Business Finance

Governor Pack Road, Baguio City, Philippines 2600

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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

FINANCIAL STATEMENTS PREPARATION

FINANCIAL STATEMENTS ANALYSIS & INTERPRETATION
Learning objectives:
At the end of this module, students must be able to:
1. explain the types of financial statements;
2. discuss the information in the financial statements;
3. explain how investors utilize the financial information;
4. describe ratio analysis, its use and importance to owners and investors;
5. describe the limitations of financial statement analysis;
6. perform financial statements analysis and interpretation.

CONTENTS:

Preparation of Financial Statement

As discussed in FABM-1 & FABM-2, preparation of financial statements is part of the accounting cycle,
specifically the Step no. 7.

Basic guidelines in the preparation of Financial Statements:

1. Fair presentation (faithful representation of effects of transactions) – FS must be presented fairly
with all the necessary information that will influence the economic decision of the users. FS can
still be considered fairly even if some information are omitted as long as such omission will not
influence the decision of the users.
Philippine Accounting Standards (PASs) & Philippine Financial Reporting Standards (PFRSs) –
statements of financial accounting standards promulgated by the Accounting Standards
Council (ASC).
2. Going concern assumption – means that the accounting entity is viewed as continuing in
operation indefinitely in the absence of evidence to the contrary. As a rule, a going concern
entity may ignore market values and use the historical cost of assets, however, new standards
require measurement of certain assets at fair value. An entity shall prepare FS on a going
concern basis unless management intends to liquidate the entity or to cease trading.
3. Accrual basis of accounting – means income is recognized when earned regardless of when
received and expense is recognized when incurred regardless of when paid.
4. Consistency of presentation – requires the presentation and classification of items in the FS are
retained from one period to the next. An entity may change the presentation and classification
of information provided:
a. Another presentation and classification is more appropriate and provide more relevant
information.
b. The Standard allows change in the presentation.
c. Comparability is not impaired.
5. Materiality and aggregation – means an entity shall present separately each material class of
similar items. An entity shall present separately items of a dissimilar nature or function unless they
are immaterial. Materiality depends on the size and nature of the omission or misstatement
determined in surrounding circumstances.
6. Offsetting principle – requires that assets and liabilities, and income and expenses, are reported
separately. An entity shall not offset assets and liabilities or income and expenses, unless required
or permitted by a Standard.
7. Comparability of information – ensuring the comparability both with the entity’s financial
statements of previous periods and with the FS of other entities.
8. Disclosure of accounting policies – an entity must disclose the accounting policies adopted.
Disclosures are usually made on the notes to the FS.

A. Statement of Financial Position (SFP). The new title of the balance sheet.
A structured FS that shows the assets, liabilities, and equity of a business entity as of a given date. The
SFP has the information about the company’s liquidity, solvency, financial structure, and capacity for
adaptation.
Business Finance Page 1 of 8
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

Assets – are resources controlled by the

entity as a result of past transaction or
event and from which future economic
benefits are expected to flow to the
entity.

Liabilities – are present obligations of the

entity arising from past transaction or
events the settlement of which is
expected to result in an outflow from
the entity of resources embodying
economic benefits.

Equity – the residual interest in the assets

of the entity after deducting all of its
liabilities.

Figure A. Balance Sheet (SFP)

B. Income Statement. As previously discussed FABM-1 and FABM-2, the Income Statement is also known
as the Profit of Loss (P/L) Statement. P/L is part of the Statement of Comprehensive Income (SCI) as far
as accounting income is concerned.

