Program : BACHELOR OF SCIENCE IN

OFFICE MANAGEMENT

Course Code : MACC 423

Course Title : MANAGERIAL ACCOUNTING

Course Credit : 3 units Contact Hours : 54

BULACAN POLYTECHNIC COLLEGE

Bulihan, City of Malolos
 Managerial Accounting
MODULE MATERIALS

List of Modules

No. MODULE
MODULE TITLE
CODE

1 Introduction to Managerial Accounting MACC 423-1

2 Controllership MACC 423-2

3 Managerial Accounting As A Career MACC 423-3

4 Managerial Cost Concepts MACC 423-4

5 Costs & Margin Concepts MACC 423-5

6 Cost Behavior Analysis MACC 423-6

7 Estimating Cost Behavior MACC 423-7

8 Cost-Volume-Profit (CVP) Analysis MACC 423-8

9 Job Order Costing & Process Costing MACC 423-9

10 Budgetary Planning-Strategy & The Master Budget MACC 423-10

11 Statement of Cash Flows MACC 423-11

12 Financial Statements Analysis MACC 423-12

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 2 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 MACC 423-12
Financial Statements Analysis

MODULE MATERIALS

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 3 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 FINANCIAL
STATEMENTS
ANALYSIS
(MACC 423-12)

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 4 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 MODULE CONTENT
COURSE TITLE: Managerial Accounting

MODULE TITLE Financial Statements Analysis

NOMINAL DURATION: 3 Hours

SPECIFIC LEARNING OBJECTIVES:

At the end of this module you MUST be able to:
1. Analyze carefully the different kinds of financial statements, its
limitations, analysis, and ratios.

TOPICS: (Sub-Topics)
1. Limitations of Financial Statements
2. Comparative Statements
3. Common-Size Statements
4. Vertical Analysis & Horizontal Analysis
5. Financial Analysis Ratios

ASSESSMENT METHOD/S:
Quiz-Multiple Choice
REFERENCE/S:
1. Cabrera, Ma. Elenita Balatbat
Management Accounting-Concepts and Applications,
2017 Edition
Manila: GIC Enterprises
2. A) Mejorada, N.D.
Introduction to Management Accounting, 2018 Edition
Makati City: Goodwill Trading Co., Inc.
3. A) Sollenberger and Schneider
Managerial Accounting, 9th Edition 2016
Hoboken, New Jersey, USA: John Wiley and Sons
B) Homgren, Sundem and Stratton
Introduction to Management Accounting 10th Edition, 2017
Upper Saddle River, New Jersey, USA: Pearson Prentice Hall
C) Engler, Calvin
Managerial Accounting, 3rd Edition
Irwin, Homewood, Illinois 60430
Boston, MA, USA 02116
4. Vicente, Ma. Violeta V.
Cost Accounting & Cost Management, 2016 Edition
Mutual Books Inc. Distributors & Publishers
Mandaluyong City, M.M. 1552
5. www.slideshare.net

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 5 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 Information Sheet
MACC 423-12
Financial Statements Analysis

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Have an understanding and application on the different methods and
techniques in analyzing financial statements.

INTRODUCTION

Managers, stockholders, potential investors, creditors, financial analysts,

employees, and their representatives are the major users of a firm’s financial
statements. Because financial statements are prepared using a historical cost
framework, the statements represent a summary of past transactions. Although
external users may be interested in historical results to evaluate the company’s
past performance, their main focus is future oriented (i.e. how well the company
will perform in the future). Management’s concerns are also future oriented.
Statement users must use various analytical tools to make references into
historical financial statements regarding a firm’s future expected performance.
Financial Statements
Ultimate or final product of the accounting cycle based on historical or
past data or information
Consists of Income Statement, Statement of Changes in Equity, Balance
Sheet, Statement of Cash Flows, & Notes to Financial Statements.
Financial information used by internal and external users for sound
decision making
Formal or written record which provides information about the financial
activities of business, status, condition, and position of the business and
much other business entities.
LIMITATIONS OF FINANCIA STATEMENTS ANALYSIS
Financial statements are derived from historical costs.
They are not adjusted for inflation.
They do not contain some intangible assets.
They only cover a specific period of time.

