Business Finance 1st QTR Study Guide

Business
Finance
IN THE PHILIPPINE
SETTING
Prepared by:
Vincent J. Ramirez, LPT
Senior High School Faculty
Table of Contents
Cover Page
Table of Contents
Unit 1: Introduction to Finance .............................................................................1

Chapter 1 Understanding Finance .............................................................................1
1.1 Definition and concept of finance ..........................................................1
1.2 Areas of finance .....................................................................................5
1.3 Finance in a business organization ........................................................8
1.4 Functions of a finance officer ................................................................9
1.5 Qualifications of a finance officer .......................................................14
Chapter 2 Financial Institutions, Instruments, and Markets ................................16

2.1 The business environment....................................................................16
2.2 The financial system ............................................................................16
2.3 Financial institutions ............................................................................19
2.4 Financial markets .................................................................................25
2.5 Financial instruments ...........................................................................27
Unit 2: Analysis and Interpretation of Financial Statements ...........................32

Chapter 3 Analysis of Financial Statements: Traditional Approaches ................32
3.1 Nature of financial statement analysis .................................................32
3.2 Horizontal or comparative approach ....................................................33
3.3 Vertical or common-size approach ......................................................37
3.4 Trend percentage approach ..................................................................38
Chapter 4 Analysis of Financial Statements: Financial Mix Ratio Approach .....41

4.1 Financial mix ratio ...............................................................................41
4.2 Liquidity ratios .....................................................................................41
4.3 Solvency ratios .....................................................................................47
4.4 Profitability ratios ................................................................................52
4.5 Qualitative factors in the analysis of the financial statements .............56
Grading System
Written Work 25%
Performance Task 45%
Quarterly Examination 30%
TOTAL 100%
1
Topic : Unit 1 Introduction to Finance

: Chapter 1 Understanding Finance
Week/Date :
Learning Outcomes
At the end of this chapter, the students should be able to:
1. Define finance;
2. Identify the different areas of finance;
3. Discuss finance in the business organization
4. Describe the functions of the finance officer; and
5. State the qualifications of the finance officer.
1.1 DEFINITION AND CONCEPT OF FINANCE

Finance is usually related to money. This is partly true since
the finance manager or finance officer is often considered as the
fund custodian.
However, the term finance has not gained a universally
accepted definition despite its significant role in the activities of
business and non-business organizations. In fact, most finance
books, whether introductory or advanced, do not provide a precise
definition of the term. Rather, these books simply outline the
activities or work performed by the people in finance. This may be
due to the wide scope of finance and the interlocking relationships among the different areas.
The American Heritage Desk Dictionary defines finance as the management of money,
banking, investment, and credit. It is also defined as a science of management of money and other
assets. This definition suggests the finance is directly related to money or to a business activity
that primarily deals with money transactions.
Key Concepts of Finance
Both a Science and an Art

Finance, as a field of specializations, deals directly with as
is strictly governed by financial facts and truths. People
practicing finance including financial managers do not work on
a business environment with whimsical figures and information.
Factual information, which is the product of scientific business
process, supports, and provides the basis for making financial
decisions.
For instance, financial decisions are made based on financial
statements. The financial statements present relevant, factual,
and true information about the financial performance of a business. The pieces of information
contained in the financial statements are not fabricated or presented with reliable basis. The use of
the factual information in financial decisions and activities underscores that the finance is a
science.
Reference:
Aduana, Nick L., Business Finance in the Philippine Setting for Senior High School, C & E Publishing, Inc. 2017
2
Finance is also considered as art. The different financial services continue to change and
develop as the operations of the business organization become more complicated. The financial
practices do not remain static but become adaptive to the changes in the business environment over
time. The business operations change parallel to the change happening in the business community.
The practice of finance is, therefore, related to the changes in business operations.
As business practices change over time, new financial theories are introduced by experts
or specialist in the field of finance. The modern issues in finance now include the risk-return
relationship and capital structure theory. These new developments and trends are a clear
manifestation that finance will continue to evolve in the future. Finance, therefore, is an art.
Application of Economic and Accounting Concepts and Principle