The P/L is a structured FS that shows the financial

performance of a business entity for a given period. The SCI
is frequently used to measure the return on investment
(ROI), or earnings per share (EPS).
Income – is the increase in economic benefit during the
accounting period in the form of an inflow or increase of
asset or decrease of liability that results in an increase in
equity, other than contribution or investment the owners.
Expense – decrease in economic benefit during the
accounting period in the form of an outflow or decrease of
asset or increase of liability that results in decrease in
equity, other than distribution to the owners.
Figure B. Income Statement
Other Comprehensive Income (this will be discussed in detail in higher accounting in college).
Note: Other Comprehensive Income is composed of the following:
1. Unrealized gain (loss) on investment in equity instrument measured at Fair Value through OCI.
2. Gain (loss) from translating FS of a foreign operation.
3. Change in revaluation surplus.
4. Unrealized gain (loss) from derivative contracts designated as cash flow hedge.
5. Actuarial gain (loss) on defined benefit plan in accordance with the "full recognition approach".
XYZ Corporation
C. Statement of Changes in Equity (SCE). Statement of Changes in Equity
A structured FS that reflects all the elementsFor the caused
that period ended December
changes in an31,entity’s
20xx equity between two
dates of the statement of financial position.
Retained
Share Capital Reserves Earnings
Balances-January 1, 20xx P xxx P xxx P xxx
Net Income xxx
Correction of prior period (if any)
Dividend payment (xxx)
Issuance of stocks xxx
Balances-December 31, 20xx P xxx P xxx P xxx
Figure C. Statement of Changes in Equity

Business Finance Page 2 of 8

 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

C. Statement of Cash Flows (SCF). XYZ Corporation

A structured FS showing how the Statement of Cash Flows
entity’s operation have affected the For the year ended December 31, 20xx
cash position of the business. The two
major decisions that affect the cash Cash flows from operating activities:
position of the entity are investment Cash sales P xxx
decisions and financing decisions. Collections from customers xxx
Measurements that can be done Other income xxx
using the SCF are Net Working Capital Payment of salaries (xxx)
(NWC), Net Operating Working Payment to suppliers (xxx)
Capital (NOWC), Operating Cash Other operating expenses (xxx)
Flows (OCF), and Free Cash Flows Net Cash Flow from operating activities P xxx
(FCF). These measurements will be
discussed in detail in your higher
Cash flows from investing activities:
accounting subjects under the
Disposal of fixed assets P xxx
Management Advisory Services
Acquisition of fixed assets (xxx)
(MAS) in college.
Investment in stocks/bonds (xxx)
Net Cash Flow from investing activities P xxx

Cash flows from financing activities:

Receipt of bank loans P xxx
Issuance of stocks/bonds xxx
Payment of bank loans (xxx)
Net Cash Flow from financing activities P xxx
Net Cash Flow (Increase/Decrease in Cash) P xxx
Add: Cash-Beginning balance xxx
Figure D. Statement of Cash Flows CASH-Ending balance P XXXX

Financial Statement Analysis:

The process of selecting related data from financial statement to evaluate the entity’s past financial
position and operating performance and predict the outcome of future operations.

Objectives of Financial Statement Analysis:

 Determining the strengths and weaknesses of the entity.
 Determining the profitability, stability, and soundness of the investments.
 Determining the entity’s financial flexibility or capability to diversify its business.
 Determining the entity’s liquidity and solvency.

Limitations of Financial Statement Analysis:

 The information that can be derived in the analysis are not absolute measures of performance.
These are only indicators to give the users of these information they can use in making good
business decisions.
 The limitations in preparing the financial statements (discussed in FABM-1 and FABM-2) will affect
the results of the analysis. Lack of consistency in the application of accounting principles and/or
standards is one of the many reasons.
 The tools and techniques used in the analysis also have limitations such as the use of averages.
 The influence of the management on the result of the analysis could be overlooked by the
analyst.

Guides in Financial Statement Analysis:

1. Establish the objectives of the analysis.
2. Conduct study of the industry where the entity operates.
3. Develop deep knowledge of the entity and quality of its management.
4. Evaluate the financial statements using the tools and techniques to be discussed below.
5. Prepare the summary report on findings.
6. Report the conclusions of the analysis.
Business Finance Page 3 of 8
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

Types of FS Analysis:
I. Common-Size Analysis – A simple step in financial statements analysis comparing two financial
statements.
Two forms of common-size analysis:
1. Horizontal Analysis (aka Time Series Analysis/Trend Analysis)
Methods of financial statement analysis generally involve comparing certain information. The
horizontal analysis compares specific items over a number of accounting periods.
Formula1 (Peso change): Current Year amount – Base Year amount
𝑃𝑒𝑠𝑜 𝐶ℎ𝑎𝑛𝑔𝑒
Formula2 (% change): 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡 𝑥 100

