 12








Redeveloped Division Initiated Self-Learning Module

Department of Education
i – Division of Palawan
Fundamentals of Accountancy, Business, and Management 2 – Grade 12
Redeveloped Division Initiated - Self-Learning Module
Quarter 1 – Module 6: Analysis and Interpretation of Financial Statements
Second Edition, 2021

Republic Act 8293, section 176 states that: No copyright shall subsist in
any work of the Government of the Philippines. However, prior approval of the
government agency or office wherein the work is created shall be necessary
for exploitation of such work for profit. Such agency or office may, among
other things, impose as a condition the payment of royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand

names, trademarks, etc.) included in this module are owned by their
respective copyright holders. Every effort has been exerted to locate and seek
permission to use these materials from their respective copyright owners. The
publisher and authors do not represent nor claim ownership over them.

Published by the Department of Education, Division of Palawan

Schools Division Superintendent:
Roger F. Capa, CESO VI
OIC - Assistant Schools Division Superintendents:
Rufino B. Foz
Arnaldo G. Ventura, Ph.D.

Development Team for

Development Team
Redevelopment Activity

Writer: Daisy S. Dela Peña Writer: Jovy Cassandra D. Goh-Malacad

Editors: Marianne R. Valdez Editors: Aniza S. Taha, Marianne R.
Illustrator: Valdez
Layout Artist: Mark G. Javillonar Illustrator:
Reviewer: Eric N. Quillip Layout Artist: Mark G. Javillonar
Management Team: Reviewer: Sean A. Catelo
Aurelia B. Marquez Management Team:
Rodgie S. Demalinao Aurelia B. Marquez
Eric N. Quillip Rosalyn C. Gadiano
Rodgie S. Demalinao
Sean A. Catelo

Department of Education – MIMAROPA Region – Division of Palawan

Office Address: PEO Road, Barangay Bancao-Bancao, Puerto Princesa City
Telephone: (048) 433-6392
E-mail Address: palawan@deped.gov.ph
Website: www.depedpalawan.com
ii
Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear learners, can
continue your studies and learn while at home. Activities, questions, directions,
exercises, and discussions are carefully stated for you to understand each
lesson.

Each SLM is composed of different parts. Each part shall guide you step-by-
step as you discover and understand the lesson prepared for you.

Pre-tests are provided to measure your prior knowledge on lessons in each SLM.
This will tell you if you need to proceed on completing this module or if you
need to ask your facilitator or your teacher’s assistance for better
understanding of the lesson. At the end of each module, you need to answer
the post-test to self-check your learning. Answer keys are provided for each
activity and test. We trust that you will be honest in using these.

In addition to the material in the main text, Notes to the Teacher are also
provided to our facilitators and parents for strategies and reminders on how
they can best help you on your home-based learning.

Please use this module with care. Do not put unnecessary marks on any part
of this SLM. Use a separate sheet of paper in answering the exercises and tests.
And read the instructions carefully before performing each task

If you have any questions in using this SLM or any difficulty in answering the
tasks in this module, do not hesitate to consult your teacher or facilitator.

Thank you.

iii
 Fundamentals of
Accountancy,
Business and Analysis and Interpretation of
Management 2 Financial Statements
First Quarter
Week 6

MELCs: Define the measurement levels, namely, liquidity, solvency,

stability, and profitability (ABM_FABM12- Ig-h-12)
Perform vertical and horizontal analyses of financial statements of
a single proprietorship (ABM_FABM12- Ig-h-13)

Objective/s:
1. To Identify and define measurement levels.
2. To differentiate the various financial ratios.
3. To solve exercises and problems that require computation and
interpretation using various financial ratios.
4. To compare and contrast vertical and horizontal analyses;
5. To perform vertical and horizontal analyses of financial
statements of a single proprietorship; and
6. To determine the importance of vertical and horizontal
analyses of financial statements of a single proprietorship

What I Know

Directions: Read and analyze each question. Write the letter of your answer on
a separate sheet of paper.

