BUSINESS APPLICATION

LESSON OBJECTIVES At the end of the lesson, the students should be able to:
1. Solve partnership problems;
2. Solve tax problems;
3. Perform vertical anaysis of financial statements;
4. Perform horizontal analysis of financial statemnts; and
5. Perform ratio analysis.

PARTNERSHIP PROBLEMS
A lot of partnership problems involve the use of percentage and ratio and proportion. Deter-
mining the partners’ share in profit/loss and determining the capital contribution of partners make
use of ratio and proportion.
Examples:
1. Partners A,B, and C share profits and losses: 20% to A, 30% to B, and50% to C
Solution:

2. X and Y are partners with capital balance P 20,000.00 and P 30,000.00, respectively. They
agreed to deliver to divide profits and losses according to their capital ratio. Find the share
of each in a net loss of P 10,000.00.
Solution:

3. Partners N, L, and M agreed to form a prtnership and to share profits and losses at a ratio of
1:1:2. They further agreed that their capital should be in the same proportionate relationship
as their PL ratio. Their agreed capital is P 100,000.00.
Solution:

4. D, E, and F are partners sharing profits and losses: 16 to D, 2

6 to E, and 3
6 to F. If E’s share
in the net income is P 8,333.33, find the total net income.
Solution:

5. Partners D and E agreed to share profits and losses in their capital ratio. If the total capital
is P 24,000.00 and E’s capital is P 16,000.00, what part of the profit/loss is his /her share?
Solution:

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TAX PROBLEMS
Another use of the concept of percentage is taxation. Tax rates are established for various
purposes income tax, sales tax, value-added tax (VAT), etc.
Examples:

1. A corporation earned P 36,800.00 in net income before tax. If the corporation’s income tax
is 35%, compute for the net income after tax.
Solution:

2. If a corporation paid P 17,500.00 in income tax and the income tax rate is 35%, find the net
income before income tax.
Solution:

3. Mariz purchased a gold bracelet for P 8,960.00. It included as 12% VAT. How much is the
retail price of the bracelet excluding tax?
Solution:

4. Tessa paid P 3,687.40 for an article which included P 107.40 as sales tax. What is the tax
rate?
Solution:

VERTICAL ANALYSIS OF FINANCIAL STATEMENTS

Vertical analysis primarily involves the comparison of one number with another to identify sig-
nificant relationships. Vertical analysis is used in the preparation of common-size statements.
Common-size statements are financial statements expressed in percent.

Example:

1. To convert the regular financial statements into common-size statements, a figure is taken
as 100% and the rest of the items in the financial statements are restated in terms of the
base chosen to represent 100%. For the income Statement, the Net Sales is taken as the base
representing 100%. For the balance Sheet, the total Assets is taken as 100%.

(a) Convert the following Income Statement to a common-size statement:

Excesior Enterprise
Income Statement
For the Month Ended June 30, 2010

Net Sales .....................................................................P 150,000.00

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 Less: Cost of Sales.........................................................P 90,000.00
Gross Profit ...................................................................P 60,000.00
Less: Operating Expenses..............................................P 35,000.00
Net Income.....................................................................P 25,000.00
Solution:

(b) Convert the following Balance Sheet to a common-size statement.

Onairam Amron International
Balance Sheet
June 30, 2010
ASSETS

Cash ..............................................................................P 10,000.00

Accounts Receivable, Net................................................P 20,000.00
Merchandise Inventory....................................................P 30,000.00
Furniture and Equipment, Net........................................P 40,000.00
Total Assets...................................................................P 100,000.00

LIABILITIES AND CAPITAL

Accounts Payable...............................................................P 20,000.00

Notes Payable....................................................................P 10,000.00
Onairam Amron, Capital...................................................P 70,000.00
Total Liabilities and Capital.............................................P 100,000.00

Solution:

(c) A company’s total assets is P 200,000.00. Its current assets represents 25% and the rest
represent fixed assets. Find the amount of:
1. Current Assets
2. Fixed Assets

Solution:

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 (d) A company’s Accounts Receivable is P 20,000.00. it represents 35% of the current assets
and 8% of the total assets.
Compute for:
1. Current Assets
2. Total Assets

Solution:

RATIO ANALYSIS
Ratio Analysis is a form of vertical analysis.It is used to determine certain ratios important
in business decision-making, like determining profitability ratios, liquidity ratios, solvency ra-
tios, assets utilization ratios, etc.

