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Fundamentals of
Accountancy,
Business &
Management 2
Module 6:
Analysis of Financial Statements

SELF-LEARNING MODULE

DIVISION OF GENERAL SANTOS CITY

SELF-LEARNING MODULE

DIVISION OF GENERAL SANTOS CITY

Fundamentals of Accountancy, Business & Management 2 for Grade 12
Self-Learning Module (SLM)
Module 6: Analysis of Financial Statements
First Edition, 2020

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Reviewers: Luzviminda R. Loreno
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Gregorio O. Ruales, EPS – ADM Coordinator
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Fundamentals of
Accountancy, Business
& Management 2
Module 6:

Analysis of
Financial
Statements
Introductory Message
For the facilitator:

Welcome to the Fundamentals of Accountancy, Business & Management 2 -Grade 12

Self-Learning Module (SLM) on Analysis of Financial Statements.

This module was collaboratively designed, developed and reviewed by educators both from
public and private institutions to assist you, the teacher or facilitator in helping the learners
meet the standards set by the K to 12 Curriculum while overcoming their personal, social,
and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent learning
activities at their own pace and time. Furthermore, this also aims to help learners acquire
the needed 21st century skills while taking into consideration their needs and
circumstances.

In addition to the material in the main text, you will also see this box in the body of the
module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module. You also
need to keep track of the learners' progress while allowing them to manage their own
learning. Furthermore, you are expected to encourage and assist the learners as they do the
tasks included in the module.

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For the learner:

Welcome to the Fundamentals of Accountancy, Business & Management 2 – Grade 12

Self-Learning Module (SLM) on Analysis of Financial Statements.

The hand is one of the most symbolized part of the human body. It is often used to depict
skill, action and purpose. Through our hands we may learn, create and accomplish. Hence,
the hand in this learning resource signifies that you as a learner is capable and empowered
to successfully achieve the relevant competencies and skills at your own pace and time.
Your academic success lies in your own hands!

This module was designed to provide you with fun and meaningful opportunities for guided
and independent learning at your own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

What I
This will give you an idea of the skills or
Need to
Know competencies you are expected to learn
in the module.
What I This part includes an activity that aims
Know to check what you already know about
the lesson to take. If you get all the
answers correct (100%), you may decide
to skip this module.

What’s In This is a brief drill or review to help you

link the current lesson with the
previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such
as a story, a song, a poem, a problem
opener, an activity or a situation.

What is It This section provides a brief discussion

of the lesson. This aims to help you
discover and understand new concepts
and skills.
What’s This comprises activities for
More independent practice to solidify your
understanding and skills of the topic.
You may check the answers to the
exercises using the Answer Key at the
end of the module.
What I
This includes questions or blank
Have
Learned sentence/paragraph to be filled in to
process what you learned from the
lesson.

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 What I Can This section provides an activity which
Do will help you transfer your new
knowledge or skill into real life
situations or concerns.

Assessment This is a task which aims to evaluate

your level of mastery in achieving the
learning competency.
Additional In this portion, another activity will be
Activities given to you to enrich your knowledge
or skill of the lesson learned. This also
tends retention of learned concepts.
Answer This contains answers to all activities in
Key the module.

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities included
in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not hesitate to
consult your teacher or facilitator. Always bear in mind that you are not alone.

We hope that through this material, you will experience meaningful learning and gain
deep understanding of the relevant competencies. You can do it!

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 What I Need to Know

This module was designed and written with you in mind. It is here to help you master the
Analysis of Financial Statements. The scope of this module permits it to be used in many
diff erent learning situations. The language used recognizes the diverse vocabulary level of
students. The lessons are arranged to follow the standard sequence of the course. But the
order in which you read them can be changed to correspond with the textbook you are now
using.

The module discusses the topic on:

 Lesson 5 – Analysis of Financial Statements

After going through this module, you are expected to: 1. Define the measurement levels,
namely; liquidity, solvency and profitability; (ABM_FABM12- Ig-h-12) 2. Perform
vertical and horizontal analyses of financial statements of a single proprietorship;
and, (ABM_FABM12- Ig-h-13) 3. Compute and interpret financial ratios such as
current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover,
inventory turnover, debt-to-equity ratio, and the like. (ABM_FABM12- Ig-h-14)

This module is self-instructional. You can read, analyze concepts and ideas
presented and reflect on them. The activities will help you assess your progress as
you go through in this module.

