For Students

Bukidnon Association of Catholic Schools (BUACS), Inc.

Diocese of Malaybalay

Loyola High School

Don Carlos, Bukidnon
Senior High School Department

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

First Quarter
School Year 2020-2021
Learning Activity Sheet No. 3
Week: 3
Day : 4

Topic : Analysis of Financial Statements

A. Topic Background Information/Concept Notes

A company’s financial statements provide important information about a business enterprise. The analysis
helps the user make an informed decision or judgment rather than rely on guesses and intuitions in the process
of decision making by effectively and systematically using the financial data.It lessens the uncertainty of
outcomes with every decision made because of the use of analytical tools to financial statements and the
related data.

These tools and techniques are the following:

• Horizontal Analysis
– compares the same account in the financial statements of two periods (current and past year)
determining the amount of changes and computing its percentage change using a base year as comparison.
• Vertical Analysis
– shows the relationship of each part to the whole in a single financial statement. In the statements of
financial position, each item is expressed as a percentage of total assets or total liabilities and owner’s equity.
In the income statement, each item is presented as percentage of net sale.
• Trend Analysis – compares not only two years but covers three, four, or five years’ financial statements.
This is to determine the trends in the industry.
• Financial Ratio Analysis – describes the significant relationship between the numbers presented in the
financial statements.

COMPARISON STANDARDS
One of the qualitative characteristics of a good financial statements is comparability. This is the ability of
the financial statement to create a basis and allow identification of similarities and differences between the
statements being compared. More often than not, this information could lead to reasonable conclusion.
The following are the comparison standards that can be used by entities:
1. Intracomparability
In this kind of comparison, the company’s financial statements for the current period are being
compared with the financial statements prior or earlier periods. Increases in the total assets income,
decreases in the total liability or increases in total assets are possible indicators that could be used by the
entity.
Ex:
a. The total net income of ABC Company for the current year 2016 are being compared with the total net
income of ABC Company for the year 2015.
b. The total assets DEF Company for the current year 2016 are being compared with the total assets of DEF
Company for the year 2015.
2. Intercomparability
On the other hand, intercomparability deals with the comparative analysis of the company’s
financial statements against a direct competitors. This is very valuable tool especially for companies that
do not have the monopoly of the market. More than anything else, the direct competitor’s financial
 statements could show if our entity underperformed or overachieved in the recently concluded accounting
period.

Ex:
a. The financial statements of Smart Telecom are being compared with the financial statements of Globe
Telecom.
b.The financial statements of McDonald Restaurant are being compared with the financial statements of
Jollibee restaurant.
3. Industry Standard
In an open market industry where there are many players involved, it would more prudent for some
to compare their company’s financial statement with the standard average for that certain industry. By
looking at the industry averages as a whole instead on a per competitor basis, the process would negate
the seasonal fluctuations affecting the direct competitor. This would also apprise the company on where
does is stand financially in that certain industry.
Ex:
a. The financial statements of Smart Telecom are being compared with the industry standard for the telecom
industry.
b. The financial statements of McDonald Restaurant are being compared with the industry standard for the
food and beverage industry.

DIFFERENT FINANCIAL RATIOS:

Financial ratios in accounting can be classified into three groups:
1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
Furthermore, different ratios under the three main groups are shown below:

1. Liquidity Ratios
a. Working Capital
b. Current Ratio
c. Acid Test Ratio
d. Accounts Receivable Turnover Ration
e. Average Collection Period
f. Inventory Turnover Ratio
g. Average Days in Inventory
h. Number of Days in Operating Cycle
2. Solvency Ratios
a. Debt to Total Assets Ratio
b. Debt to Equity Ratio
c. Times Interest Earned Ratio
3. Profitability Ratios
a. Gross Profit Ratio
b. Profit Margin Ratio
c. Operating Expenses to Sales Ratio
d. Return on Investment
i. Return on Assets
ii. Return on Equity
e. Asset Turnover Ratio
Note: Please refer to your book for formulas and sample interpretation. Aside from memorizing the different
formulas, the accounting student is expected to interpret the results of it and apply to the specific scenario that is
involved

For more reference please refer to your FABM2 Vibal book (Beticon, Domingo, Yabut) 2016
edition pages 104-123.
B. Learning Competencies with Codes:
Content Learning Competencies Code
1. Analysis and Interpretation 1.a.define the measurement levels, namely, liquidity, ABM_FABM12-Ig-h12
of Financial Statements solvency, stability, and profitability

1.b.perform vertical and horizontal analyses of financial ABM_FABM12-Ig-h13

statements of a single proprietorship
1.c.compute and interpret financial ratios such as current ABM_FABM12-Ig-h14
ratio, working capital, gross profit ratio, net profit ratio,
receivable turnover, inventory turnover, debt-to-equity
ratio, and the like

C. Learning Objectives:
The students will be able to:
1. Identify the importance of financial statement analysis in the life of every enterprise.
2. Enumerate the different kinds of standards that could be used in comparing companies.
3. Perform horizontal and vertical analysis on the financial statements of selected companies.
4. Enumerate the different ratios according to their classification
5. Compute the different ratios and interpret the result.