Finance used to be considered an integral part of economics. Today, finance functions as a
separate specialized field that operates closely with economics and accounting. Hence, finance is
not merely a part of economics but an application of the concept and principles of both economic
and accounting.
Economics, as a social science, is concerned with the
efficient utilization of scare resources to satisfy human needs
and wants. Economic, variables such as price, demand,
supple, income, and expenditure are the focus of study in the
development of the economic theories and principle.
Accounting is an art of recoding business transactions
and deals with the preparations of financial statements. The
recording process follows the Philippine Financial Reporting Standards (PFRSs) which is in
accordance with the international standards. The financial statements, the final product of the
whole accounting process, provide useful information to finance. Accounting is considered as the
language of both business and finance.
System, Structure and Process
The field of finance provides and clearly defines a systematic, structured, and procedural
mechanism on the various financial activities affecting the business. A single financial activity of
a business, therefore, is not simply happening by itself, but rather follows the defined system,
structure, and process adopted by the business organization.
The term system connotes that the financial activities of the business are properly
coordinated with the whole structure. A clear financial procedure directs all the human resources
of the business towards the attainment of the ultimate objective.
Though the proper application of the system, structure and process, nothing in the financial
sphere of the business happens by chance or accident. Every financial activity has a purpose.
Reference:
3
Management, Allocation, and Utilization

Economically, the fundamental concern of finance is to
ensure that the limited financial resources are correctly managed,
allocated, and utilized in order to achieve the financial goal of a
business.
In this context, management implies the efficient handling
of business resources, particularly those that are financial in
nature. Allocation connotes wise distribution financial resources
to the different functional areas, the proper assignment of funds
between current and non-current assets, and the correct sourcing
of funds based in the concepts of risk and return.
Financial resources that are properly managed, allocated, and utilized significantly
influence the financial performance of the business.
Financial Resources, Investments and Expenditure

Financial resources refer to the funds of a
business which are provided by the owner or by the
creditors. The resources of the business are largely
intended to handle the current operating activities and the
other activities that will have long-term effects.
Financial investments are resources that are
expected to provide income and achieve appreciation or
growth of the business. The financial benefits that are
usually derived from financial investments come in the
form of interest and bonds. Large businesses are heavily
engaged in putting many funds in the investment.
The financial expenditures of a business may
cover the operating expenditures and the capital expenditures. Operating expenditures are period
costs that include business expenses such as salaries, electricity and water, traveling expenses and
the like. Capital expenditures involve the acquisition or constructions of buildings, machinery,
processing plant and land.
Recommended Reading:
• Read in advance the next topic after this lesson.
Reference:
4
Formative Assessment
Self-Internalization Exercises
Use the space provided for your answers. You may use the back portion of this page or an extra
sheet if the space provided is not enough.
1. Explain why finance is both a science and an art.
2. Differentiate accounting from economics.
3. Discuss the terms in the operational definition of finance.
Reference:
5
1.2 AREAS OF FINANCE