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 6 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 Financial statements may not be comparable.
They could be wrong due to fraud.
FS does not contemplate cost price level changes
Financial analysis might be ambiguous without the prior knowledge of the
changes in accounting procedure followed by an enterprise.
Commonly Used Financial Statements Analysis
1. Comparative Financial Statements (Vertical & Horizontal)
2. Ratio Analysis
3. Trend analysis
4. Structural analysis
COMPARATIVE FINANCIAL STATEMENTS
Done by setting the balance sheets, income statements, or statements of
cash flows, side by side, year-to-year changes, and reviewing the changes
that have occurred in individual categories from year to year and over the
years.
The comparison of FS over a number of years will also reveal the velocity
of trend.
Such analysis could be vertical or horizontal analysis which is based on a
year to year change
Trend
Most important factor shown by comparative FS
The general direction of financial data expressed in terms of a number of
a base period (usually one year).
Velocity of Trend
The rate of movement of financial data in a general direction.
COMMON-SIZE FINANCIAL STATEMENTS
One which each component of the statement is shown as a percentage
instead of in peso amounts.
In the balance sheet, the assets as well as the liabilities and capital are
each expressed as 100%, and each item in these categories is expressed
as a percentage of the respective totals (Illustration 18-5).
In the income statement, net sales are set as 100%, and every other item
in the statement is expressed as a percent of net sales Illustration 18-6).
Because the totals always equal 100%, these statements are referred to as
common-size.

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 7 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
VERTICAL & HORIZONTAL ANALYSIS OF FINANCIAL STATEMENTS
Pre-Test
MULTIPLE CHOICE. Read the following items carefully. Encircle the letter of the
correct answer
1. Financial Statement are important to its user like the owner, and it useless
to a person who does not know how to interpret the information contained
in this report.
a. True b. False

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 8 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 2. An entrepreneur will need various sources of information when making
business decision. A major source of information is the financial
statements.
a. True b. False
3. Vertical analysis is a comparison of financial statement information from
one period to another.
a. True b. False
4. The horizontal analysis of a financial statements is an analysis of the
interrelationship of information in a single period, expressed as percentage
of a common denominator.
a. True b. False
5. Zephaniah Co. reported inventory balance of P100 and P50 in 20X1 and
20X0, respectively. In horizontal analysis, a financial statement user
conclude that Zephaniah Co’s inventory has increased by 50% from 20X0
to 20X1.
a. True b. False
6.In 20X1, Prudence Co. reported sales of P1,000 and profit of P200. In
vertical analysis, financial statement user conclude that Prudence Co was
able to generate _______ profit from every peso of its sale during the period.
a. 20% b. 80% c. 120%
7. At the beginning of the day, you have 200 pesos in your pocket. At the
end of the day, you have P50 left. If you make a horizontal analysis of
your pocket, you would conclude that your cash decrease by ______
during the day.
a. 25% b. 80% c. 75%
Items 8 & 9. Your Papa gave you an allowance of P200, good for one week.
By the end of the week, you have P40 left. The following were your
expenditures during the week: Transportation is P80, Snacks – P60, and
Text (cellphone load) P20.
8. In vertical analysis, you would conclude that out of your total
allowance, _____ is spent on snacks.
a. 20% b. 80% c. 40%
9. In vertical analysis, you would conclude that out of your total
allowance, you spent ____ and save ___
a. 80% & 20% b. 60% & 40% c. 10% & 40%
` 10. In horizontal analysis, the prior year’s item amount is use
as a denominator in getting the percentage increase or
decrease of each and every item in the financial statement.
a. True b. False
11. What could be the reason for the decreased bad debts expense?
a. Increase on trade receivables
b. decrease on trade receivables
c. Additional borrowings
12. What could be the reason for the increased in interest expense?
a. payment of loan
b. additional borrowings
c. bank deposits
Bulacan Date Developed:
Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 9 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 d.
13. What could be the reason for the increase in depreciation expense?
a. purchased of supplies
b. purchase of land
c. purchase of equipment
14. What could be the reason for the decreased in depreciation expense?
a. sale of merchandise
b. Sale of old building
c. Sale supplies
Review of Past Lessons!
Lesson Proper:
Motivation:
You are encouraged by your friend to do online business. First, you search for
product you can sell. Next, you advertise it online. Gladly you got several order’s
and deliveries. You, were able to sold product with a total of P2,500. Your
expenditures go like this: Delivery expense of 400.00 cellphone load of 300. And
the cost of items old is 1,300.
Make a percentage representation of each amount.
ANALYSIS:
Processing questions:
A. (Question)