Now, just fasten your seatbelts because we are now about to begin this journey…

What I Know

At the start of this mpdule, you are to take the test to see how much backgroun d
information and knowledge you stored for the new lesson.
Let’s begin with challenging our minds about analysis of financial statements. Are you
ready now?

Let’s answer this!

Instruction: Read the questions and encircle the letter of your answer.
1. It is the capability of a company to pay its current obligations.
a.liquidity b. solvency c. profitability d. stability

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 2. This ratio measures the capability of a company to pay its current obligations.
a. liquidity ratio b. solvency ratio c. profitability ratio d. stability ratio

3. The following ratios are used in measuring liquidity position of a company, except
a. quick ratio b. acid-test ratio c. current ratio d. gross profit ratio

4. If current asset is P 10,000 and current liability is P 5,000, the current ratio is
a. 2:1 b. P 2,000 c. 1:2 d. P 5,000

5. It is the capability of a company to pay non-current liabilities as they fall due.

a. liquidity b. solvency c. profitability d. agility

6. This ratio measures the capability of a company to pay non-current liabilities as

they fall due.
a. liquidity ratio b. solvency ratio c. profitability ratio d. stability ratio

7. Which financial ratios are used in financial statement analysis?

a. liquidity ratios b. solvency ratios c. profitability ratios d. all of these
except stability

8. It is a common-size statement analysis or proportional analysis of a financial

statements.
a. vertical analysis b. diagonal analysis c. horizontal analysis d. ratio analysis

9. It is the comparison of two or more financial statements over the time.

a. vertical analysis b. diagonal analysis c. horizontal analysis d. ratio analysis

10. If current assets is P 200,000 and total assets is P 800,000, what percentage of total
assets is current assets?
a. 2.5% b. 25% c. 250% d. 23%

11. A firm has liabilities of P 30,000 and owner’s capital of P 70,000. The percentage of
total liabilities to total assets is
a. 20% b. 25% c. 30% d. 43%

12. A firm had owner’s capital of ₱125,000 in 2018 and ₱150,500 in 2019. The increase
in owner’s capital from 2018 to 2019 is
a. 20% b. 21% c. 16% d. 17%

13. Which of the following is not included in computing acid-test ratio?

a. cash b. notes receivable c. accounts payable d. merchandise
Inventory

14. Which of the following is not included in computing current ratio?

a. land b. notes payable c. accounts receivable d. merchandise
Inventory

15. The difference between current assets and current liabilities is called
a. current ratio b. working capital c. acid-test ratio d. both a and b

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 Lesson
Analysis of
6 Financial Statements

Can you tell a person having a fever by just looking at it? Can you tell a
person happy by just looking at her/his face? Some of you would answer
yes. We can tell a person is happy when there’s a spark in their eyes, a smile
on their face and etc. Same with business. As detectives, we can tell that a
business is healthy or not by just looking thoroughly at financial
statements.
This module would assist you as Senior High School learner to define the
measurement levels, perform vertical and horizontal analyses of financial
statements of a single proprietorship; and compute and interpret financial
ratios.

What’s In

In order to proceed with the next topic, let’s recall your understanding about the
different financial statements. Can you recall?
Activity 1: Just Do It!
Instruction: Follow what is being asked.
A. Classify the following account titles as to Assets, Liabilities and Owner’s Equity.
Use “check mark” (/) on the space provided.
ASSET LIABILITY OWNER’S
EQUITY
1. Cash in Bank __________ __________ __________
2. Notes Receivable __________ __________ __________
3. Accounts Payable __________ __________ __________
4. Corona Covid, Capital __________ __________ __________
5. Office Equipment __________ __________ __________
6. Professional Income __________ __________ __________
7. Building __________ __________ __________
8. Notes Payable __________ __________ __________
9. Taxes and Licenses __________ __________ __________
10. Salaries and Wages __________ __________ __________

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 B. Encircle the letter of the correct answer in each question.