2. Vertical Analysis (aka Correlation Analysis)

A method of financial statement analysis in which each entry for each of the three major
categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a
proportion of the total account. The main advantages of vertical analysis is that the balance
sheets of businesses of all sizes can easily be compared.
𝐼𝑡𝑒𝑚 𝑎𝑚𝑜𝑢𝑛𝑡
Formula (%): 𝑥 100
𝐵𝑎𝑠𝑒 𝐼𝑡𝑒𝑚 𝑎𝑚𝑜𝑢𝑛𝑡

II. Financial Ratio Analysis – is an analytical tool employing the ratio or proportion of a certain item in
the financial statement vis-à-vis other related items in the same FS or other’s FS for purposes of
comparing performance.
Types of financial ratios:
1. Liquidity ratios – emphasizes the company’s ability to pay off short-term obligations as they
become due.
2. Activity ratios (asset management ratio) – measures the speed (efficiency) at which the
company is turning over accounts receivable, inventory, and long-term assets.
3. Solvency ratios (leverage ratios/debt management) – evaluates the over-all debt position of
the company in light of its asset base and earning power.
4. Profitability ratios – allows to measure the ability of the firm to earn adequate return on sales,
total sales, and invested capital.

Liquidity Ratios
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
1. Current ratio 𝑪𝑹 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

𝑪𝒂𝒔𝒉+𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔+𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒍𝒃𝒆, 𝒏𝒆𝒕

2. Quick ratio (Acid-test ratio) 𝑸𝑹 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

𝑪𝒂𝒔𝒉+𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔+𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔

3. Cash ratio =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

4. Working capital = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

Activity ratios (Asset Management)

𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔
1. Receivable Turnover 𝑨𝑹𝑻𝑶 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆

𝟑𝟔𝟓 𝑨𝒗𝒆𝒈. 𝑨𝑹
2. Average Collection Period (days sales outstanding) 𝑨𝑪𝑷 = 𝑨𝑹𝑻𝑶 or 𝑨𝒗𝒆𝒈. 𝑫𝒂𝒊𝒍𝒚 𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅 𝑺𝒂𝒍𝒆𝒔

3. Inventory Turnover 𝑰𝑻𝑶 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 or 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 * if COGs can’t be determined.

𝟑𝟔𝟓 𝑨𝒗𝒆𝒈. 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

4. Days of Inventory (Average sale period) 𝑫𝑶𝑰 = 𝑰𝑻𝑶
or 𝑨𝒗𝒆𝒈. 𝑫𝒂𝒊𝒍𝒚 𝑮𝑶𝑮𝑺

𝑺𝒂𝒍𝒆𝒔
5. Fixed Asset Turnover 𝑭𝑨𝑻𝑶 = 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔

𝑺𝒂𝒍𝒆𝒔
6. Total Asset Turnover 𝑨𝑻𝑶 = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
Business Finance Page 4 of 8
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

𝟑𝟔𝟓 𝑨𝒗𝒆𝒈. 𝑨𝑷
7. Payable Deferral Period 𝑷𝑫𝑷 = or
𝑨𝑷𝑻𝑶 𝑨𝒗𝒆𝒈. 𝑫𝒂𝒊𝒍𝒚 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
𝑪𝒓𝒆𝒅𝒊𝒕 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
Note: 𝑨𝑷𝑻𝑶 = 𝑨𝒗𝒆𝒈. 𝑨𝑷

Solvency ratios (Leverage)

𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (𝑹𝑶𝑨)
1. Debt to total assets (debt ratio) 𝑫𝑹 = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
or [1 − (𝑹𝑶𝑬)
]

𝑬𝑩𝑰𝑻
2. Times interest earned 𝑻𝑰𝑬 = 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆

𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
3. Equity ratio 𝑬𝑹 = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
4. Debt-to-Equity ratio 𝑫𝑬𝑹 = 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚

Profitability ratios
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
1. Gross Profit margin 𝑮𝑷𝑹 = 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
2. Net Profit margin 𝑵𝑷𝑹 = 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝑺𝒂𝒍𝒆𝒔

3. Return on Assets (Investment) 𝑅𝑂𝐴 = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
or 𝑺𝒂𝒍𝒆𝒔
𝒙 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔

4. Return on Equity 𝑹𝑶𝑬 = 𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚 or = 𝟏−𝑫𝒆𝒃𝒕 𝑹𝒂𝒕𝒊𝒐

𝑵𝒆𝒕 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑨𝒇𝒕𝒆𝒓 𝑻𝒂𝒙

5. Return on Invested Capital 𝑹𝑶𝑰𝑪 = 𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍

𝑬𝑩𝑰𝑻
6. Return on Sales 𝑹𝑶𝑺 = 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆−𝑷𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝑺𝒉𝒂𝒓𝒆 𝑫𝒊𝒗𝒊𝒅𝒆𝒅𝒔

7. Earnings Per Share 𝑬𝑷𝑺 =
𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝑶𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝑺𝒉𝒂𝒓𝒆𝒔

𝑪𝒂𝒔𝒉 𝑫𝒊𝒗𝒊𝒅𝒆𝒅 𝒑𝒆𝒓 𝑪𝒐𝒎𝒎𝒐𝒏 𝒔𝒉𝒂𝒓𝒆

8. Dividend Pay-out ratio 𝑫𝑷𝑶𝑹 = 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆

𝑪𝒂𝒔𝒉 𝑫𝒊𝒗𝒊𝒅𝒆𝒅
9. Dividend Per Share 𝑫𝑷𝑺 = 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔

𝑪𝒂𝒔𝒉 𝑫𝒊𝒗𝒊𝒅𝒆𝒅 𝒑𝒆𝒓 𝑪𝒐𝒎𝒎𝒐𝒏 𝒔𝒉𝒂𝒓𝒆

10. Dividend Yield 𝑫𝒀 = 𝑴𝒂𝒓𝒌𝒆𝒕 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒉𝒂𝒓𝒆

The DuPont System Analysis

System used to dissect the firm’s
financial statements and to assess its
financial condition. The DuPont system
provides a useful way to link ratios to
explain the firm’s return on assets and
equity. The formula states that the return
on equity is the product of the firm’s
leverage ratio, asset turnover, profit
margin, and debt burden. Return on
assets is the product of the firm’s asset
turnover and profit margin.

Figure E. DuPont Analysis Model

Business Finance Page 5 of 8
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

Sample Problems no. 1: Horizontal analysis. Comparative Financial Statements of Del Valle Co.

Del Valle Co. Del Valle Co.