1. It pertains to the company’s capacity to pay long-term debts or liabilities.

a. Solvency c. Liquidity
b. Profitability d. Stability

2. What do we call the company’s ability to pay short-term debts that are
coming due?
a. Solvency c. Liquidity
b. Profitability d. Stability

1
3. What is the process of evaluating risk, performance, financial health, and
future prospects of a business by subjecting financial statement data to
computational and analytical techniques to make economic decisions?
a. Financial statement technique c. Financial statement comparison
b. Financial statement analysis d. Financial statement evaluation

4. It refers to the company’s ability to be structurally firm and support its long-
term debts by its equity.
a. Solvency c. Liquidity
b. Profitability d. Stability

5. What is the company’s ability to convert its sales into cash flow and profit?
a. Solvency c. Liquidity
b. Profitability d. Stability

6. It is a technique used that compares the relationship between each line

item of the financial statements in one given period.
a. Horizontal Analysis c. Vertical Analysis
b. Sequential Analysis d. Situational Analysis

7. It is a technique used in analyzing and evaluating financial statements

using a series of financial statement data that determines if each item
increases or decreases.
a. Horizontal Analysis c. Vertical Analysis
b. Sequential Analysis d. Situational Analysis

8. In a vertical analysis of financial statements, what will be the base amount

if the Statement of Financial Position will be analyzed for the period?
a. Total Assets c. Total Equity
b. Total Liabilities d. Total Liabilities and Equity

9. What is the other term used for horizontal analysis because it shows the
percentage of change from one period to another?
a. Time analysis c. Total analysis
b. Change analysis d. Trend analysis

10. A business has liabilities of Php 200,000.00 and equity of PhP800,000.00.

What is the percentage of total liabilities to total assets?
a. 20% c. 60%
b. 40%s d. 80%

2
11. A business had owner’s equity of PhP2,000,000.00 for 2018 and
PhP2,700,000.00 for 2019. What is the increase in owner’s equity?
a. 39% c. 37%
b. 38% d. 35%

12. If current assets are PhP550,000.00 and total assets are PhP3,050,000.00,
what is the percentage of non-current assets?
a. 82.97% c. 83.75%
b. 81.97% d. 84.20%

13. During the period, Dale Merchandising had reported net sales amounting
to PhP2,875,000.00, gross profit of Php1,515,000.00, and operating expenses
of PhP718,000.00. What is the percentage of the cost of goods sold to net
sales?
a. 43% c. 46%
b. 45% d. 47%

14. Based on the data given on item no. 13, what is the percentage of Net
Income to Net Sales?
a. 28% c. 26%
b. 25% d. 27%

15. A business had net sales of PhP5, 956,000.00 for 2018 and PhP4, 898,000.00
for 2019. What is the percentage of net sales?
a. -19% c. -17%
b. -16% d. -18%

3
 What is It
LESSON 1: Define the Measurement Levels, namely, Liquidity, Solvency,
Stability, and Profitability

Evaluating and analyzing how the business is doing is a very important

task for business owners and other financial statement users. It is done by
reviewing its financial statements because it will give them a clearer picture of
where their business is heading and help them make good economic
decisions. Analysis and interpretation of financial statements have
measurement levels regarding the firm’s liquidity, solvency, stability, and
profitability. These ratios and other financial ratios will be discussed further in
the succeeding module. Each measurement level has various financial ratios
that gauge the firm’s performance.

The most common ratios for the following measurement levels are as follows:
1. Liquidity - the company’s ability to pay debts that are coming due
/short-term debt.

a. Current ratio- the ratio of current assets to current liabilities, meaning

the firm’s ability to pay its current debt.

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Example:
Dale’s Apparel Store applies a loan for the store’s remodeling. He
presented his detailed Statement of Financial Position for the bank to
compute its Current Ratio. The Statement of Financial Position includes
the following accounts:

Cash P 25,000.00
Accounts Receivable 18,000.00
Merchandise Inventory 8,000.00
Investments 10,000.00
Prepaid Expenses 1,500.00
Current Liabilities 18,000.00

4
The current Ratio computation is:

𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎 + 𝟏, 𝟓𝟎𝟎

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟖, 𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟑. 𝟒𝟕

Interpretation:
Dale’s current ratio of 3.47 means that the store is liquid
considering it can pay off all of its current liabilities with current assets
and still have some current assets that will be left for them.

b. Quick ratio – also called Acid Test Ratio, is a stricter measure of

liquidity. It does not consider all the current assets, only those that are
easier to liquidate such as cash, cash equivalents, short-term
investments, or marketable securities and accounts receivable are
referred to as quick assets. Quick assets are current assets that can be
converted to cash within 90 days or a shorter period.