Though there is no standard or universally accepted dichotomy of finance areas, the
suggested division of finance as illustrated in Figure 1 provides the general perspective of this
specialized field. The division is based on the different finance subjects prescribed by the
Commission on Higher Education (CHED) for the tertiary business curriculum.
Figure 1. Areas of Finance
Private Finance
Private finance is the management is the management of financial resources of private
individuals, non-governmental organizations, and private organizations in accordance with the
prescribed financial policy and priority of the person or business organization.
Public Finance
Public finance is the allocation of government income generated from either taxation or
borrowings and the government expenditure based on the approved national and local appropriate
or budget. Public finance is also termed as fiscal administration.
In the Philippines, the national agency primarily involved in the exercise of finance
function is the Department of Finance (DOF) along with its collecting and regulatory offices such
as the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), the Land Transportation
Office (LTO), and the Land Transportation and Franchising and Regulatory Board (LTFRB).
The DOF, however, works closely with other national government agencies such as the
Department of Budget and Management (DBM), the Bangko Sental ng Pilipinas (BSP), the
Securities and Exchange Commission (SEC), and even the two houses in the congress of the
Philippines in the formulation of laws and policies, and appropriation, allocation, administration,
and spending of public funds.
Public finance or fiscal policy and administration is taken up in college under business
program.
Reference:
6
Personal Finance
Personal finance is a sub-category of private finance which is directed towards the
management of personal resources of an individual. The income of an individual is sourced from
compensation, exercises of profession, or business income as a sole proprietor, Income is allocated
based on the individual’s personal needs such as household expenses, education, hospitalization,
and acquisition of personal and real properties.
Business Finance
Business finance is an area of finance that focuses on the handling and management of
financial resources of the business organization. The three major divisions of business finance are
financial management, capital market, and financial investment.
Financial management focuses on capital budgeting decision or investment on the
acquisition of assets and its corresponding financing scheme. This area of finance answers the
following questions:
a) What kind of assets shall be acquired?
b) What type of financing scheme shall be used in the acquisition of the assets?
For example, in a planned transportation business, Jenny intends to buy a utility vehicle to
transport passengers from Cotabato City to Davao City. She has to decide whether to buy a 15-
seater, a 30-seater, or 50-seater transportation vehicle. Further, Jenny has to decide what financing
scheme to be use in buying the vehicle. These decisions are covered by financial management.
Financial management is further discussed in finance subjects at the tertiary level.
Capital Market is an area of business finance that studies the different financial
institutions and their functions that provide assistance to both private and public borrowers of
funds. It also includes the study of the cost of borrowing the funds such as internet and other
financing charges. Capital market is covered in a finance curriculum at the tertiary level.
Financial investment includes business decisions about the value and price of stocks and
bonds, portfolio analysis, market analysis, security analysis, and the behavior of the investors. This
area of business finance is likewise discussed lengthily in a finance course in college.
Reference:
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1. Differentiate the two broad areas of finance.
2. Discuss the sub-classification of private finance.
3. Describe the three major divisions of finance.
Reference:
8
1.3 FINANCE IN A BUSINESS ORGANIZATION

In business organization, finance has elevated its status as one functional area. In a typical
arrangement of a business organization, four functional divisions are involved:
1. Production and operations division
2. General administrative or human resource division
3. Finance division
4. Marketing division
Figure 2. Finance in a Business Organization
Some business organizations also elevate information technology and system as one
functional area. In large entities, the finance department is headed by the vice president for finance
while in medium or small organizations; the common designation of the head of finance
department is a comptroller or finance officer.
Figure 2 presents the typical organizational arrangement of finance in business
organization.
Some business organizations follow a structure of two major divisions under the president
or chief executive officer. These two are the operating division and finance division.
Reference:
9
The operating division handles the marketing, production and operation, and human
resource functions. It is usually headed by the chief operating officer (COO). The finance division,
on the other hand, is headed by the chief finance officer (CFO) and handles the accounting and
treasury functions. This type of organizational structure is illustrated in Figure 3.
Figure 3. Finance in a Business Organization

No specific or rigid rule governs the structuring of finance in the organization. The nature
and type of business organizations, the product or services provided by the customers, the scope
and coverage of operations, and the complexity of the business operations are some of the factors
that influence the place of finance in the structure of a business.
A medium-sized business has a simpler finance structure compared to a business with
operating activities in a foreign country. Similarly, a rural bank that operates within one province
has a simpler finance structure compared to a commercial or international bank with banking
activities worldwide.
1.4 FUNCTIONS OF FINANCE OFFICER