Comparative Statement of Financial Position Comparative Income Statement
As of December 31, 20X1 and 20X2 As of December 31, 20X1 and 20X2
Increase (Decrease) Inc
20X2 20X1 Amount % 20X2 20X1 A
ASSETS Sales 1,250,000 1,160,000
Current Assets: COGS 350,000 330,000
Cash 70,000 68,000 Gross Profit
2,000 2.94% 900,000 830,000
Accounts Receivable (net) 218,000 185,000 Gen. & Admin.
33,000 Expenses
17.84% 200,000 215,000
Marketable Securities 50,000 60,000 Selling Expenses -16.67%
(10,000) 150,000 200,000
Inventories 223,000 197,000 Total26,000
Expenses 13.20% 350,000 415,000
Prepaid expenses 68,000 77,000 Operating Income-11.69%
(9,000) 550,000 415,000
Total Current Assets: 629,000 587,000 Interest Expense
42,000 7.16% 30,000 30,000
Non-Current Assets: Net Profit before tax 520,000 385,000
Land 1,000,000 900,000 Income Tax
100,000 11.11% 156,000 115,500
Building (net) 2,000,000 1,500,000 Net 500,000
Income 33.33% 364,000 269,500
Equipment 300,000 350,000 (50,000) -14.29%
Total Non-Current Assets: 3,300,000 2,750,000 550,000 20.00%
TOTAL ASSETS: 3,929,000 3,337,000 592,000 17.74%
LIABILITIES & EQUITY
Current Liabilities:
Accounts Payable 158,000 140,000 18,000 12.86%
Taxes Payable 60,000 50,000 10,000 20.00%
Total Current Liabilities: 218,000 190,000 28,000 14.74%
Non-Current Liabilities:
Bonds Payable 1,400,000 1,200,000 200,000 16.67%
Total Non-Current Liabilities: 1,400,000 1,200,000 200,000 16.67%
TOTAL LIABILITIES: 1,618,000 1,390,000 228,000 16.40%
STOCKHOLDERS' EQUITY
Capital Stock:
Common Stock (at Par Value) 950,000 950,000 - 0.00%
Preferred Stock (at Par Value) 500,000 500,000 - 0.00%
Share Premium 300,000 300,000 - 0.00%
Retained Earnings 561,000 197,000 364,000 184.77%
Total Stockholders' Equity 2,311,000 1,947,000 364,000 18.70%
TOTAL LIAB. & EQUITY: 3,929,000
Del Valle Co. 3,337,000 592,000 17.74%
Comparative Statement of Financial Position
Requirement: Evaluate the Financial Position and Financial Performance of Del Valle Co.
As of December 31, 20X1 and 20X2
Increase (Decrease)
20X2 20X1 Amount %
ASSETS
Current Assets:
Cash 70,000 68,000 2,000 2.94%
Accounts Receivable (net) 218,000 185,000 33,000 17.84%
Marketable Securities 50,000 60,000 (10,000) -16.67%
Inventories 223,000 197,000 26,000 13.20%
Prepaid expenses 68,000 77,000 (9,000) -11.69%
Total Current Assets: 629,000 587,000 42,000 7.16%
Non-Current Assets:
Land
Business Finance 1,000,000 900,000 100,000 11.11% Page 6 of 8
Building (net) 2,000,000 1,500,000 500,000 33.33%
 20X2 20X1 Amount %
ASSETS
Current Assets:
Cash 70,000 Business
68,000 Finance2,000 2.94%
Governor Pack Road, Baguio City, Philippines 2600
Accounts Receivable (net) 218,000
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
185,000 33,000 17.84%
Marketable Securities
442-2564; 442-8219; 442-8256; Fax No.: 50,000
442-6268 Grade Level/Section:
60,000 (10,000) Grade 12- ABM
-16.67%
Email: [email protected]; Website: www.uc-bcf.edu.ph
Inventories 223,000 197,000 26,000 13.20%
MODULE 3– FINANCE
Prepaid expenses 68,000
Subject Teacher: Kenny Jones A. Amlos
77,000 (9,000) -11.69%
Total Current Assets: 629,000 587,000 42,000 7.16%
Non-Current Assets:
Land 1,000,000 900,000 100,000 11.11%
Building (net) 2,000,000 1,500,000 500,000 33.33%
Equipment 300,000 350,000 (50,000) -14.29%
Total Non-Current Assets: 3,300,000 2,750,000 550,000 20.00%
TOTAL ASSETS: 3,929,000 3,337,000 592,000 17.74%
LIABILITIES & EQUITY
Current Liabilities:
Accounts Payable 158,000 140,000 18,000 12.86%
Taxes Payable 60,000 50,000 10,000 20.00%
Total Current Liabilities: 218,000 190,000 28,000 14.74%
Non-Current Liabilities:
Bonds Payable 1,400,000 1,200,000 200,000 16.67%
Total Non-Current Liabilities: 1,400,000 1,200,000 200,000 16.67%
TOTAL LIABILITIES: 1,618,000 1,390,000 228,000 16.40%
STOCKHOLDERS' EQUITY
Capital Stock:
Common Stock (at Par Value) 950,000 950,000 - 0.00%
Preferred Stock (at Par Value) 500,000 500,000 - 0.00%
Share Premium 300,000 300,000 - 0.00%
Retained Earnings 561,000 197,000 364,000 184.77%
Total Stockholders' Equity 2,311,000 1,947,000 364,000 18.70%
TOTAL LIAB. & EQUITY: 3,929,000 3,337,000 592,000 17.74%

Del Valle Co.