11. Which of the following is not a component of Cost of Sales?

a. freight-in c. purchase discount
b. sales discounts d. merchandise inventory

12. Which of the following is an expense account?

a. freight-in b. freight-out c. sales discounts d. purchase discount

13. A balance sheet which is presented in horizontal format

a. report form b. account form c. natural form d. standard form

14. Which of the following is included in making a head of cash flow statement?

a. title of the report c. period covered

b. name of the business d. all of these except place of the
Business

15. Which of the account titles that is differently classified from others?
a. rent expense b. supplies expense c. taxes and licenses d. drawing

Notes to the Teacher

Teacher facilitates an activity that enables learners to use previously

taught lesson.

What’s New

How are you coping with our lesson? Are you now ready and excited to do the
activities we will cover in this module? So, let’s begin…

Let’s warm up!

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Activity 2: Novice Stage!

Instruction: Read the following scenes, then, solve the scenes by writing your
answer on the space provided below.

Scene 1. Assume that you want a new cellphone. Since you don’t have enough
money, you tend to borrow some from your parents. Are you capable of paying your
parents with what you have right now? If yes, how?
_________________________________________________________________________________
_________________________________________________________________________________
Scene 2. Assume you have a P 50.00 allowance for a day. List down what comprises
for that allowance. You can add components or change the amount of your daily
allowance.
Example: ____________
Food P 20.00 ____________
Fare 10.00 ____________
Total P 30.00 ____________
____________

Scene 3. Using your grade from previous year, complete the table.

Subjects First Quarter Second Quarter

Physical Education & Health
Oral Communication
Komunikasyon at Pananaliksik
sa Wika at Kulturang Pilipino

Processing Questions:

Instruction: Write your answers on the space provided.

1. How did you find the activity?

_________________________________________________________________________________
_________________________________________________________________________________

2. In scene two (2), what component is the largest and smallest?

_________________________________________________________________________________
_________________________________________________________________________________

3. In scene three (3), what is your observation in your grades?

_________________________________________________________________________________

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 What is It

In the previous lesson, that we tackled, we focused on the different financial

statements being prepared by an entity. By this time, let us discuss about the
measurement levels worth analyzing for in a business and I will explain to you
further what you missed to answer in the previous activities. In our review, you are
asked to answer a pretest in order to pre-assess your prior knowledge about our
new lesson. And followed by completing the novice stage to know how far your
knowledge is. This is purposely to gear up your mind because we are going to mug
up the different measurement levels.

Financial Statements are tools in decision making process. It contains financial

information of how the business runs throughout its life. To make use of it,
accountant shows his analytical capabilities to analyze and interpret such figures
found in financial statements to help in decision making. Not only accountants are
interested in it but also other users of financial statements such as investors,
employees, lenders, suppliers and many more.

The purpose of statement analysis is to evaluate the performance of the business in

the past as basis for future operations. Usually, financial statement analysis focuses
on these three aspects of the business.

1. Liquidity – it is the company’s ability to pay its short-term obligations. A good

liquidity position would encourage banks or financial institutions to lend. Short
term obligation is a liability will be paid back within 12 months.
a. Current Ratio
b. Quick or Acid-Test Ratio

2. Solvency – it is the company’s capability to pay its long-term obligations as they

fall due. Long-term obligation is defined as liability that will be paid back after
12 months.
a. Debt to Total Assets Ratio
b. Owner’s Equity to Total Assets Ratio

3. Profitability – it is the company’s ability to generate higher profit.

a. Rate of Return on Total Assets

b. Rate of Return on Sales
c. Gross Profit Ratio
d. Rate of Return on Investment

Comparison Standards

Comparability is one of the key qualities which accounting information must have.
Accounting information is comparable when accounting standards and policies are
applied and consistently from one period to another. This comparability principle is
important because it allow us to compare a set of financial statements with those
previous periods and with other companies.

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 The following are the comparison standards that can be used by entities:
a. Intracomparability. The company’s financial statements for the current period
are being compared with the financial statements of the past periods. It would point
out areas for improvements and may be used as performance evaluation for sound
decision making.