𝐂𝐚𝐬𝐡+𝐂𝐚𝐬𝐡 𝐄𝐪𝐮𝐢𝐯𝐚𝐥𝐞𝐧𝐭𝐬+𝐒𝐡𝐨𝐫𝐭−𝐭𝐞𝐫𝐦 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬+𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

Example:
Using the same example above, Dale’s Apparel Store applies a
loan for the store’s remodeling. He presented his detailed Statement of
Financial Position for the bank to compute its Quick Ratio. The Statement
of Financial Position includes the following accounts:

Cash P 25,000.00
Accounts Receivable 18,000.00
Merchandise Inventory 8,000.00
Investments 10,000.00
Prepaid Expenses 1,500.00
Current Liabilities 18,000.00
Quick Ratio computation is:

𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟖, 𝟎𝟎𝟎
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 = 𝟐. 𝟗𝟒

5
 Interpretation:
Dale’s quick ratio of 2.94 means that the store can pay off all of its
current liabilities with its quick assets and still have some current assets
that will be left for them.

c. Working Capital Ratio – pertains to the business's ability to pay its

current liabilities with the use of its current assets. There are four examples
of changes that can affect the working capital:
Current Assets increase = increase in working capital
Current Assets decrease = decrease in working capital
Current Liabilities increase = decrease in working capital
Current Liabilities decrease = increase in working capital

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 − 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

Example:
Amor’s Water Station has made loans from banks to purchase its
water and sanitation equipment five years ago. This made its working
capital decrease because these loans are becoming due. At the end
of the year, Amor’s statement of the financial statement showed a
balance of P350,000.00 for its Current Assets and P180,000.00 for its
Current Liabilities. Compute for its Working Capital.

Computation of Working Capital:

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟑𝟓𝟎, 𝟎𝟎𝟎 − 𝟏𝟖𝟎, 𝟎𝟎𝟎

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟏𝟑𝟎, 𝟎𝟎𝟎. 𝟎𝟎

Interpretation:
Amor’s Water Station showed a positive working capital ratio,
showing that the business can pay all its current liabilities and have
current assets left.

2. Solvency- pertains to the company’s capacity to pay long-term debts

or liabilities.
a. Debt to asset ratio- it pertains to the ratio of total debt to total assets.
It shows a company’s ability to pay off its liabilities with its assets.

𝐓𝐨𝐭𝐚𝐥 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Example:
Annie’s Tailoring Shop would like to expand its shop and buy
additional sewing and tailoring equipment. The owner consulted the

6
bank for a new loan. She presented the shop’s financial statement. It
showed total assets of P250,000.00 and total liabilities of P 85,000.00. Debt
to Asset ratio is computed as:

𝐏𝟖𝟓, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐏𝟐𝟓𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟒

Interpretation:
The debt to asset ratio of the shop shows that the shop’s total
liabilities is 34% of its total assets. It can be considered as less risky
because the owner owns more of the shop.

b. Debt to equity ratio- it pertains to the ratio of total debt to owner’s

equity/ shareholder’s equity (Asset – liabilities = Equity).

𝐓𝐨𝐭𝐚𝐥 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲
Example:
Let us assume that a business has P250,000.00 credit from a bank
and a P450,000.00 loan mortgage on its property. The owners of the
business invested P1.8 million. The debt to equity ratio is computed as:

𝐏 𝟕𝟎𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏, 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟗

Interpretation:
A debt ratio of .39 means that there are still more equities than liabilities.

c. Equity ratio- it pertains to the ratio of the business assets that are
financed by capital. A high ratio shows a high level of capital.

𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬

Example:

John Dale’s Infotech has just started its business with some
investors. It is looking for additional investors to finance its future
expansion. It had reported its total assets to P 350,000.00, total liabilities
of P80,000.00, and total equity of P 270,000.00. The equity ratio is
computed as:

7
 𝐏 𝟐𝟕𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟑𝟓𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟕𝟕

Interpretation:
John Dale’s showed a healthy ratio because 77 percent of its total
assets are owned by the owners and not creditors. It means that
investors/ owners rather than creditors are funding more assets.

3. Stability – It is the long-term counterpart of liquidity or the company’s

ability to be structurally firm and can support its long-term debts by its
equity.
a. Debt to equity ratio- it pertains to the ratio of total debt to owner’s
equity/ shareholder’s equity (Asset – liabilities = Equity).
𝐓𝐨𝐭𝐚𝐥 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲

b. Interest Cover Ratio- it shows how many times a business’s interest

expense on its loans/ credits are covered by its operating profit. The
higher multiple the better.
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐄𝐱𝐩𝐞𝐧𝐬𝐞

Example:
Arlene’s Flower Shop has generated P 95,000.00 operating profit
for the year and spent P 13,800 on its Interest expense. Interest Cover
ratio is computed as follows:
𝐏 𝟗𝟓, 𝟎𝟎𝟎
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟑, 𝟖𝟎𝟎
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 = 𝟔. 𝟖𝟖

Interpretation:
The interest cover ratio of 6.88 shows that the shop’s operating
profit can cover up its interest expense 6.88 times.

