Department of Education

SCHOOLS DIVISION OF CITY OF MEYCAUAYAN

Pag-asa St., Malhacan, City of Meycauayan, Bulacan

Senior High School

Activity Sheet 12
in
Fundamentals of
Accountancy, Business
and Management 2
Financial Analysis Ratio
ABM_FABM12Ig-h-12 & ABM_FABM12Ig-h-14
 FINANCIAL ANALYSIS-FINANCIAL RATIOS

Let Us Know

In continuation of our lesson about financial analysis, we realized that it is not

enough that we prepare a financial statement to make an economic decision. We are oriented
to use horizontal and vertical analysis techniques to analyze and understand the financial
data reported. In this activity, we will get to know more about financial ratios to acquire better
understanding of our business profitability, solvency, liquidity and operating efficiency which
is significant for strategic planning, financial and operations management.

Let Us Review

Use the diagram below to enumerate the purpose of financial analysis to the busines
organization. Answer the activity on separate sheet of paper.

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 Let Us Study

In this activity sheet, we will discuss and perform the basic financial statement
analysis and look beyond the account values and relate them on firms’ structure and
performance. We will use ratio so we can have a better understanding how the business entity
performs in the prior year and current year of business operation.

A ratio is a calculation that show relationship between two values. Financial ratio
according from the author of Fundamental of Accountancy, Business and Management, is
composed of numerator and a denominator that expresses relationship between specific
financial data (Salazar 2017). A ratio analysis helps management to measure the performance
and its credibility that the company can pay its liabilities before the given maturity date. The
ratio can be expressed as a percentage, a rate or proportion It is a powerful tool used by an
entity to generate an objective economic decision.

LIQUIDITY RATIOS
It is an analysis that measures the company capacity to pay its current maturing or
short-term obligation and converting receivables and inventory into cash. This is important
to short-term creditors of a company to determine if the borrowing company is in position
to pay the borrowed principal and interest when they are already due.
Definition Formula
Working Measures a company
Capital capability to pay its current Working Capital =
liability with its current Current Assets – Current Liabilities
assets.
Current Ratio Working capital ratio that
shows the relationship Current Ratio = Current Asset
between current assets and Current Liabilities
current liabilities. It measures
liquidity of company to pay off
its current liabilities upon
maturity or in timely manner.
Quick Ratio Also known as quick asset
ratio or acid ratio indicator of Quick Ratio =
most readily available current Cash +Market Securities +Receivables
assets to pay off short-term Current Liabilities
obligations. It is useful in Current Assets-Inventories-Prepayments
assessing liquidity in the most Current Liabilities
difficult situation of
companies.
Efficiency Ratio

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 Account • It is a ratio measures the
Receivable frequency of conversion of
Turnover Accounts Receivable to
cash.
• How many times the
company was able to
collect accounts receivable Account Receivable Turnover =
to its customers. Net Sales ÷Average Account Receivable
• The higher receivables
turnover ratio would be
more favorable as they
measure efficiency of
receivable collection.

Inventory Measures the number of times

Turnover the company was able to sell
Ratio its entire inventory to Inventory Turnover Ratio =
customers during the year. Cost of Goods Sold÷ Average Inventory
The goal is to have a high
inventory turnover.

Leverage/ Solvency Ratio

Measures capability of an entity to pay long term obligation as they fall due. Creditors of
the company’s long-term notes payable and bond payable will be interested in knowing its
solvency status.

Debt to It compares the liabilities of Debt to Equity Ratio=

Equity Ratio the company with its equity. Total Liabilities ÷ Total Assets

Profitability Ratios
Primary objective of an investor in investing capital in the business is to earn or gain
profit. It is a ratio measure the company’s earning power and management’s effectiveness
in running operations.
It compares the gross
margin of a business to the
net sales. It measures how
Gross Profit profitable a company sells Gross Profit Ratio=
Ratio its inventory or Gross Profit ÷ Net Sales
merchandise. The higher
the ratios indicate that the
company is selling the
inventory at higher profit
percentage.