 The total net income of XYZ Company for the current year 2019 is being compared
with the total net income of XYZ Company for the year 2018 and 2017.
 The total assets of XYZ Company for the current year 2019 is being compared with
the total assets of XYZ Company for the year 2018 and 2017.

b. Intercomparability. The company’s financial statements are being compared

against a direct competitor. It could show if our entity underperformed or
overachieved against our direct competitor’s financial statements.
 The financial statements of Lechonan 1 are being compared with the financial
statements of Lechonan 2.
 The financial statements of Coffee Shop A are being compared with the financial
statements of Coffee Shop B.

c. Industry Standard. The company’s financial statements are being compared

within the industry. It helps the company on where does it stand financially and
evaluate its financial performance. It could lead to benchmarking.
 The financial statements of Lechonan 1 are being compared with the industry
standard for the food and beverage industry.
 The financial statements of Smart Telecom are being compared with the industry
standard for the telecom industry.

METHODS USED IN STATEMENT ANALYSIS

The most common method of statement analysis employed by accountants as
financial analyst are as follows:
1. Presentation of statement showing the component percentages;
2. By using trends by means of percentages;
3. Using ratio to establish the relationship between certain item in the Statement of
Financial Position and Statement of Comprehensive Income.

COMPONENT PERCENTAGES

The analytical technique used in this method is the Vertical Analysis. Vertical Analysis is
a common size statement analysis or proportional analysis of a financial statement. This
means, each line item of the statement of comprehensive income is stated as a percentage
of net sales. On the other hand, each line item of the statement of financial position is
stated as percentage of total assets. Doing this analysis can see the relative proportions
of account balance and any relative changes in accounts over the time.

Go Company
Statement of Comprehensive Income
For the year March 31, 2018
Percent
Sales P 42,000 102.54%
Less: Sales Returns & Allow. P 240
Sales Discounts 800 1,040 2.54%
Net Sales P 40,960 100%
Less: Cost of Goods Sold 28,500 69.58%
Gross Profit P 12,460 30.42%
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Less: Operating Expenses 4,600 11.23%
Net Income P 7,860 19.19%

Sales P 42,000
Net Sales ÷ 40,960
% of increase P 102.54%
(Net Sales is used as a common base)

The above common-size Statement of Comprehensive Income shows that every P1 peso
of your sales, seventy centavos cover the cost of goods sold, eleven centavos for the
operating expenses and nineteen centavos represents profit. Go Company can consider
this in decision making by reducing the cost of goods sold to increase net income.

TRENDS BY MEANS OF PERCENTAGES

The analytical technique used in this method is the Horizontal Analysis. Horizontal
Analysis is the comparison of two or more financial statements over the time. It helps to
see if there are changes whether it is high or low that may lead for further investigation
of the reason for changes.

Go Company
Statement of Comprehensive Income
For the year March 31, 2018
Amount of % of
Increase Increase
2018 2017 (Decrease) (Decrease)
Sales P 42,000 P 35,000 P 7,000 20%
Less: Sales Returns & Allow. P 240 P 155 P 85 55%
Sales Discounts 800 1,600 (800) (50%)
Total P 1,040 P 1,755 P (715) (41%)
Net Sales P 40,960 P 33,245 P 7,715 23%
Less: Cost of Goods Sold 28,500 29,000 (500) (1.72%)
Gross Profit P 12,460 P 4,245 P 8,215 193.52%
Less: Operating Expenses 4,600 2,500 2,100 84%
Net Income P 7,860 P 1,745 P 6,115 350.43%

Sales of 2018 or Year 2 P 42,000 P 7,000/P 35,000 = 0.2

Sales of 2017 or Year 1 - 35,000 or 20% (% of increase)
Amount of Increase P 7,000

Analysis/Interpretation:
1. Sales has increased by 20%. From P 35,000 to P42,000. Sales rate is higher
than cost of goods sold (20% vs. 1.72%). It means more sales were done
which increased in sales at a minimal increase in cost.
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 2. Sales Returns & Allowances has increased by 55%. It means more
items/merchandise has been returned due to bad conditions upon
shipment/delivery.
3. Sales Discounts has decreased by 50%. It means that customers cannot
pay their accounts within the discount term due to its short discount term.
Also, maybe the discount rate is too low that customers losing interest to
pay within discount term.
4. Operating expense has increased by 84%. It is much higher than the
increase in sales.