The finance officer plays a crucial role in the whole business organization. He or she acts
as the wary financial traffic officer to almost business transactions with monetary considerations.
The finance officer is also expected to be the “shock absorber” of budgetary request and
requirements of the other functional units of the business.
For example, the marketing division request for heavy advertising and promotional
campaign for their product to penetrate the target market. The cost of advertising, however, may
have significant financial implications for the operating expenses of the business. In this case, the
finance officer may control or limit the funds for advertising contrary to the desire of the marketing
officer. The same things happens when the operation and production division require a substantial
acquisition of a raw materials for production purposes but the cost of maintaining higher level of
inventory will significantly affect the cash flow of the business.
Therefore, the finance officer, depending on the business structure, is primarily responsible
for managing the finances in the organization. Exercising functions in finance is a very delicate
task that requires substantial knowledge of economics and accounting. The professional judgment
of the finance officer in routine and occasional transactions is the product of his or her varied
Reference:
10
experience and strong educational background in accounting, economics, and even operation
science.
The finance officer is heavily engaged in making decisions for the business to attain its
objectives at the optimum level. His or her decision-making function is broadly classified into thee
(as illustrated in Figure 4):
1. Operating decisions
2. Investing decisions
3. Financing decisions
Figure 4. Types of Financial Decisions Executed by the Chief Finance Officer
Operating Decisions
Operating decisions are financial
decisions affecting the routine operating
activities of a business. It is directed towards
providing immediate solution to the concerns of
the functional areas of the firm such as
manufacturing, marketing, purchasing and the
like.
The ordinary business activities are
characterized by the nature of a business. For
example, a merchandising business is largely
involved in the buying and selling activities.
Hence, the operating decisions made by the
financial officer are focused mainly on the
buying, selling, and operating expenses.
A bank is engaged with providing funds to borrowers and safeguarding the money
entrusted by the depositors in accordance with the prescribed rules and regulations of the BSP. As
such, the operating decisions of its finance officer revolve around the evaluation of the operating
expenses against the budget, payment of ordinary expenditures, monitoring of past due accounts,
determination of the cash level must be maintained in the vault against total deposits, and
avoidance of penalties and surcharges for any violations of compliance requirements of the BSP
rules and regulations and banking laws.
Reference:
11
The opening decisions made by a finance officer are, therefore, routine in character.
Through the operating decisions do not entail very critical analysis if the economic and business
environment, the finance officer shall still exercise due purchase and wise judgment in making
such decisions.
Investment Decisions
Investment decisions deal with choosing small and large projects with several investment
opportunities. The different projects are critically evaluated in term of return of investment and
expected cash flows. However, investment decisions are made only when investment opportunities
come.
The different economic information or variables such as the
prime interest rate, discounted rate expected cash flow for several
periods, total and net estimated cost of investment, and rate of
return must be determined and compound correctly if not readily
available. Substantial mathematical computations are usually
performed to have a quantitative basis in making investment
decisions.
In making an investment decision, a large amount of money
is involved. For example, the decision to construct as power plant involves an amount of not less
than P 20 Billion. The investment decision to construct a cement processing plant requires billions
of pesos. Hence, an erroneous investment decision will have an adverse effect on the entire
business operation. Making an erroneous investment decision can lead to the downfall of the
business.
Investment decisions also included placing extra money or funds to stocks and bonds.
Holding the money in excess of the required funds of the ordinary business activities does not
provide much benefit to the business. Sound finance management dictates that excess and idle cash
must be properly invested on fruitful ventures like the stock market.
Financing Decisions
Financing decisions deal with raising or acquiring of funds from outside sources and not
form the ordinary results of the business operations. In other words, financing decisions are made
when the business needs to borrow money.
A business can raise money from the following activities or sources:
1. Operations
2. Investors or lenders
3. Owners
Funds from the operations are intently
generated money. Financial decisions relative
to these funds are classified under operating
decisions. Internally generated funds,
however, are partly returned to the owners of
the company in the form of dividends.
Funds that come from the outside
sources such as investors, lenders, and
company owners are a result the financing
activities of the business.
Reference:
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Borrowing funds from the outside sources, the business pays interests for the use of
money. The finance officer must weight and evaluate the cost of borrowings funds. The right mix
of debt portfolio must be properly evaluated.
In making a financing decision, the following questions must be answered:
1. How much should be borrowed from the external sources?
2. What is the allocation for the borrowed funds into the short term and long term?
3. Will the much-needed funds be sourced from creditors or company owners?
4. Is the borrowing short term or long term?
5. What is the expected cost of borrowings the funds?
Reference:
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1. Under normal situations, what are the four functional areas of a business?
2. What are the differences in the functions of the two units under the provisions of a chief
finance officer?
3. What are the three decision-making functions of a finance officer?
Reference:
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1.5 QUALIFICATIONS OF A FINANCE OFFICER

The delicate position occupied by the chief finance officer in a business along with the
highly technical activities inherent to the role primarily dictates the stringent requirements for the
position.
The Chief finance officer must have the following requirements:
Reference:
15
1. Discuss the finance officer’s need for understanding the other functional areas of the
business.
2. Explain the reasons why a finance officer should have a good communication skill
Reference:
16
Topic : Unit 1 Introduction to Finance

: Chapter 2 Financial Institutions, Instruments, and Markets
Week/Date :
Learning Outcomes
1. Describe a business environment;
2. Discuss the financial system;
3. Identify the elements of a financial system; and
4. Differentiate bonds from stocks.
2.1 FINANCIAL INSTITUTIONS, INSTRUMENTS, AND MARKET

