CHAPTER 4 – FINANCIAL ANALYSIS-1 (pg.

145)
Problem 1 (Percentage Changes)

Selected information taken from financial statements of Little Company for

two successive years follows. You are to compute the percentage change
from 20X8 to 20X9 whenever possible.

20X9 20X8
a. Accounts Receivable P 126,000 P 150,000
b. Marketable securities -0- 250,000
c. Retained earnings 80,000 (80,000)
d. Notes Receivable 120,000 -0-
e. Notes Payable 860,000 800,000
f. Cash 82,400 80,000
g. Sales 990,000 900,000

Computing a percentage change in comparative statements requires two

steps, namely:

1) Compute the peso amount of the change from the base (earlier period)
to the later period, and
2) Divide the peso amount of change by the base-period amount and
multiply by 100. This is not done however, if the base year figure is
NEGATIVE or ZERO.

CURRENT PERIOD AMOUNT −EARLIER PERIOD AMOUNT

X 100
EARLIER PERIOD AMOUNT
PROBLEM 1

Solution:

Increase (Decrease)
20X9 20X8 Amount Percentage
Change
a. Accounts Receivable P 126,000 P 150,000 (P 24,000) (16 %)
b. Marketable securities -0- 250,000 (250,000) (100%)
c. Retained earnings 80,000 (80,000) 160,000 Not applicable
d. Notes Receivable 120,000 -0- 120,000 Not applicable
e. Notes Payable 860,000 800,000 60,000 7.5%
f. Cash 82,400 80,000 2,400 3%
g. Sales 990,000 900,000 90,000 10%

Supporting Computations:
a. [(P 126,000 - P 150,000) ÷ P 150,000] x 100
b. [(P 0 - P 250,000) ÷ P 250,000] x 100
c. P 80,000 - (P80,000). The computation of the percentage change is not
appropriate.
d. The computation of the percentage change is not appropriate.
e. [(P 860,000 - P 800,000) ÷ 800,000] x 100
f. [(P 82,400 - P 80,000) ÷ 80,000] x 100
g. [(P 990,000 - P 900,000) ÷ 900,000] x 100

Problem 2 (Computing and Interpreting Rates of Change)

Selected information from the financial statements of Yellow Harvest

includes the following:

20X9 20X8
Net Sales P 2,200,000 P 2,000,000
Total Expenses 1,998,000 1,800,000
Required 1

a. Compute the percentage change in 20X9 for the amounts of (1)

Net Sales and (2) Total Expenses.

Increase (Decrease)
20X9 20X8 Amount Percentage
Change
Net Sales P 2,200,000 P 2,000,000 P 200,000 10%
Total Expenses 1,998,000 1,800,000 198,000 11%

Supporting Computations:

Net sales = [(P 2,200,000 – P 2,000,000/ 2,000,000)] x 100

Total Expense = [(P 1,998,000 – P 1,800,000/ 1,800,000)] x 100

Required 2

b. Using the information developed in part (a), express your opinion as to

whether the company’s net income for 20X9:

1. Increased at a greater or lower percentage rate than did net sales.

Total expenses grew faster than net sales. Net income cannot also
have grown faster than net sales, or the sum of the parts would
exceed the size of the whole.

2. Represented a larger or smaller percentage of net sales revenue than

in 20X8. For each answer, explain without making any
computations or references to peso amounts.

Net income must represent a smaller percentage of net sales in

20X9 than it did in 20X8. Again, the reason is that the expenses
have grown at a faster rate than net sales. Thus, total expenses must
represent a larger percentage of total sales in 20X9 than in 20X8,
and net income must represent a smaller percentage.
Problem 3 (Financial Statements Analysis using Comparative
Statements or Increase-Decrease Method)

The following data are available for XYZ Corporation for years 20X9
and 20X8.

Required 1. Compute the missing changes in peso amounts and

percentages in the statements

XYZ Corporation
Statements of Financial Position
AS of December 31
Increase (Decrease)
Assets 20X8 20X9 Peso %
Cash and equivalents ₱14,000 ₱16,000 ₱2,000 14.29%
Receivables 28,800 55,600 26,800 93.06%
Inventories 54,000 85,600 31,600 58.52%
Prepayments and 4,800 7,400 2,600 54.17%
others
Total Current ₱101,600 ₱164,600 63,000 62.01%
Assets
Property, Plant, &
Equipment – net of 30,200 73,400 43,200 143.05%
depreciation
Total Assets ₱131,800 ₱238,000 106,200 80.58%

Liabilities and Equity

Notes payable to banks ₱10,000 ₱54,000 ₱44,000 440.00%
Accounts payable 31,600 55,400 23,800 75.32%
Accrued liabilities 4,200 6,800 2,600 61.90%
Income taxes payable 5,800 7,000 1,200 20.69%
Total current ₱51,600 ₱123,200 71,600 138.76%
liabilities
Share Capital 44,600 44,600 0 0.00%
Retained Earnings 35,600 70,200 34,600 97.19%
Total equity ₱80,200 ₱114,800 34,600 43.14%
Total Liabilities and ₱131,800 ₱238,000 106,200 80.58%
Equity