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Profit Margin It referred also as the return
Ratio on sales ratio or gross profit
ratio. This measures the
amount of net income
earned with each peso of Profit Margin Ratio=
sales generated by Net Income ÷ Net Sales
comparing the net income
and net sales of a
company. It also indicates
percentage of sales is left
over after all expenses are
paid by the business.
Return on It is also knowns as
Assets (ROA) Return on total assets. The Return on Assets=
ratio that measures the net Net Income ÷ Average Total Assets
income produced by total
assets during a period by
comparing net income to
the average total assets.
To compute the average
total assets, add the
beginning and ending asset
as stated in the statement of
financial position and divide
by two.
Return on It interprets how much
Equity profit is generated for each Return on Equity =
peso of ordinary shares Net Profit÷Ordinary Stockholders Equity
equity. It is an indicator of
management effectiveness
in using equity financing to
fund the operations for the
needed growth.

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 Let Us Practice

Read and analyze the given problem below. Write your answer on a separate sheet
of paper.

1. Francis Magancia Shop purchased equipment in the last five by securing several loans
from banks All these loans are becoming due which decrease the working capital. At the
end of the year, Francis had ₱400,000 current assets and ₱200,000 current liabilities.
Compute for the working capital of Francis Magancia.

2. Al Quin Tattao Tattoo Company has ₱100,000 bank credit line and a PHP ₱500,000
mortgage on its property. He invested ₱1,500,000. Compute for debt equity ratio of Al
Quin Tattao.

3. Cathy’s Kitchen spent ₱100,000 on her cake inventory for the year. Ms. Cathy was able
to sell her cake inventory for ₱500,000. Unfortunately, a ₱50,000 worth of cakes were
returned by customer and refunded. Compute for Ms. Cathy’s. gross margin ratio for the
year.

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 Let Us Remember

The higher the current ratio is more favorable than a lower current ratio. It shows
that the company is more flexible in paying its maturing obligation.
The shorter the cash conversion process of whatever company assets is the greater
impact it has on the ability of the company to settle its currently maturing
obligations in cash and on time.
A negative working capital is considered risky by creditors and investors because it
shows the company is not running efficiently and cannot cover its current debt.
As a rule, a higher debt to equity ratio indicates that more financing from
creditors is used than investor making additional capital. Debt to equity ratio of
1 mean that investors and creditors have an equal share or claim in the business.
Higher ratios of Accounts Receivable
Lower debt equity ratio usually implies a more financially stable business and
less risky to creditors and investors.

Changes that affect the working capital

Current asset increase Increase in working capital
Current asset decrease Decrease in working capital
Current Liabilities increase Decrease in working capital
Current Liabilities decrease Increase in working capital

Measurement level of business operation, solvency, liquidity, and profitability.

Financial statement ratios express the relationship among specific financial data.
Profitability ratios measure the ability of the company to control costs and generate
income from the use of its assets and invested capital.
Solvency ratio refers to company’s capacity to pay their long-term liabilities while
liquidity ratio company’s capacity to pay their short-term liabilities.

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 Let Us Appreciate

Research and create an infographic discussing the limitations of financial statements

analysis . You can use Canva or power point so that you can create a good lay-out for your
infographics.

Rubrics
Creativity 40 %
Substance & Content 30%
Lay-out & Design 20%
Originality 10%
Total 100 %

Let Us Practice More

Given below is the comparative Statement of Financial Position & Statement of

Comprehensive Income of Miz Na Company for 2017 and 2018. Compute for the following
financial ratios. Show your solutions. Write your answer on a separate sheet of paper.

Working Capital
Current Ratio
Quick Ratio
Accounts Receivable Turnover Ratio
Inventory Turnover Ratio
Debt to Equity Ratio
Gross profit ratio
Net Profit margin ratio
Return on Assets

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 MIZ NA COMPANY
COMPARATIVE STATEMENT OF FINANCIAL POSITION
For the Year 2017-2018
Asset 2018 2017
Cash ₱350,000.00 ₱175,000.00
Accounts Receivable 100,000.00 120,000.00
Marketable Securities 80,000.00 100,000.00
Inventories 100,000.00 75,000.00
Prepaid Expenses 20,000.00 10,000.00
Total Current Assets ₱650,000.00 ₱480,000.00

Total Non-Current Assets 300,000.00 190,000.00

Total Assets ₱950,000.00 ₱670,000.00

Liabilities
Total Current Liabilities 150,000.00 275,000.00
Total Non -Current Liabilities 175,000.00 200,000.00