4. Profitability - the company’s ability to convert its sales into cash flow and
profit.
a. Gross margin ratio is the ratio of gross profit to sales (Gross profit= Sales-
Cost of goods sold).
𝐆𝐫𝐨𝐬𝐬 𝐌𝐚𝐫𝐠𝐢𝐧
𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬

8
Example:
Assume Dale’s Apparel Store showed Inventory of P250,000.00 for
the year. They were able to make a sale of P840,000.00. Some of it was
returned and refunded, amounting to P35,000.00. Dale’s gross margin
ratio is computed as follows:

( 𝐏 𝟖𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟓, 𝟎𝟎𝟎) − 𝐏 𝟐𝟓𝟎, 𝟎𝟎𝟎

𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟖𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟓, 𝟎𝟎𝟎
𝐏 𝟓𝟓𝟓, 𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟖𝟎𝟓, 𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟔𝟗
Interpretation:
Dale’s gross margin ratio of 69 percent shows a high ratio in the
apparel industry. It means that after Dale pays off its inventory costs, it
still has 69 percent of the sales revenue to cover its operating costs.

b. Operating margin ratio is the ratio of operating profits to sales

(Operating profit = Gross profit- Operating expenses).
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬

Example:
Josefina’s Café reported a Gross Profit of P500,000.00, Operating
Expenses of P 115,000.00, and Net Sales of P 785,000.00 on its Statement
of Comprehensive Income. Operating Margin Profit is computed as:
𝐏𝟓𝟎𝟎, 𝟎𝟎𝟎 − 𝟏𝟏𝟓, 𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟕𝟖𝟓, 𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟒𝟗

Interpretation:
Josefina’s operating margin ratio shows that after paying off
operating expenses it still has a 49 percent remaining portion of net sales
that could cover other expenses.

c. Net income margin ratio - it is the ratio of net income margin to sales
(Net income = Operating profit – interest and taxes). Also referred to as
Profit Margin Ratio. It measures how much net profit is produced at a
certain level of sales.
𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬

9
Example:
On its Statement of Comprehensive Income, Josefina’s Café
reported Net Sales of P910,000.00 and a Net Income of PhP315,000.00.
Net Income Margin ratio is computed as:
𝐏 𝟑𝟏𝟓, 𝟎𝟎𝟎
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟗𝟏𝟎, 𝟎𝟎𝟎
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟓
Interpretation:
It shows that Josefina’s converted 35 percent of her sales into profits.

d. Return on asset (ROA) - it is the ratio that measures the peso value of
income generated by using the business assets.

𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬

Note: Average assets are computed by adding the beginning and

ending balance and dividing them by 2. It may be only the ending of
total assets if the beginning balance is not given.

Example:
Kiko’s Trading and Construction is a fast-growing construction
business that caters to building construction and real estate
development in Puerto Princesa City. Its Statement of Financial Position
showed beginning assets of PhP2,500,000.00 and an ending balance of
Php 3,800,000.00. During the year, it had made a net income of Php
15,825,000.00. Kiko’s return on assets ratio will be:
P 15,825,000
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
(P 2,500,000 + 3,800,000)/ 2

P 15,825,000
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
(P 2,500,000 + 3,800,000)/ 2

P 5,825,000
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
3,150,000

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟓𝟎𝟐. 𝟑𝟖

Interpretation:
The ROA of 502.38 percent means that every peso that Kiko
invested in assets during the year produced Php 5.02 of net income.

10
 e. Return on equity (ROE) measures the return (net income) generated
by the owner’s capital invested in the business. Similar to ROA, the
denominator of ROE may also be total equity or average equity.

𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐄𝐪𝐮𝐢𝐭𝐲

Note: Average equity is computed by adding the beginning and

ending balance and dividing it by 2. It may be only the ending of total
equity if the beginning balance is not given.

Example:
John’s Trading is engaged in a retail business. It had reported a
Net Income for the year of Php 235,000.00 and Owner’s Capital of Php
580,000.00 ending balance.
𝐏𝐡𝐏 𝟐𝟑𝟓, 𝟎𝟎𝟎
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐏𝐡𝐏 𝟓𝟖𝟎, 𝟎𝟎𝟎
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =. 𝟒𝟏

Interpretation:
ROE of 41 percent shows that there is a P.41 return on the owner’s
investment for every peso of investment.