XYZ Corporation
Income Statement
Years ended December 31
(P thousands)

Increase (Decrease)
20X8 20X9 Peso %
Net Sales ₱266,400 ₱424,00 ₱157,600 59.16%
0
Cost of Goods Sold 191,400 314,600 123,200 64.37%
Gross Profit ₱75,000 ₱109,40 34,400 45.87%
0
Selling, General and
Administrative Expenses 35,500 58,400 22,900 64.51%
Income Before Income Taxes ₱39,500 ₱51,000 11,500 29.11%
Income Taxes 12,300 16,400 4,100 33.33%
Net Income ₱27,200 ₱34,600 7,400 27.21%

Required 2. Evaluate the company’s short-term financial position,

leverage, managerial efficiency and profitability using the increase-
decrease method of analysis.

Short-term Financial Position

1. Current Assets increased by 62.01% while Current Liabilities
increased by 138.76% - Unfavorable, this can be observed that the notes
payable to banks, accounts payable and accrued liabilities have
increased significantly.
2. Net Sales increased by 59.16% while Accounts Receivable increased
by 93.06% - Unfavorable, meaning most of the sales were on credit
basis and Accounts receivable increasing by a significant amount
indicates a slower conversion of receivables to cash.

The changes resulted to the deterioration in the short-term financial

position of the company as of the end of the year 20X9 compared with
the year 20X8.

Leverage
3. Total Assets increased by 80.58% while Total Liabilities increased by
138.67% - Unfavorable, the company has relied on leverage to finance
its assets, meaning the company’s assets are being funded by
borrowings. If this continues the company may be at risk of defaulting
on loans when interests were to suddenly rise and would become
insolvent.
4. Total Liabilities increased by 138.76% while Total Equity increased
by 43.14% - Unfavorable, the company had shifted towards borrowing.

The changes indicate that the company is being funded primarily by

borrowing this should be addressed by the company and ensure that it
can pay its financial liabilities otherwise this can be risky for the
company in the long-term.

Managerial Efficiency and Profitability

5. Net Sales increased by 59.16% while Cost of Goods Sold increased
by 64.37% - Unfavorable, this indicates that either the company was
unable to adjust the selling price of the goods commensurate to the
increase in cost of goods purchased or manufactured or was unable to
control the price factor of its cost of sales.
6. Net Sales increased by 59.16% while Selling and Administrative
Expenses increased by 64.51% - Unfavorable, this may be due to
management inefficiency in controlling the expenses.

Managerial Efficiency could be considered unsatisfactory because of the

higher increase in cost of 64.51% as compared to the increase in net
sales of 59.16% which only resulted to a 27.21% increase in Net
Income.
Problem 4 (Trend Percentages)

Spooky Company’s sales, current assets and current liabilities (all in

thousands of pesos) have been reported as follows over the last 5 years
(Year 5 is the most recent):

Year 5 Year 4 Year 3 Year 2 Year 1

Sales ₱5,625 ₱5,400 ₱4,950 ₱4,725 ₱4,500

Current Assets:
Cash ₱ 64 ₱ 72 ₱ 84 ₱ 88 ₱ 80
Accounts Receivable 560 496 432 416 400
Inventory 896 880 816 864 800
Total current assets ₱1,520 ₱1,448 ₱1,332 ₱1,368 ₱1,280

Current Liabilities ₱ 390 ₱ 318 ₱ 324 ₱ 330 ₱ 300

Required 1. Express all of the asset, liability, and sales date in trend
percentages. (Show Percentages for each item) Use Year 1 as the base
year, and carry computations to one decimal place.

Trend Percentages
Year 5 Year 4 Year 3 Year 2 Year 1
Sales 125.0 120.0 110.0 105.0 100.0

Current Assets:
Cash 80.0 90.0 105.0 110.0 100.0
Accounts Receivable 140.0 124.0 108.0 104.0 100.0
Inventory 112.0 110.0 102.0 108.0 100.0
Total Current Assets 118.8 113.1 104.1 106.9 100.0

Current Liabilities 130.0 106.0 108.0 110.0 100.0

Required 2. Comment on the results of your analysis.

Sales: The sales are increasing at a steady rate, with a particularly strong
gain in Year 4

Assets: Cash declined from Year 3 through Year 5. This may have been
due to the growth in both inventories and accounts receivable. In
particular, the accounts receivable grew far faster than sales in Year 5.
The decline in cash may reflect delays in collecting receivables. This is a
matter for management to investigate further.

Liabilities: The current liabilities jumped in Year 5. This was probably

due to the build-up in accounts receivable in that the company doesn’t
have the cash needed to pay bills as they come due.