Comparative Income Statement
As of December 31, 20X1 and 20X2
Increase (Decrease)
20X2 20X1 Amount %
Sales 1,250,000 1,160,000 90,000 7.76%
COGS 350,000 330,000 20,000 6.06%
Gross Profit 900,000 830,000 70,000 8.43%
Gen. & Admin. Expenses 200,000 215,000 (15,000) -6.98%
Selling Expenses 150,000 200,000 (50,000) -25.00%
Total Expenses 350,000 415,000 (65,000) -15.66%
Operating Income 550,000 415,000 135,000 32.53%
Interest Expense 30,000 30,000 - 0.00%
Net Profit before tax 520,000 385,000 135,000 35.06%
Income Tax 156,000 115,500 40,500 35.06%
Net Income 364,000 269,500 94,500 35.06%

Evaluation:

Liquidity – The comparative financial position of the company shows that the percentage increase in
total current assets (7.16%) is lower than the percentage increase in total current liabilities (14.74%).
The accounts receivable and inventory have increased at a much higher percentage compared
with that of the percentage increase in sales. This shows that the company has slow in its conversion
of inventory and receivables to cash. These figures clearly show the deterioration in the liquidity
(short-term solvency) of the company in year 20x2 as compared to year 20x1.

Solvency – The current book value of the fixed assets has declined maybe due disposal or increase in
the provision for depreciation. The total liabilities have increase by 16.4% while the stockholders’
Business Finance Page 7 of 8
 Business Finance
Governor Pack Road, Baguio City, Philippines 2600
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 protected]; Website: www.uc-bcf.edu.ph

MODULE 3– FINANCE Subject Teacher: Kenny Jones A. Amlos

equity has increased by 18.7%. These to figures show that the company is focusing on the improving
the profitability and decreasing its borrowings. This is an indication that the company is strengthening
its long-term financial position.

Efficiency and Profitability – The amount of sales has increase by 7.76% while the cost of sales has
increased by 6.06%. These figures show that the company was able to adjust its selling price that is
commensurate with that of the cost. The gross profit rate has slightly increased due to good cost-
price management ability of the company. The company was also able to reduce the expenses as
evidenced by the percentage decrease in total expenses. This means that the company has been
efficient in keeping expenses within its control that resulted to an overall increase in net income by
35.06%.

Practice exercises: Now it’s your turn. Evaluate Del Valle Co. using financial ratio analysis and
calculations from the list of formula given above.

Sample Problems no. 2:

Kevin Kosme Corporation had net income of ₱2 million in 2018. Using the 2018 financial elements as
the base data, net income decreased by 70 percent in 2019 and increased by 175 percent in 2020.
The respective net income reported by Kevin Kosme Corporation for 2019 and 2020 are:

Solution: Solution:
2019 2020
𝑃𝑒𝑠𝑜 𝐶ℎ𝑎𝑛𝑔𝑒 𝑃𝑒𝑠𝑜 𝐶ℎ𝑎𝑛𝑔𝑒
% change = 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡 𝑥 100 % change= 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡 𝑥 100

Let  be the 2019 net income Let  be the 2020 net income
 − ₱2,000,000  − ₱2,000,000
(70%) = ₱2,000,000 𝑥 100 175% = ₱2,000,000 𝑥 100

 − ₱2,000,000  − ₱2,000,000
(.70) = ₱2,000,000
1.75= ₱2,000,000

(₱1,400,000) =  - ₱2,000,000 ₱3,500,000 =  - ₱2,000,000

(₱1,400,000) + ₱2,000,000 =  ₱3,500,000 + ₱2,000,000 = 

₱600,000 =  ₱5,500,000 = 

Sample Problems no. 3:

During 2019, Masipag na ABMer Company purchased ₱960,000 of inventory. The cost of goods sold
for 2019 was ₱900,000, and the ending inventory at December 31, 2019 was ₱180,000. What was the
inventory turnover for 2019?

Solution:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐼𝑇𝑂 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

₱900,000
𝐼𝑇𝑂 = [(₱120,000+₱180,000)÷2] 𝐼𝑇𝑂 = 6.0 𝑡𝑖𝑚𝑒𝑠

References:
 BAL 658.15 C1128, 2017. Cabrera, Ma. Elenita Balatbat and Cabrera, Gilbert Anthony B.,
Business Finance for Senior High School, GIC Enterprises
 BAL 658.15 G4476, 2017. Gitman, Lawrence J., et. al. Business Finance. JO-ES Publishing House,
Inc.
 BAL 332.4 L161, 2015. Laman, Rose Marie B. et. al. Financial System, Market & Management.
GIC Enterprises
 BAL 658.15 An15, 2010. Anastacio, Ma. Flordeliza, Dacanay, Roberto C. Fundamentals of
Financial Management, Rex Book Store
Business Finance Page 8 of 8