The business does not operate in a vacuum but is an environment influenced by various
forces, variable, and systems. In marketing or entrepreneurship, the environment where the
business operates is broadly classified as either macro or micro environment. In finance, the
business environment is divided into international, national, regional, and local level. Regardless
of the nomenclature on the business environment layers, business is affected by different outside
forces.
One of the environmental layers of the macro environment is the societal environment; this
environment is made up of the following system illustrated in Figure 5:
1. Political system Figure 5. The Business Environment

2. Financial system
3. Economic system
4. Socio-cultural system
5. Technological system
6. Legal system
The financial system is one of the
factors that directly or indirectly affect the
financial operation of a business organization.
A system is composed of several parts within
interrelated functions.
2.2 THE FINANCIAL SYSTEM
The Financial system at the societal environment or regional level is principally

responsible. For the flow of money or funds form the lender to the borrower. The financial system
controls, regulates, facilitates the saving, borrowing, lending, and investing activities happening
among the different players in the system.
Figure 6 illustrates the structure of a typical financial system. This system is highly
responsible for the channeling of funds from the savings of the household or business to the
individual and corporate organizations that need funding support through financial institutions,
financial intermediaries, and financial instruments.
Reference:
17
Figure 6. Typical Financial System
In the Philippines financial system, the government plays an active role in the flow of
money in the economy through the Bangko Sentral ng Pilipinas (BSP). The BSP regulates the
operations of the financial institutions and financial intermediaries.
The basic elements of a financial system are as follows:
1. Financial institutions
2. Financial markets
3. Financial instruments
4. Lenders and borrowers
Only the first three elements will be discussed in the succeeding sections since these
concepts are new to you.
Reference:
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1. State the different forces or system in the societal environment that may affect the business
organization.
2. Define financial system at the regional level.
3. Identify the basic elements in a typical financial system.
Reference:
19
2.3 FINANCIAL INSTIRUITIONS

People commonly equate financial institutions with banks. However, the term does not
simply refer to banks.
Financial institutions are institutions or organizations that provide financial services,
among others, in the form of loan, credit, fund administration, financing, depository, and
safekeeping.
Financial institutions, based on the financial services provided, are generally classified as
follows:
1. Depository institutions
2. Financial intermediaries
3. Investment institutions
Figure 7. Illustrations of financial Institutions
Depository Institutions
Depository institutions are financial institutions that accept deposits (savings, current, and
time deposits) form individuals and corporate entities, extend loans to borrowers, transfer funds
and manage funds for investment purposes.
The depository institutions include the Banks, savings and loan association, trust
companies and credit unions as illustrated in the Figure 7.
Banks. Banks are institutions authorized to operate and regulated by BSP under the General
Banking Law of 2000. They accept deposits and bills payment, provide loans, and facilitate the
transfer of funds domestically or abroad.
Under the BSP Circular No. 271, the major classifications of banks operating in the
Philippines are illustrated in the Figure 8.
Reference:
20
Figure 8. Classifications of Banks
Universal bank. A universal bank is considered the biggest bank in terms of assets, loan,
portfolio, and revenue. It has the widest scope of banking activities authorized by the BSP and
usually has the most branches nationwide and abroad.
Commercial Bank. It is a type of bank that provides commercial loans and offers
investment products in addition to the regular banking service of accepting deposits. There are also
number of branches across the country. The minimum capital requirement of the commercial bank
is lower compared to that of the universal bank.
Thrift Bank. As defined in the Republic Act No. 7906, include savings and mortgage
banks, private development banks, and stock savings, loan association, and microfinance thrift
banks that are organized under existing laws of the following purposes:
1. Accumulating and investing the savings of depositors
2. Providing working capital to businesses engaged in agriculture, service and housing.
3. Providing diversified financial services to individuals and small and medium enterprises.
Rural Banks and Cooperative Banks. Rural and cooperative banks and organized and
operating in the rural area. They are intended to promote the rural economy by providing the people
with basic financial services.
The primary target market if rural and cooperative banks are farmers who need financial
help in the production and marketing of agricultural products. Rural and cooperative banks are
also engaged into micro financing to assist small individual entrepreneurs.
Islamic Bank. The Islamic bank, which has been created and organized under R.A No.
6848, aims to promote and accelerate the socio-economic development of the Autonomous Region
of Muslim Mindanao by performing banking, financing, and investment operations and to establish
and participate in agricultural, commercial, and industrial ventures based on the Islamic Concept
of banking. All business dealings and activities are subject to the basic principle and ruling of
Islamic Sharia law.
Savings and Loan Association. A saving and loan association, sometimes referred to as a
financing and mortgage loan company, is a financial institution that is engaged in the business of
accumulating savings of its member and stockholders, and using such accumulations for loans or
investments in securities if productive enterprise. The savings and loan association, which can be
stock or non-stock, is created and regulated under R.A No. 3779, as amended by R.A No. 4378.
Reference:
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Trust Companies. A major division of universal or commercial bank, that acts as a