RATIO ANALYSIS
Ratio analysis is a method of financial evaluation whereby the relationship between the
items found in the Statement of Financial Position, Statement of Comprehensive Income
or both are being established.
1. Liquidity Ratios. These ratios are very important to the short-term creditors of a
company.
a. Current Ratio – it measures the ability of the business to pay its current
obligations arising from operations. As much as possible, 1 or more current
ratio is preferred.
Formula: Current Ratio = Current Assets/Current Liabilities
Example: Current Assets 1,000,000
Current Liabilities ÷ 400,000
Current Ratio 2.5 or 2.5:1

The current ratio of 2.5:1 indicates that for every one peso of current liability, there is P
2.5 of current asset to pay. This is a high indicative of its liability to pay the currently
maturing obligation since it’s more than 1.

The Current Ratio is also called Working Capital Ratio because the difference between
current assets and current liabilities is called working capital.
Current Assets 1,000,000
Current Liabilities - 400,000
Working Capital 600,000

b. Acid-Test or Quick Ratio – is a stricter test or measurement of the liability of

the business to remove its non-cash current assets such as inventory and
prepaid expenses in payment of its current obligations. As much as possible,
1 or more quick ratio is preferred.
Formula: Quick Ratio = (Current Assets-Inventories-Prepaid Expenses/Current
Liabilities
Example: Quick Assets 800,000
Current Liabilities ÷ 400,000
Quick Ratio 2 or 2:1

The quick ratio of 2.5:1 indicates that P 2.00 is used to pay the obligation of P 1.00. The
business is very solvent.

2. Inventory Ratios
a. Rate of Inventory Turnover – this ratio measures the number of times the
company was able to sell its entire inventory to customers during the year.

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 A high rate turnover ratio indicates a great demand of the commodities.
The higher the better.

Formula: Rate of Inventory Turnover = Cost of Sales/Average Inventory

Example: Merchandise Inventory, beginning P 35,000
Add: Purchases 130,000
Cost of Goods Sold Available for Sale P 165,000
Less: Merchandise Inventory, End 15,000
Cost of Sales P 150,000

Merchandise Inventory, beginning P 30,000

Merchandise Inventory, end + 20,000
Total P 50,000
÷ 2
Average Inventory P 25,000

Rate of Inventory Turnover = Cost of Sales/Average Inventory

6 times = P 150,000/P 25,000

b. Number of Days Sales in Inventory – it indicates the length of time it

takes to acquire, sell and replace the merchandise inventory.
Formula: Number of Days Sales in Inventory = Number of Days in a Year or 365
Rate of Inventory Turnover
60 days = 365 days/ 6 times
It takes 2 months to buy, sell and replace merchandise.
*Inventory turnover is a measure of how efficiently a company can control its
merchandise, so it is important to have a high turnover.

c. Accounts Receivable Turnover – it indicates the number of times the

Accounts Receivable were collected from its customers.
Formula: Accounts Receivable Turnover = Credit Sales/Average Receivable
Example: Accounts Receivable, Jan. 1 P 25,000
Accounts Receivable, Dec. 31 15,000
Cash Sales 40,000
Credit Sales 160,000

Accounts Receivable, Jan. 1 P 25,000

Accounts Receivable, Dec. 31 + 15,000
Total P 40,000
÷ 2
Average Accounts Receivable P 20,000

Accounts Receivable Turnover = Credit Sales/Average Receivable

8 times = P 160,000/ P 20,000

d. Average Collection Period – it indicates the number of days it takes to

collect the customer’s accounts.
Formula: Average Collection Period = Number of Days in a Year or 365
Accounts Receivable Turnover
45 days = 365 days/ 8 times
It takes 45 days to collect receivable.