D. Detailed Instructions/Directions:
1. Read and understand the background information of the topic. Answer the problem in a short bond paper
neatly.
2. Exercise I. Perform a horizontal analysis on the following information taken from the books of
Chrysanthemum Trading.
3. Exercise II. The following data are taken from the book of Coral Merchandising. Perform a vertical
analysis.
4. Exercise III. Listed below are ratios for 2019 and 2020 of ABC Company. Identify whether the change in
ratio value is favorable or unfavorable then state the general rule.
5. Exercise IV. The following are data from Fluffy Trading on December 31, 2020. Compute the following:
a. Current Ratio
b. Acid-test Ratio
c. Working Capital
6. Exercise V. Given the income statement of TimTamTom Trading, compute the missing information
considering the given additional information. Show computations in good form.
E. References
 Flocer Lao Ong, Janelle Gomendoza
Fundamentals of Accountancy, Business, and Management 2
For Senior High School
2017 Edition
 Nick L. Aduana
Fundamentals of Accountancy, Business, and Management 2
For Senior High School
2016 Edition
 Beticon, Domingo, Yabut
Fundamentals of Accountancy, Business, and Management 2
For Senior High School
2017 Edition
 Note: To be submitted to your subject teacher

Bukidnon Association of Catholic Schools (BUACS), Inc.

Diocese of Malaybalay

LOYOLA HIGH SCHOOL

Don Carlos, Bukidnon
Senior High School Department

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

First Quarter
Week: 2
Day: 4
School Year 2020-2021

NAME : ___________________________________________ SCORE : __________________________

GRADE & SECTION: _______________________________ DATE : __________________________

Exercise I. Perform a horizontal analysis on the following information taken from the books of Chrysanthemum
Trading.

Chrysanthemum Trading
2020 2019
Cash P 70,000 P 90,000
Trade and Other Receivables 120,000 100,000
Prepaid Expenses 35,000 50,000
Merchandise Inventory 40,000 30,000
Trade and Other Payables 30,000 24,000
Mortgage Payable 200,000 240,000

Exercise II. The following data is taken from the books of Coral Merchandising. Perform a vertical analysis.

Coral Merchandising
2020 2019
Net Sales P350,000 P275,000
Cost of Goods Sold 225,000 200,000
Gross Profit P125,000 P 75,000
Operating Expenses 105,000 55,000
Net Income P 20,000 P 20,000

Exercise III. Listed below are ratios for 2019 and 2020 of ABC Company. Identify whether the change in ratio
value is favorable or unfavorable; and state the general rule.

ABC Company
2020 2019
1. Current Ratio 1.5 1.3
2. Quick Ratio .86 1.1
3. Receivable Turnover 12 11
4. Average Collection Period 32 28
5. Inventory Turnover 10 8
6. Average Sales Period 38 45
7. Debt Ratio 45% 48%
8. Equity Ratio 55% 60%
9. Debt to Equity Ratio 3 4
10. Times Interest Earned 6 8
11. Gross profit Ratio 35% 42%
12. Operating Profit Margin 25% 20%
13. Net Profit Margin 12% 15%
14. Return on Assets 21.8% 19.6%
Exercise IV.The following are data from Fluffy Trading on December 31, 2020. Compute the following:
a. Current ratio
b. Acid-test ratio
c. Working capital

Fluffy Trading

Cash P410,000
Trade Receivables 120,000
Merchandise Inventory 235,000
Property, Plant and Equipment 455,000
Trade Payables 265,000

Exercise V. Given the income statement of TimTamTom Trading, compute the missing information considering
the given additional information. Show computations in good form.

TimTamTom Trading
Income Statement
For the Year Ended December 31, 2020

2020
Net Sales P 2, 750,000
Cost of Goods Sold (?)___
Gross Profit P (?)
Selling and Administrative Expenses 556,250
Operating Income (?)
Income Tax Expense 140,000
Net Income P (?)___

Additional information:
a. All sales are on credit.
b. The current ratio on December 31, 2020 is 3.0.
c. The receivables turnover for 2020 is 10 times.
d. The inventory turnover for 2020 is 4.8 times.
e. The net profit margin for 2020 is 14.5%.