fiduciary agent or trustee on behalf of an individual person or corporate entity for the purpose of
management, administration, and final transfer of property to the beneficiary.
Credit Union. It is a financial depository institution that is mainly controlled and operated
by its member for the following purpose:
1. Extending credit to members
2. Offering competitive interest rates
3. Promoting concept of thrift
4. Providing other types of financial services.
Credit unions exist to help and extend financial assistance to the members by pooling and
accumulating funds from all the members. Only those who have accounts with credit union are
considered member and owners.
Reference:
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1. Define financial institutions
2. State the three-broad classification of financial institutions
3. Describe the following:
a. Universal bank d. Rural bank
b. Commercial bank e. Cooperative bank
c. Thrift bank f. Islamic bank
4. Describe the nature of savings and loan association.
5. Discuss the concept of a trust company.
6. Describe the organizational concept of a credit union.
Reference:
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Financial Intermediaries
Financial intermediaries are a type of financial intuitions that acts as the middle person
between two parties – investors and the borrowers. Financial intermediaries do not have depository
functions similar to banks and other institutions though some have a wide range of financial
services.
Hence, financial intermediaries refer to the following:
a) Mutual funds
b) Pension funds
c) Insurance companies
Mutual funds. Mutual funds accumulate money by selling shares of stocks or bonds of
publicly-listed corporations to individuals or corporate investors. The funds form the proceeds of
the sale are pooled together to channeled to the borrowers.
Pension Funds. A pension fund is set up by a business for the purpose of paying the
pension requirements of all private-sector employees who retire form the business organization
upon reaching the retirement age.
Insurance Companies. An insurance company acts as a financial intermediary by pooling
together the proceeds of insurance policies sold to public and investing the accumulated funds in
highly-yield maturing securities from the investment houses.
Insurance companies may offer the following products to the public:

a) Life insurance
b) Health insurance
c) Car insurance
d) Fire insurance
e) Crop insurance
f) Marine insurance
g) Other insurance products
In return, the individual or the business pays a premium to the insurance company in
exchange for the expected benefit of the company or the individual may receive when risk happens.
Investment Institutions
An investment institution is a company engaged in buying securities of other companies
which are listed in the security in exchange for the investment purposes only. Financial securities
are help up to the time of their maturity. This Financial institution earns income from holding the
securities in the form of interest and dividends. An investment institution is usually composed of
very wealthy investors. Mutual funds and insurance companies likewise pool their financial
resources together to form an investment company for investment purposes only.
Reference:
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1. Differentiate financial intermediaries from depository institutions.
2. Describe the following financial intermediaries:
a. Mutual funds
b. Pension funds
c. Insurance companies
3. Discuss the basic operation of investment institutions.
Reference:
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2.4 FINANCIAL MARKETS