LESSON 2: Perform Vertical and Horizontal Analyses of Financial Statements of

a Single Proprietorship
Financial statement analysis is needed by every business in
understanding and analyzing its operation and financial condition. It gives
them the real picture of how well the business is doing or what should be done
to improve its business condition. It is very helpful in evaluating business
activities from the past, the present, and project future financial performance
that will help make sound economic decisions.

From Lesson 1 of this module, you have learned the different financial
ratios for each measurement level (liquidity, solvency, stability, and
profitability). Liquidity is the company’s ability to pay debts that are coming
due /short-term debt. Solvency is the company’s capacity to pay long-term
debts or liabilities. Stability is the company’s ability to be structurally firm and
support its long-term debts by its equity. Profitability is the company’s ability to
convert its sales into cash flow and profit. Let us now study the other two
techniques of financial statement analysis (the vertical and horizontal analyses
of financial statements of a single proprietorship).

11
Analysis and Interpretation of Financial Statements
Financial statement (FS) analysis is the process of evaluating risks,
performance, financial health, and future prospects of a business by
subjecting financial statement data to computational and analytical
techniques to make economic decisions (White et al. 1998). There are three
kinds of FS analysis techniques:

- Horizontal analysis
- Vertical analysis
- Financial ratios (this will be discussed further in the succeeding module)

1. Horizontal analysis- it is a technique used for evaluating financial

statements data over a period of time. It is also called trend analysis
because it shows the increases and decreases of each item compared to
the previous years. These changes may be presented in monetary value
(Phil. Peso) and percentages using the following formulas:

Change in Peso = Current year’s balance – Prior year’s balance

Change in Percentage = (Current year’s balance – Prior year’s balance)

Prior year’s balance

Example:
2018 2019
Net Income PhP 655,000.00 PhP 932,000.00
Change in Peso = PhP 932,000.00 – 655,000.00 = PhP 277,000.00

Change in Percentage = (PhP 932,000.00 – 655,000.00)

PhP 277,000.00
= 42.29%

It can be interpreted as Net income for 2015 has increased by

PhP277,000.00, with a percentage of 42.29% compared to the year 2014.

2. Vertical analysis is a technique used to compare the relationship between

each line item of the financial statements in one given period. It is also
called common-size analysis and may be used to analyze the Statement
of Financial Position (SFP) and Statement of Comprehensive Income (SCI).
For Statement of Financial Position (SFP), the base amount will be the Total

12
Assets (it concludes the composition of assets and the company’s
financing mix- portion of assets financed by debt and equity). In contrast,
for the Statement of Comprehensive Income (SCI), the base amount is Net
Sales (it shows how “Net Sales” is used up by the different business’
expenses).

Example:

For Statement of Financial Position (SFP)

2019 % of Assets
Cash PhP 500,000.00 500,000/1,650,000 = 30.3%
Accounts Receivable 150,000.00 150,000/1,650,000 = 9.1%
Inventory 200,000.00 200,000/1,650,000 = 12.1%
Equipment 800,000.00 800,000/1,650,000 = 48.5%
TOTAL ASSETS PhP 1,650,000.00 Total of the components is 100%

Accounts Payable PhP 400,000.00 400,000/1,650,000 = 24.2%

Notes Payable 150,000.00 150,000/1,650,000 = 9.1%
Owner’s Capital 1,100,000.00 1,100,000/1,650,000 = 66.7%
TOTAL LIABILITIES AND Total of the components is 100%
OWNER’S EQUITY PhP 1,650,000.00

It can be interpreted as:

o The largest component of an asset is Equipment, with 48.5%.

Accounts Receivable is the smallest component at 9.1%.
o 33.3% of assets are financed by debt, and the rest is financed by
equity.

For Statement of Comprehensive Income (SCI)

2019 % of Sales
Sales PhP 5,300,000.00
Cost of Goods Sold 3,850,000.00 3,850,000/5,300,000 = 72.6%
Gross Profit 1,450,000.00 1,450,000/5,300,000 = 27.4%
Operating Expenses
Rent 120,000.00 120,000/5,300,000 = 2.3%
Salaries 385,000.00 385,000/5,300,000 = 7.3%
Utilities 155,000.00 155,000/5,300,000 = 2.9%
Administrative and 545,000.00 545,000/5,300,000 = 10.3%
other expenses
NET PROFIT PhP 245,000.00 245,000/5,300,000 = 4.6%

13
 It can be interpreted as:

o Cost of Goods Sold is 72.6% of Sales. The gross profit rate is 27.4%
of Sales. Total Expenses is 22.7% of Sales.
o For every peso of Sales, the business earns PhP0.046. Gross profit
generates PhP0.274 for every peso of Sales.