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3. Profitability Ratios. These ratios are used to select right investment opportunities.
a. Rate of Return on Total Assets – it measures the business’ efficiency in utilizing
its assets to generate profits. A higher return on assets is better.
Formula: Rate of Return on Total Assets = Profit+ Interest Expense/Average Total Assets
Example: Profit for the Year P 50,000
Interest Expense 10,000
Average Total Assets 200,000
Rate of Return on Total Assets = Profit+ Interest Expense/Average Total Assets
30 or 30% = P60,000/P 200,000

The business earned an average of 30% for every peso of asset invested.

b. Gross Profit Ratio – it measures how profitable a company sells its product.
Formula: Gross Profit Ratio = Gross Profit/ Net Sales
Example: Net Sales P 1,000,000
Cost of Sales 500,000
Gross Profit P 500,000

Gross Profit Ratio = Gross Profit/ Net Sales

50% = P 500,000/ P 1,000,000
The company has 50% of the sales revenue to cover operating expenses.

c. Rate of Return on Investments – it measures the profit’s percentage generated

by investment by owners.
Formula: Rate of Return on Investments = Profit/ Average Investment (Owner’s Equity)
Example: Profit P 7,000
Owner’s equity, beginning 15,000
Owner’s equity, end 20,000
Rate of Return on Investments = Profit/ Average Investment (Owner’s Equity)
0.4 or 40% = P 7,000/ P 17,500
In every peso of investment, it earned 40 centavos profit. In other words, there is 40%
return on their investment.

What’s More

Now, let us practice what you have learned from the topic discussed. Challenge your
memory (if you still remember what you have learned from the discussion) by doing this
activity.

Let’s try this!

Activity 3. “Medium Stage”

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 A.
Current Assets Current Liabilities
Year A P 100,000 Year A P 50,000
Year B 130,000 Year B 20,000

1. The amount of increase (decrease) in the Current Assets is _________________.

2. The percent of increase (decrease) in the Current Assets is _________________.
3. The amount of increase (decrease) in the Current Liabilities is _____________.
4. The percent of increase (decrease) in the Current Liabilities is ______________.
5. The current ratio for Year A is __________. For year B is ___________________.

B. Make a vertical analysis.

Sales P 73,000 __________
Less: Sales Returns & Allowances 3,000 __________
Net Sales P 70,000 __________
Less: Cost of Sales 55,000 __________
Gross Profit P 15,000 __________
Less: Operating Expense 12,000 __________
Profit P 3,000 __________

C. Inventories Sales Accounts Receivable

Beginning P 80,000 Credit Sales P 220,000 Beginning P 50,000
Ending 60,000 Cost of Sales 210,000 Ending 90,000

Assume 365 days in a year.

1. Inventory Turn-over _____________________
2. Average age of Inventory _____________________
3. Receivable Turn-over _____________________
4. Average Collection Period _____________________

What I Have Learned

Great Job! You did well in your previous activity. Now, let us check your understanding
of the lesson by underlining the highlighted word/s that complete the thought of each
sentence. (10 points)

1. Liquidity is the company’s ability to pay its (short, long) term obligations.
2. (Liquidity, Solvency, Profitability) is the company’s capability to pay its long-
term obligations as they fall due.
3. The base year in the comparative statements is the (previous, current) year.
4. The trend used in performing the Horizontal Analysis is the (comparative,
common-size) statements.
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 5. Merchandise Inventory is (included, excluded) in determining the Acid-Test Ratio
because it takes time to be converted into cash.
6. The current ratio of 4:1 is interpreted that every peso of your (asset, liability), you
have P4 to pay.
7. A high rate on rate of inventory turn-over indicates a (great, poor) demand of the
commodities.
8. Working capital is computed by (deducting, adding, multiplying) the current
liabilities from the current assets.
9. Prepaid expenses are (included, excluded) in computing quick ratio.
10. A (high, low) rate of accounts receivable turn-over indicates efficiency in collecting
the customer’s account.

What I Can Do

Wow! It’s good to know that are you are almost done. I hope you now have a deeper
understanding and appreciation of analyzing financial statements. Are you now ready
to apply what you have learned in this module in real life applications? If yes, do the
next activity.

Activity 4: Last Stage

Instruction: Analyze the problem given and answer the questions be;w.