Another element that plays crucial in the whole financial system at the national or
international level is the financial market.
Market refers to the place where the buyers and sellers of goods and services meet. In the
market, the major business happening is the selling-buying activity, in which exchange occurs.
The exchange process indicates that the seller and the buyer agree on the exchange price.
Financial Market refers to the place where the selling-buying activity occurs to trade equity
securities such as bonds and stocks, currencies, securities, notes and mortgages. The selling-buying
transaction happening in the financial market is called trading security.
Types of financial market, among other, include the following:
1. Capital market
2. Money market
3. Primary market
4. Secondary market
5. Public market
Capital Market
Capital Market is a financial market where stocks and bonds are issued for medium- and
long-term period. Investors who hold stocks receive return from their investment in the form of
dividends while whose hold bonds earn income in the form of interest.
In the Philippines, the capital market is the Philippine Stock exchange (PSE) created in
1994 from two defunct capital markets-the Manila Stock Exchange and the Makati Stock
Exchange.
Money Market
The financial market is classified as money market when the financial securities being
traded have a period of less than one year. This type of security is called shot-term security. Since
short-term are not intended to be held more than one year, they are also referred to as trading
securities. The Philippine Stock Exchange is both a capital and money market.
Primary Market
Primary market is financial market where company can issue new shares of stock. Stock
Corporation that needs fresh capital can raise the required funds by issuing new shares of stocks.
New share can be issued only by the corporation from the unissued authorized shares. Therefore,
the trading of financial securities in a primary market happens between the issuing corporation and
the investors or investment bank.
Secondary Market
The secondary market is a financial market where financial securities are traded between
or among the investors. In the secondary market, there is no issuance of new shares from the
corporation.
Public Market
Public Market is a market in which the financial securities of the publicly-listed corporation
are traded following the standardized contract agreement and procedures. A public market is an
organized financial market.
Reference:
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1. Discuss the primary activity happening in a market
2. Define financial market
3. Discuss the following types of financial market:
a. Capital market d. Secondary market
b. Money market e. Public market
c. Primary market
Reference:
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2.5 FINANCIAL INSTRUMENTS

The third element of the financial system at the regional and national level is the financial
instrument. Without it, financial institutions and financial markets can hardly exist. The financial
institutions and financial markets carry out their activities through the financial instruments.
Financial instruments refer to the contracts that give rise to the formation of the financial
assets of one entity and at the same time the creation of a financial liability or an equity instrument
in another entity.
The most common forms of financial instruments are as follows:
1. Cash – on the part of the holder, cash is a financial asset. However, on the part of the
government such as BSP, cash is a financial liability.
2. Check – it is a financial asset of the payee, but is considered a financial liability to the
drawer or issuer.
3. Loan – is a financial asset to the lender or creditor and a financial liability to the borrower
of debtor.
4. Bond – it is a financial asset to the holder or investor but a financial liability fo the issuing
company.
5. Stocks – it is a financial asset of the investor or shareholder but an equity to the issuing
company.
Bonds
Business entities may raise the necessary funding requirements to support their investing
activities by issuing bonds. Similarly, the Philippine government, when it falls short on the
collection of taxes and import duties, may raise the necessary money to support expenditures by
issuing of floating bonds either on the local market or abroad. A Bond is a financial instrument
that represents a contractual debt of the party issuing the bond. This type of financial instrument
is evidenced by a certificate called bond indenture.
The most common types of bonds are as follow:

1. Term bond – it is a bond that has a single maturity date. The bond can be single lone bond,
or can be composed of several bonds with the same maturity date.
2. Serial bond – is a kind of bond that has a series of maturity dates instead of single maturity
dates.
3. Secured bond – it is a type of bond that is secured by the issuing company.
4. Debenture bond – a bond is considered debenture bond when it is not supported by any
collateral or security as assurance in times if non-payment or default.
5. Convertible bond – a bond is a debt security. As such, a bondholder is also referred to as a
creditor.
6. Callable bond – bonds that have maturity dates indicated on the face of the indenture.
Reference:
28
Stocks
Stock is a financial security that signifies ownership of the assets of the corporation. Only
stock corporations are authorized by the SEC to issue stocks. Hence, sole proprietorship and
partnerships can never issue shares of stocks. The holder of the shares of stock evidenced by the
stock certificate is called shareholder or stockholder.
The two major types of stocks are as follows:
1. Common stocks or ordinary shares – the common stock or ordinary share is a financial
instrument whose holder does not have preferences over each other. The common
stockholders have the same rights and privileges in terms of divided or assets distribution
with other stockholders. A common stock is a voting stock.
2. Preferred stock or preference shares – the preference share is a kind of stock that is
preferred over common stock. These preferences are in terms of the following:
a) Distribution of earnings or dividend distribution
b) Net assets of the time of liquidation
The privileges of the preference shares outline the distinct difference between common
stockholders and preference stockholders. However, preference shareholders do not have voting
rights.
Reference:
29
1. Explain financial instruments.
2. Give some examples of financial instruments.
Reference:
30
Unit 1 - Summative Assessment
1.1 True or False
Write True if the statement is correct. If it is not, write False.
____________1. The term finance has a standard definition that is universally recognized and
accepted.
____________2. Finance connotes money.
____________3. Finance is considered a science since it involves financial facts and truths.
____________4. Finance is static.
____________5. Finance intrudes the fields of accounting and economics.
____________6. Financial management is primarily focused on the allocation of public resources.
____________7. Financial investment, as an area of finance, is directed towards the evaluation
and study of financial institutions and their functions in a financial community.
____________8. In large companies, the head of the finance division is designated as the chief
finance officer.
____________9. The two offices under the direct supervision of the finance officer are accounting
and treasury.
____________10. The accountant can likewise perform the functions of the treasurer in a business
organization.
1.2 True or False
____________1. Finance is a science but not an art.

