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 analysis of financial statements;
4. Perform horizontal analysis of financial statements; and
5. Perform ratio analysis.

PARTNERSHIP PROBLEMS
A lot of partnership problems involve the use of percentage and ratio and proportion.
Determining 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, and 50% to C. If last
year, they earned a total of P125,500.00, how much did each of them get?
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 partnership 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 P/L ratio. Their agreed capital is P 100,000.00.
Solution:

4. D, E, and F are partners sharing profits and losses: 1/6 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:

TAX PROBLEMS
Another use of the concept of percentage is taxation. Tax rates are established for various
purposes like 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:

ANALYSIS OF FINANCIAL STATEMENTS

A. Vertical analysis primarily involves the comparison of one number with another to
identify significant relationships. Vertical analysis is used in the preparation of common-
size statements.

1. Common-size statements are financial statements expressed in percent.

Example:
a) 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%.

i. Convert the following Income Statement to a common-size statement:

ii. Convert the following Balance Sheet to a common-size statement:

 iii. 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

iv. 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

2. 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 ratios, assets utilization ratios, etc.

a) Profitability ratios show how profitable a firm is and also measure the
return or earnings on investments. Some of these ratios are:

i. 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 P1,000,000.00 the ROI would be:

ii. 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:

b) Liquidity ratios refer to the ratios used to gauge if the company can meet
its current liabilities, those that need to be paid within the current year. One
example is the current ratio which shows if the company has enough
current assets to meet its current liabilities.

If a company has P300,000.00 current assets and P100,000.00

current liabilities, its current ratio would be:
 c) Solvency ratios are concern with meeting the long-term obligations of the
company, those maturing in more than one year. Common example is the
debt ratio which 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

of P900,000.00, the debt ratio would be:

Creditors and suppliers are interested in knowing the liquidity and

solvency ratios of companies they grant loans to.

B. 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 increasing or decreasing, of
certain accounts, say, sales or net income. The increases or decreases are expressed both
in amounts and in percent.

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:

There was a decrease of P 10,000

which is (22.22%) in operating
expenses.

This means that sales increased by 20%.