Company A and Company B were competitors and both engaged in buying and selling
the same products. Their Balance Sheet after operation is shown below.
Company A Company B
Current Assets:
Cash in Bank P 110,000 P 105,000
Accounts Receivable 85,000 65,000
Merchandise Inventory 125,000 75,000
Prepaid Expenses 20,000 6,000
Current Liabilities:
Accounts Payable 40,000 35,000
Accrued Expense 20,000 --
Notes Payable -- 15,000

Processing Questions:
1. Determine the working capital of each company. ____________________________

2. Which of the two companies has a better liquid position? Compute and interpret
their respective current ratio.
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 _______________________________________________________________________________
______________________

3. Which of the two companies was more liquid in terms of paying debts right away.
Compute and interpret their respective acid-test ratio.
_______________________________________________________________________________
_______________________________________________________________________________
______________________

Assessment

Congratulations! You are now about to test what you have learned from this module.

Instruction: Read each question carefully and encircle the letter of your answer.
1. It is the capability of a company to pay its current obligations.
a. liquidity b. solvency c. profitability d. asset

2. This ratio measures the capability of a company to pay its current obligations.
a. liquidity ratio b. solvency ratio c. profitability ratio d. direct

3. The following ratios are used in measuring liquidity position of a company, except
a. quick ratio b. acid-test ratio c. current ratio d. gross profit ratio

4. If current asset is P 10,000 and current liability is P 5,000, the current ratio is
a. two is to one b. P 2,000 c. one is to two d. four

5. It is the capability of a company to pay non-current liabilities as they fall due.

b. liquidity b. solvency c. profitability d. agility

6. This ratio measures the capability of a company to pay non-current liabilities as

they fall due.
a. liquidity ratio b. solvency ratio c. profitability ratio d. equal ratio

7. Which financial ratios are used in financial statement analysis?

a. liquidity ratios b. solvency ratios c. profitability ratios d. all of these

8. It is a common-size statement analysis or proportional analysis of a financial

statements.
a. vertical analysis b. diagonal analysis c. horizontal analysis d. ratio analysis
9. It is the comparison of two or more financial statements over the time.
a. vertical analysis b. diagonal analysis c. horizontal analysis d. ratio analysis

10. If current assets is P 200,000 and total assets is P 800,000, what percentage of

21
 total assets is current assets?
a. 2.5 percent b. 25 percent c. 250 percent d. 2,500
11. A firm has liabilities of P 30,000 and owner’s capital of P 70,000. The percentage of
total liabilities to total assets is
a. 20 percent b. 25 percent c. 30 percent d. 43 percent

12. A firm had owner’s capital of ₱125,000 in 2018 and ₱150,500 in 2019. The increase
in owner’s capital from 2018 to 2019 is
a. 20 percent b. 21 percent c. 16 percent d. 17 percent

13. The cost of goods sold and operating expenses excluding depreciation in 2018
amounted to
a. P 4,287,500 b. P 5,022,500 c. P 6,022,500 d. P 12,050,000

14. Selected information from Musang Company’s accounting records is as follows:

Cost of good sold- 2019 P 1, 200, 000.00
Inventories January 1, 2019 350,000.00
Inventories – December 31, 2019 310,000.00

Assuming a business year consisting of 360 days, what was the number of days’
sales in average inventories for a year.
a.2.5 days b. 99 days c. 100 days d. 77.5 days

15. Mindanao Electronics registered accelerated increases in its net income, earning
P 437, 500.00 to P 1,260,000.00 in 2019. Rate of return on current assets increased
from 25% in 2018 to 30% in 2019. Current asset turnover on the other hand, went up
to 2. 67 turnovers in 2019 from 2.45 turnovers in 2018?

The average investment in current assets for the company in 1991 was

a. P 1,607,500 b. P 4,200,000 c. P 1, 750,000 d. P 5, 040,000

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 Additional Activities

I hope you have a learned a lot from the activities in this module. This
additional activity is expected to enrich your knowledge about the analysis of
financial statements.

