketable securities + Accounts receivable, net)
ratio Current liabilities
(440,000 + 130,000) ÷ 620,000 = 0.92 : 1
c. Working capital = Current assets - Current liabilities

730,000 – 620,000 = ₱110,000

II. Activity ratios (Asset management ratios):

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 7 of 8

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 2 Subject Teacher:

Cost of goods sold

d. Inventory turnover =
Average inventory
600,000 ÷ [(120,000 + 480,000) ÷ 2) = 2 times
365 days in a year
e. Days of inventory =
Inventory turnover
365 ÷ 2 = 182.5 days
Credit sales
f. Accounts receivable turnover =
Average accounts receivable
1,000,000 ÷ [(130,000 + 120,000) ÷ 2] = 8 times
365 days in a year
g. Days of receivable =
Receivable turnover
365 ÷ 8 = 45.63 days
III. Leverage ratios (Debt management ratios):
Total liabilities
h. Debt ratio =
Total assets
620,000 ÷ 1,490,000 = 0.42 : 1
Total equity
i. Equity ratio =
Total assets
870,000 ÷ 1,490,000 = 0.58 : 1
Total liabilities
j. Debt-to-equity ratio =
Total equity
620,000 ÷ 870,000 = 0.71 : 1
IV. Profitability ratios
Gross profit
k. Gross profit ratio =
Net sales
400,000 ÷ 1,000,000 = 0.40 : 1
Profit for the year
l. Net profit ratio =
Net sales
120,000 ÷ 1,000,000 = 0.12 : 1

Profit for the year

m. Return on assets =
Total assets
120,000 ÷ 1,490,000 = 0.08 : 1
Profit for the year
n. Return on equity =
Total equity
120,000 ÷ 870,000 = 0.14 : 1

References:

Ferrer, R. & Millan Z. (2018). Fundamentals of Accountancy, Business, and Management 2. Baguio
City: Bandolin Enterprise

Ballada, W. (2019). Fundamentals of Accountancy, Business, and Management 2. Manila: DomDane

Publishers

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 8 of 8