How much is your income on your online business?

What is your income in terms of percentage?

B. (Question)

Is the online business nowadays will last long?

Will you engage in online business activity if possible?
ABSTRACTION (Discussion of the Topic)

A financial statement analysis may involve analyzing one or more of the

following, depending on the objective of the analysis.

1. Industry and economic trend – This involve the analysis of the economic
environment where the business operates.

2. Solvency and capital structure – Solvency - refers to the ability of the

business to pay its debts and remain as a going concern. Solvency can be
short term (liquidity) or long term (solvency). While capital structure refers
to how a business efficiently finances it operations using different sources
of funds, such as debt or equity. Solvency and capital structure relate to
the stability of the business.

3. Operational efficiency – refers to how well a business is managing its

resources to maximize earnings.

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 10 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 4. Profitability – refers to the ability of the business to generate profit.
Methods of Financial Statement Analysis
1. Horizontal Analysis and Vertical Analysis
2. Financial ration analysis
Horizontal Analysis – is the comparison of financial information over two or
more reporting periods. The purpose is to analyze if changes in amount are
unusually high or low, which entail investigation to the reason of unusual
change.
Steps in Horizontal analysis
1. Compute for the change in the amount in a baseline year and a later
year.
2. Divide the change by the amount in the baseline year (earlier Period).

Trend Analysis – a variation to the horizontal analysis. The comparison of

financial information extends beyond two periods normally five or more years
and the computation to procedures are similar to horizontal analysis.
Vertical Analysis- involves the analysis of the financial statements of one
reporting period. It is a proportional analysis whereby each amount in the
financial statement is shown as a percentage of another item.

Examples:
1. Each amount in the balance sheet stated as a percentage of total assets.
2. Each amount in the income statement is stated as percentage of gross sale.
Solvency and Capital Structure

Liquidity (Short-term solvency): The liquidity of the business has

improved if it is reflected by the increase in total current assets has higher
percentage compared to the increase in total current liabilities.

However, the possible cause of the increase in total current assets is the
increase in accounts receivable. This would mean’s that the ability of the
business to pay its current liabilities is dependent on its ability to collect the
accounts receivable. This is because despite the increase in total current assets.

Solvency (Long-Term solvency): The solvency of the business improved if

it reflected by the decrease in noncurrent liabilities. The business able to settle
the currently maturing loan of 180,000 past year.

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 11 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
ACTIVITY A: (Written Works /Task)

On Column 2 state whether the activity/item written on column 1 is considered

as item in a horizontal or vertical method.

ACTIVITY ANALYSIS METHOD

1. Increase in Accounts
Receivable

2. Salaries payable is 4% of total

Liabilities and capital

3. Utilities expense is 2% gross income

4. Increase in Accounts Payable

5. Equipment is 42% of Assets

6. Inventory is 23% of Assets

7. Increase in Accounts payable

8. Decrease in inventory

9. Increase in prepaid assets

10. 65% Cost of sales

ACTIVITY B: (Written Work / Task)

What is the source of interpretation stated in Column 1?