A. The balance sheet data of Malaya Company

Balance Sheet 2018 2019
Cash P 30, 000.00 P 52, 000.00
Marketable security 170, 000.00 200, 000.00
Accounts Receivable, Net 100, 000.00 200, 000.00
Inventory 150, 000.00 100, 000.00
Machinery and Equipment 340, 000.00 300, 000.00
Land and Building, Net 110, 000.00 100, 000.00
Goodwill 80, 000.00 80, 000.00
Deferred Charges 20, 000.00 18, 000.00
Notes Payable, Trade 20, 000.00 30, 000.00
Accounts Payable, Trade 122, 000.00 158, 000.00
Expense Payable 8, 000.00 12, 000.00
Long term Note due 2031 500, 000.00 450, 000.00
15% Preferred Stock, P100 par 100, 000.00 100, 000.00
Common Stock, P10 par 200, 000.00 200, 000.00
Retained Earnings 50, 000.00 100, 000.00

Prepare Comparative Balance Sheets for 2018 and 2019 shown peso and
percentage increase of decrease (Horizontal Analysis)

B. The income statement data of Malaya Company:

2019 Income Statement Accounts

Sales P 1,050,000.00
Sales Returns and Allowances 50, 000.00
Inventory December 31, 2019 100, 000.00
Inventory December 31, 2018 150, 000.00
Purchases 550, 000.00
Selling Expenses 80, 000.00
Administrative Expenses 120, 000.00
Interest on long Term Notes 50, 000.00
Income Taxes 35% 52, 500.00

Prepare income statement for the year ended December 31, 2019 with common –
size percentages (Vertical Analysis)

2
 3
What I Have What I Can Assessment
Learned Do
1. short 1. P280,000; P 201,000 1. a 11. c
2. Solvency 2. Company A has a 2. a 12. a
3. previous better liquid position. 3. d 13. a
4. comparative 5.67:1; 5.02:1 4. a 14. c
5. excluded In every peso of 5. b 15. b
6. asset Company’s A current 6. b
7. great liability, there is P 5 of 7. d
8. deducting current asset to pay. 8. a
9. excluded 3. Company A was 9. c
10. high more liquid in terms of 10. b
paying debts right
away.
3.52:1; 3.4:1
What I Know What’s In What’s More
1. a 11. c 1. A 11. b A.
2. a 12. a 2. A 12. b 1. P30,000 2. 30%
3. d 13. d 3. L 13. b 3. (P30,000) 4. (60%)
4. a 14. a 4. OE 14. d 5. 2:1 and 6.5:1
5. b 15. d 5. A 15. d B.
6. b 6. OE 1. 104.29 % 2. 4.29 %
7. d 7. A 3. 100 % 4. 78.58 %
8. a 8. L 5. 21. 43 % 6. 17.14 %
9. c 9. OE 7. 4.29 %
10. b 10. OE C.
1. 3 times 2. 121. 67
3. 3.14 times 4. 116.24
Answer Key
 Additional Activities

MALAYA COMPANY
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2019
(With Common – Size Percentages)

Amount Percent
Sales P 1,050,000 100
Less: Sales Returns and Allowances 50, 000 5
Net Sales P 1,000,000 100

Cost of Goods Sold

Inventory December 31, 2018 P 150, 000 15

Add: Purchases 550, 000 55
Total Goods Available for Sale 700, 000 70
Less: Inventory December 31, 2019 100, 000 10
Cost of Goods Sold 600,000 60
Gross Margin on Sales 400,000 40

Selling and Administrative Expenses

Selling Expenses 80, 000 8
Administrative Expenses 120, 000 12
Less: Total Selling and Administrative Expenses 200,000 20
Net Operating Income 200, 000 20

Net Operating Income 200, 000 20

Less: Interest on long Term Notes 50, 000 5
Net Income before Income Taxes 150,000 15
Less: Provision for income Tax 35% 52,500 5.2
NET INCOME 97, 500 9.8

4
References

Book:

Rafael M. Lopez, Jr. (2017) Fundamentals of Accountancy, Business and

Management 2

5
 DISCLAIMER
This Self-learning Module (SLM) was developed by DepEd – Division of General
Santos City with the primary objective of preparing for and addressing the
new normal. Contents of this module were based on DepEd’s Most Essential
Learning Competencies (MELC). This is a supplementary material to be used
by all learners in General Santos City in all public schools beginning SY 2020-
2021. The process of LR development was observed in the production of this
module. This is version 1.0. We highly encourage feedback, comments, and
recommendations.

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