What I Can Do

Activity 1: Match It
Directions: Match Column A with its corresponding answer on Column B and
write the letter of your answer on your answer sheet.

COLUMN A COLUMN B
1. Liquidity Ratios
a. Ratio of current assets to current liabilities
2. Solvency Ratios b. Ratio of total debts to total assets
3. Stability Ratios c. Ratio of total debts to total assets
d. Ratios that show the capacity of the business
4. Profitability Ratios to pay its short-term debts.

5. Current Ratio e. Ratio of net income to sales

f. Ratios that show the capacity of the business
6. Debt to Asset Ratio to pay its long-term debts.
g. Ratio of operating profit to sales
7. Debt to Equity Ratio
h. Ratios that show the capacity of the business
8. Gross Margin Ratio to convert its sales into cash flow and profit.
i. Ratio of gross profit to sales
9. Operating Margin Ratio
j. Ratios that show the capacity of the business
10. Net income Ratio to pay its short-term debts by its equity.

14
Activity 2: Perform Me

Directions: Based on the following information showing the Statement of

Financial Position (SFP) as of and Statement of Comprehensive Income for the
year endings December 31, 2019, and December 31, 2020, of Aysid Wash and
Wear Supplies, compute the changes for each year in terms of peso value and
percentage. Write your answer on the columns provided.

Change in Change in
2019 2020
Peso Percentage
Cash P 400,000 P600,000
Accounts 500,000 420,000
Receivable
Inventory 550,000 350,000
Equipment 850,000 1,080,000
Total Assets P 2,300,000 P 2,450,000

Accounts Payable P 600,000 270,000

Notes Payable 400,000 200,000
Owner, Capital 1,800,000 1,980,000
Total Liabilities and P 2,300,000 P 2,450,000
equity

Sales P 1,500,000 P 1,850,000

Cost of Goods Sold 700,000 980,000
Gross Profit 800,000 870,000
Operating Expenses 300,000 355,000
Operating income 500,000 515,000
Interest Expense 50,000 80,000
Net Income P 450,000 P 435,000

15
 What’s More

Activity 3: Aysid Wash and Wear Supplies- Part 1

Directions: Use the following information given by Aysid Wash and Wear
Supplies to compute for Liquidity and Solvency Ratios.
Cash P 400,000 Sales P 1,500,000
Accounts Receivable 500,000 Cost of Goods Sold 700,000
Inventory 550,000 Gross Profit 800,000
Equipment 850,000 Operating Expenses 300,000
Total Assets P 2,300,000 Operating income 500,000
Accounts Payable P 600,000 Interest Expense 50,000
Notes Payable 400,000 Net Income P 450,000
Owner, Capital 1,800,000
Total Liabilities and P 2,300,000
equity

Activity 4. Praktisado Ako

Directions: Based on the given information showing the Statement of Financial

Position (SFP) and Statement of Comprehensive Income (SCI) as of December
31, 2019, and December 31, 2020, of Dale Merchandising, prepare a horizontal
analysis with interpretation.

Dale Merchandising
Statement of Financial Position
As of Years 2019 and 2020
2019 2020
Cash PhP 500,000.00 PhP 350,000.00
Accounts Receivable 150,000.00 340,000.00
Inventory 200,000.00 515,000.00
Equipment 800,000.00 1,400,000.00
TOTAL ASSETS PhP 1,650,000.00 PhP 2,605,000.00
Accounts Payable PhP 400,000.00 PhP 700,000.00
Notes Payable 150,000.00 355,000.00
Owner’s Capital 1,100,000.00 1,550,000.00
TOTAL LIABILITIES AND
OWNER’S EQUITY PhP 1,650,000.00 PhP 2,605,000.00

16
 What I Have Learned
Activity 5: Let’s Solve It

Directions: Analyze the given situations then solve and give the appropriate
answers. Use a separate sheet of paper.