Put Statement of Financial Position or Income Statement as your answer on
Column 2.

PARTICULAR ANSWER
1. The Accounts Receivable
Increased by 22.50%
2. Salaries payable is 3% of
total Revenue
3. Utilities expense is 1% gross
income
4. Reflected 15.75% Increase
in Accounts Payable

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 12 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 5. Equipment shows is 40% of
Assets
6. Inventory reflects 20% of Assets
7. 31% Increase in Accounts
receivable
8. Decrease in inventory by
2.00%
9. Prepaid assets reflected
increase of 17.5%
10. Cost of sales is 60% of
THE gross income.
FINANCIAL ANALYSIS RATIOS
Liquidity ratios provide a measure of the ability of the business to pay its
liabilities.
a. Current Ratio. This is the most commonly used ratio in measuring the
ability of the business to pay its short-term debts.
Formula: Current Ratio = Current Assets
Current Liabilities
b. Quick Ratio (Acid-Test Ratio). A stricter ratio used to measure the ability
of the business to pay its short-term debts.
Formula: Quick Ratio = Quick Assets
Current Liabilities
Quick Assets = Cash+ Marketable Securities+ Accounts Receivable

c. Working Capital. Similar to current ratio but measures the ability of the
business to pay its short-term debts by the excess or deficiency of current
assets over current liabilities.
Formula: Working Capital= Current Assets – Current Liabilities
Activity ratios (Asset management ratio). This provides measures of how
efficient a business is utilizing it resources.1
a. Inventory Turnover. A measure of a number of times inventory is sold
and replenished during the period. Generally, the higher ratio, the better.
However, an unusually high inventory turnover could indicate inventory
shortages due to shortage in raw materials, production inefficiency,
underinvestment, poor inventory planning, and loss of sales.
Formula: Inventory Turnover = Cost of Goods Sold
Average Inventory*
Where:
*Average Inventory = Inventory, Beg. + Inventory, End
2
b. Days of Inventory (Average sale period). A measure of the number of
days’ inventory is held before it is sold.
Formula: Days of Inventory = 365 days in a year
Inventory Turnover
c. Account Receivable turnover. A measure of the number of times account
receivable have been collected during a period. It is an indication of
efficiency in collection.
Formula: Account Receivable Turnover = Credit Sales
Bulacan Date Developed:
Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 13 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 *Average Accounts Receivable
Where:
*Average accounts receivable = Accts Rec. Beg. + Accts. Rec. End
2
d. Days of receivable (Average collection period). A measure of the average
time to collect a receivable.
Formula: Days of Accts. Rec. = 365 days in a year
Accts. Rec. Turnover
Leverage ratios (Debt management ratio). Provide a measure of the extent a
business uses debt financing or “leverage”
a. Debt Ratio (Debt-to-asset ratio) Measured the proportion of assets
financed through debt.
Formula: Debt Ratio = Total Liabilities
Total Assets

b. Equity ratio. Measures the proportion of assets finance trough equity.

Formula: Equity Ratio = Total Equity
Total Assets
c. Debt-to-equity ratio. Indicates how much debt is used to finance the
assets relative to the amount pertaining to the owner(s).
Formula: Debt to equity Ratio = Total Liabilities
Total Equity
Profitability Ratios. Provide a measure of the performance of a business in
terms of its ability to generate profit from its resources.
a. Gross profit ratio, shows the relationship between sales and cost of goods
sold.
Formula: Gross Profit Ratio = Gross Profit
Net Sales
b. Net profit ratio, measured profitability after considering all income and
expenses.
Formula: Net Profit Ratio = Profit for the year
Net Sales
c. Return on assets, measures the profit generated in relation to the total
resources available to the business.
Formula: Return on assets = Profit for the year
Total Assets
d. Return on equity (Return on net assets), measures the profit generated
in relation to the resources invested by (or attributable to) the owner(s) of
the business.
Formula: Net Profit Ratio = Profit for the year
Total Equity

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 14 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423