The following ratios are often used in business:

a. Profitability Ratios
These ratios show how profitable a firm is and also measures the return or earnings on
investments. Some of these ratios are:
1. Return on Owner’s Investment (ROI)
If a company earns a net profit of P 100,000.00 and the capital of the owner(s) is
P1,000,000, the ROI would be:

N etP rof it
ROI =
Owner0 sInvestment

P 100, 000.00
=
P 1, 000, 000.00

= 10%

2. Profit Margin or Return on Sales (ROS)

This ratio is used to measure the profit generated by the sales made by the company. If
a company earned a net profit of P 100,000.00 from the generated sales of P900,000.00, the
return on sales or profit margin would be:
N etP rof it
ROI =
N etSales

P 100, 000.00
=
P 900, 000.00

= 11.11%

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b. Liquidity/Solvency Ratio
Liquidity ratios refer to the ratios used to gauge if the company can meet its current liabili-
ties, those that need to be paid within the current year.
Solvency ratios are concern with meeting the long-term obligatios of the company , those ma-
turing in more than one year. Creditors and suppliers are interested in knowing the liquidity
and solvency ratios of companies they grant loans to.

1. Current Ratio
This liquidity ratio shows if the company has enough current assets to meet its current
liabilities. If a company has P 300,000.00 current assets and P100,000.00 current liabilities,
its current ratio would be:
CurrentAssets
CurrentRatio =
CurrentLiabilities

P 300, 000.00
=
P 100, 000.00

3
= = 3:1
1
This means that for every P1.00 of liability or debt, the company has P3.00 to pay it.
The creditors are secured.
2. Debt Ratio
This solvency ratio shows the relationship between the total liabilities and total assets of
the firm. Assuming a firm with total liabilities of P450,000.00 and total assets o P 900,000.00,
the debt ratio would be:
totalliabilities
DebtRatio =
T otalAssets

P 450, 000.00
=
P 900, 000.00

3 1
= = 3:1 = 2
1
This means that the firm has P1.00 liability for P2.00 total assets. Again, the firm is
secured, meaning , the company can pay its obligations.

c. Horizontal Analysis
Horizontal Analysis, also known as trend analysis, refers to comparing figures of financial
statement of one period with the figures of financial statement of another period. It is called
trend analysis because it shows the trend, whether incresing or decreasing, of certain accounts,
say, sales or net income. The increases or decreases are expressed both in amounts and in percent.

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Analysis of a Comparative Income Statements of a certain firm:
Increase / Decrease
201B 201A Amount %
(P 000) (P 000) (P 000) R
Q2 Q1
Sales 150 125 25 (150 − 125) 20% (25/125)
Cost of Sales 90 70 20 (90 − 70) 28.57 (20/70)
GrosP rof it 60 55 15 (60 − 55) 27.27 (15/55)
OperatingExpenses 35 45 (10) (35 − 45) (22.22) [(10)/45]
N etIncome 25 10 15 (25 − 10) 150% (15/10)

Take note that the denominator is the prior year, the basis of comparison. To get the
increase/ (decrease), we follow our formula Q2 − Q1 ; hence, we subtract the 201B figures from
the 201A figures ( current year- prior year). To get the % of increase or decrease, we divide the
increase or decrease amount by the 201A ( prior year) figures. Following our formula:

Q2 − Q1
R=
Q1

150, 000.00 − 125, 000.00

R=
125, 000.00

25, 000
= = 20%
125000

This means that sales increased by 20%.

For operating expenses,

35, 000 − 45, 000 10, 000

R= =
45, 000 45, 000

= (22.22%)

There was a decrease ( as shown by the parentheses; hence, the percent is also in parentheses
denoting a decrease) of P 10,000 which is (22.22%).

Practice:

1. Richard Kidman and Nicole Gere are partners. Their invested capital are P 30,000 and P
45,000 respectively.
a. What is their capital ratio?
b. If they share profits and looses in accordance with their capital ratio, find the share of
each in a net profit of P 18,000.00.

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2. Enrollment for four consecutive semesters for a certain college is as follows:

201A 201B
F irstSemester 890 1, 010
SecondSemester 875 980

Find:
a. The increase / decrease in quantity and percent for the first semester.
b. The increase / decrease in quantity and percent for the second semester.
c. The quantiry of increase/ decrease in total enrollment and the % of increase/decrease.

3. If the tax rate is 4.5% and the total amount paid including tax is P 2,455.75, find:
a. base price
b. tax paid