1. Wash and Wear Laundry has given the following information to its bank
as follows: Cash - PhP300,000; Accounts Receivable - PhP68,000;
Inventory - PhP45,000; Prepaid Rent - PhP18,000, and Current Liabilities-
PhP85,000. Compute the current ratio and interpret its result.
2. Read Me Book Shop has financial information as follows: Inventory -
PhP10,000; Prepaid Supplies - PhP5,000; Total Current Assets - PhP35,800
and Current Liabilities - PhP15,000. Compute the quick ratio and interpret
its result.
3. No Melt Ice Cream parlor has a Net Income of PhP850,000 and Asset
with a beginning of PhP524,000 and an ending balance of PhP256,000.
Compute for Return on Assets (ROA) and interpret the result.
4. Everyday Bake Shop sold baked goodies and products costing
PhP250,000 for a 50% mark-up on cost. There were no products returned.
Compute for gross margin ratio and interpret the result.
5. Choose Me Boutique had the following accounts at year-end: Current
Assets-PhP450,000.00 and total liabilities of PhP280,000. Compute for
debt ratio and interpret the results.
6. Wash and Wear Laundry has current assets amounting to Php 300,000.
Non-current assets for the year totaled Php 89,000. What percentage of
the laundry’s total assets are current assets?
7. Read Me Book Shop has assets of PhP 2,000,000 and owner’s equity of
PhP600,000. What percentage of the book shop’s assets are financed by
liabilities?
8. No Melt Ice Cream parlor has liabilities of PhP 395,000 and assets of
PhP524,000. What percentage of the ice cream parlor’s assets are
financed by the owner’s equity?
9. Everyday Bake Shop has total liabilities amounting to Php 35,000. Total
equity had an ending balance of Php 42,000. What percentage of the
bake shop’s asset is financed by the liabilities?

17
 10. Choose Me Boutique had the following accounts at year-end: Cash-
PhP250,000, Accounts Payable-PhP70,000, Prepaid Expense-PhP15,000,
Non- current assets- PhP500,000.00. What percentage of the boutique’s
total assets are current assets?

Assessment

Directions: Read and analyze each question. Write the letter of your answer on
a separate sheet of paper.
1. What is the process of evaluating risk, performance, financial health, and
future prospects of a business by subjecting financial statement data to
computational and analytical techniques to make economic decisions?
a. Financial statement technique c. Financial statement comparison
b. Financial statement analysis d. Financial statement evaluation

2. What is the other term used for horizontal analysis because it shows the
percentage of change from one period to another?
a. Time analysis c. Total analysis
b. Change analysis d. Trend analysis

3. A business had owner’s equity of Php 2,000,000.00 for 2018 and

PhP2,700,000.00 for 2019. What is the increase in owner’s equity?
a. 39% b. 38% c. 37% d. 35%

4. What is the company’s ability to convert its sales into cash flow and profit?
a. Solvency b. Profitability c. Liquidity d. Stability

5. A business has liabilities of Php 200,000.00 and equity of Php 800,000.00.

What is the percentage of total liabilities to total assets?
a. 20% b. 40%s c. 60% d. 80%

6. It is a technique used that compares the relationship between each line

item of the financial statements in one given period.
a. Horizontal Analysis c. Vertical Analysis
b. Sequential Analysis d. Situational Analysis

18
7. It is a technique used in analyzing and evaluating financial statements
using a series of financial statement data that determine the increases or
decreases of each item.
a. Horizontal Analysis c. Vertical Analysis
b. Sequential Analysis d. Situational Analysis

8. In a vertical analysis of financial statements, what will be the base amount

if the Statement of Financial Position will be analyzed for the period?
a. Total Assets c. Total Equity
b. Total Liabilities d. Total Liabilities and Equity

9. During the period, Dale Merchandising reported net sales amounting to

Php 2,875,000.00, gross profit of Php 1,515,000.00, and operating expenses
of Php 718,000.00. What is the percentage of the cost of goods sold to net
sales?
a. 43% c. 46%
b. 45% d. 47%

10. Based on the data given on item no. 9, what will be the percentage of net
income to net sales?
a. 28% c. 26%
b. 25% d. 27%

11. It pertains to the company’s capacity to pay long-term debts or liabilities.

a. Solvency c. Liquidity
b. Profitability d. Stability

12. A business had net sales of Php 5,956,000.00 for 2018 and Php 4,898,000.00
for 2019. What is the percentage of net sales?
a. -19% c. -17%
b. -16% d. -18%

13. The company’s ability to pay debts that are coming due (short-term debt)
is called what?
a. Solvency c. Liquidity
b. Profitability d. Stability

14. If current assets are Php 550,000.00 and total assets are Php 3,050,000.00.
What is the percentage of non-current assets?
a. 82.97% c. 83.75%
b. 81.97% d. 84.20%