Owners Equity
Total Owners Equity ₱625,000.00 ₱195,000.00

Total Liabilities & Owner's Equity ₱950,000.00 ₱670,000.00

MIZ NA COMPANY
COMPARATIVE STATEMENT OF COMPREHENSIVE INCOME
For the Year 2017-2018

2018 2017
Net Sales ₱1,000,000.00 ₱650,000.00
Less : Cost of Goods Sold 115,000.00 90,000.00
Gross Profits ₱885,000.00 ₱560,000.00
Less: Operating Expenses 50,000.00 85,000.00
Operating Income ₱835,000.00 ₱475,000.00
Less : Interest Expense 10,000.00 25,000.00
Net Income Before Tax ₱825,000.00 ₱450,000.00
Less: Income Tax 90,000.00 100,000.00
Net Income After Tax ₱735,000.00 ₱350,000.00

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 Evaluation

I. Identify whether the statement is True or False. Write T if the statement is true write F if
the statement is false . Write your answer on a separate sheet of paper.

1. _______________ Financial ratios are one of the most common tools of managerial decision
making.
2. _______________ A business owner can use several methods to check the financial
condition of the business and the most used method is current ratio.
3. _______________ Inventory turnover ratio shows how effectively inventory is being
managed and it is computed by comparing cost of goods sold with average inventory for
a period.
4. _____________ Financial statements that reflect financial data for two or more periods are
often referred to as comparative statements.
5. _____________ Comparability between enterprises is more difficult to obtain than
comparability within a single enterprise.
6. _____________Generally, the first concern of financial analyst is a firm’s liquidity.
7. _____________The working capital is the fundamental measurement of a company’s
liquidity.
8. _____________ The Return on Asset (ROA) is a measure of overall asset productivity.
9. _______________ Return on Equity ratio interprets how much profit is generated for each
peso of ordinary shares equity. It is an indicator of management effectiveness in using
equity financing to fund the operations for the needed growth.
10. _______________ Return on Asset is the same with Return on investment it measures
the net income produced by total assets during a period by comparing net income to the
average total assets.

II. Choose the letter of the correct answer. Write your answer on a separate sheet of paper.

1. Current ratio compares current with __________________.

a. fixed assets b. current liabilities c. equity capital d. current profit
2. Which ratio analysis how effectively inventory is managed by comparing cost of goods
sold with average inventory for a period?
a. Account receivable turnover ratio
b. Inventory turnover ratio
c. Current Ratio
d. Gross margin ratio

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3. Which refers to profitability ratio that measures the ability of a firm to generate profits
from its shareholders investments in the company?
a. Gross profit ratio
b. Return on equity ratio
c. Turnover
d. Solvency

4. What does debt equity ratio analyze?

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

5. Which are the two main elements of working capital?

a. asset and liabilities
b. Equity and Income
c. Revenues and expenses
d. interest and taxes

6. Which one is primarily concern in the liquidity of a company?

a. Government Agency
b. Security and Exchange Commission
c. Short-term creditors
d. Long-term creditors

7. Long-terms creditors are usually interested in evaluating company’s________________.

a. Liquidity & Solvency
b. Solvency & marketability
c. Liquidity &Profitability
d. Profitability & Solvency
8. Shareholders are most interested in evaluating company’s________________.
a. Liquidity & Solvency
b. Profitability & Solvency
c. Liquidity &Profitability
d. Solvency & marketability

9. Shareholder is interested in firm’s________________.

I. pay consistent dividend
II. appreciate in share price
III. survive over a long period
a. I only b. II only c. III only d. I, II and III

10. If average inventory is ₱80,000 and the inventory turnover ratio is 20. How much is
the cost of goods sold by the company?
a. ₱1,600,000
b. ₱ 4,000
c. ₱.00025
d. ₱80,020

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 All Rights Reserved
2020

ACKNOWLEDGEMENT
CAROLINA S. VIOLETA EdD
Schools Division Superintendent

CECILIA E. VALDERAMA PhD

Asst. Schools Division Superintendent

DOMINADOR M. CABRERA PhD

Chief, Curriculum Implementation Division

EDWARD C. JIMENEZ PhD

Education Program Supervisor- LR Manager

JOCELYN A. MANALAYSAY PhD

Education Program Supervisor-Mathematics

CHARMAINE S. TUMANGAN
Developer/Writer

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