15. The company’s ability to be structurally firm and can support its long-term
debts by its equity.
a. Solvency c. Liquidity
b. Profitability d. Stability
19
 20
Activity 2
What I Know Activity 1
Change in Change in
1. A 1. D Peso Percentage
2. C 2. F Cash 200,000.00 33%
3. B 3. I Accounts Receivable - 80,000.00 -19%
4. D 4. H Inventory -200,000.00 -57%
5. B 5. A Equipment 230,000.00 21%
6. C 6. C Total Assets 150,000.00 6%
Accounts Payable - 330,000.00 -122%
7. A 7. B
Notes Payable - 200,000.00 -100%
8. A 8. I Owner, Capital 180,000.00 9%
9. D 9. G Total Liabilities and equity 150,000.00 6%
10. A 10. E Sales 350,000.00 19%
11. D Cost of Goods Sold 280,000.00 29%
12. B Gross Profit 70,000.00 8%
13. D Operating Expenses 55,000.00 15%
14. D Operating income 15,000.00 3%
Interest Expense 30,000.00 38%
15. D
Net Income -15,000.00 -3%
Activity 3 Activity 5
Liquidity Ratios 1. 5.07
1. Current Ratio 2.42 2. 1.39
2. Quick Ratio 1.5 3. 2.18
3. Working Capital Ratio P850,000 4. .50
(Interpretations may vary depending on the student’s analysis) 5. .62
Solvency Ratios (Interpretations may
1. Debt to Asset Ratio .43 vary depending on the
2. Debt to Equity Ratio .77 student’s analysis)
3. Equity Ratio .57 6. 70%
(Interpretations may vary depending on the student’s analysis) 7. 70%
8. 25%
9. 45%
Activity 4 10. 33%
Dale Merchandising
Statement of Financial Position
As of Years 2019 and 2020 Assessment
2019 2020 Difference %
Cash 500,000.00 350,000.00 -150,000.00 -30.0% 1. B
Accounts Receivable 150,000.00 340,000.00 190,000.00 126.7% 2. D
Inventory 200,000.00 515,000.00 315,000.00 157.5% 3. D
Equipment 800,000.00 1,400,000.00 600,000.00 75.0%
TOTAL ASSETS 1,650,000.00 2,605,000.00 955,000.00 57.9%
4. B
Accounts Payable 400,000.00 700,000.00 300,000.00 75.0% 5. A
Notes Payable 150,000.00 355,000.00 205,000.00 136.7% 6. C
Owner’s Capital 1,100,000.00 1,550,000.00 450,000.00 40.91%
7. A
TOTAL LIABILITIES AND 1,650,000.00 2,605,000.00 955,000.00 57.9%
OWNER’S EQUITY 8. A
9. D
Dale Merchandising
10. A
Statement of Comprehensive Income
For Years 2019 and 2020 11. A
2019 2020 Difference % 12. D
Sales 5,300,000.00 6,980,000.00 1,680,000.00 32% 13. C
Cost of Goods Sold 3,850,000.00 4,050,000.00 200,000.00 5%
Gross Profit 1,450,000.00 2,930,000.00 1,480,000.00 102% 14. B
Operating Expenses 660,000.00 1,450,000.00 790,000.00 120% 15. D
Administrative and 545,000.00 868,000.00 323,000.00 59%
other expenses
NET PROFIT 245,000.00 612,000.00 367,000.00 150%
Answer Key
References

Ballada, W. Fundamentals of Accountancy, Business and Management 2

Made Easy. Philippines: DomDane Publishers, 2018

De Guzman, A. Fundamentals of Accountancy, Business and Management 2

For Senior High School. Philippines: Lorimar Publishing, Inc., 2018

Financial Stability Ratio. Accessed September 30, 2020,

http://www.theel1tetrader.com/2015/05/4-financial-stability-ratios.html

InvestAura. “Stability ratios.” Accessed September 30, 2020,

http://www.business-planning-for-managers.com/main-
courses/finance/financial-ratios/stability-ratios/

Monfero, R.P., et. Al. Teaching Guide for Senior High School: Fundamentals of
Accountancy, Business and Management 2. Philippines: Published by
Commission on Higher Education (CHED), 2016

21
For inquiries or feedback, please write or call:

Department of Education – SDO Palawan

Curriculum Implementation Division Office

2nd Floor DepED Palawan Building
Telephone no. (048) 433-3292

Learning Resources Management Section

LRMS Building, PEO Compound
Telephone No. (048) 434-0099

22