____________2. Public finance checks whether public funds are properly spent.
____________3. The Philippine government agency primarily involved in the exercise of finance
functions is the Department of Budget Management.
____________4. Capital market is a specialized branch of business finance involved in the study
of financial institutions and their functions.
____________5. Finance is one functional area of a typical business organization.
____________6. The operating decision of the finance officer is related to the day-to-day activities
of the business.
____________7. The decision of the finance officer regarding the opening of a branch is a
financing decision.
____________8. The making of an operating decision is more delicate and critical than that of an
investment decision.
____________9. Financing decision usually affects the creditors and the business owner or
owners.
____________10. It is enough for the finance officer to have knowledge of accounting.
Reference:
31
2.1 True or False
____________1. The operation of the business organization is affected by several forces outside
of the organization.
____________2. The financial system exists and operates only at the regional level or societal
environment.
____________3. There is a standard structure for a financial system operating in the regional or
organizational level.
____________4. The basic elements compromising the financial system are financial institutions
and financial markets.
____________5. Any financial system cannot exist without the presence of financial instruments.
____________6. The only financial institution that has active participation in the financial system
is the bank.
____________7. Depository institutions include trust companies and credit unions.
____________8. The biggest type of bank in terms of assets or loan portfolio is the thrift bank.
____________9. A thrift bank may also perform the financial activities of investment houses.
____________10. Rural banks and cooperative banks are allowed to invest their funds in the
equities of non-banking institutions.
2.2 True or False
____________1. A commercial bank operates just like a universal bank but has limited financial
activities and capital requirements.
____________2. The main difference between a rural bank and a cooperative bank is the amount
of capital requirements.
____________3. The main target consumers of a thrift bank are farmers and agricultural funding
activities.
____________4. In a savings and loan association, anybody can make a deposit and avail himself
of its loan services.
____________5. A commercial bank or a universal bank can also be classified as savings and loan
association.
____________6. A trust company acts as trustee of the properties on behalf of the beneficiary for
a fee.
____________7. Universal or commercial banks are prohibited from operating like a trust
company.
____________8. Financial institutions include credit unions.
____________9. Generally, a bank is operating just like a financial intermediary.
____________10. The primary role of the financial intermediary is to raise money from investors
and offer it to debtors as borrowed funds.
Reference:
32
Topic : Unit 2 Analysis and Interpretation of Financial Statements

: Chapter 3 Financial Institutions, Instruments, and Markets
Week/Date :
Learning Outcomes
1. Describe the nature of financial statement analysis;
2. Perform horizontal and vertical analysis; and
3. Do vertical or common-size and trend percentage analysis
3.1 NATURE OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is the
process of selecting related data from the
financial statement to evaluate the entities past
financial position and operating performance
and predict the outcome of future operations.
The information provided in the
financial statements, along with other
information in the notes, assists in predicting
the entity’s future cash flows and, in particular,
their timing and certainty. The data can also
reflect the financial strength and weaknesses of
an entity.
The financial statements become more meaningful, understandable, and relevant to the
users if the pieces of information contained therein are analyzed and interpreted. The movement
of other accounting values that directly or indirectly affects a specific amounting value is
considered.
The type of information provided by the financial statement focus primarily on the
following areas:
a) Financial position
b) Result of financial operation
c) Cash flows
d) Management stewardship of resources
The basic objective of financial statement analysis is to assist the different users in the
decision-making process.
The following procedures may be adopted in analyzing financial statements:
1. Establish the objective of financial statement analysis
2. Gather complete information about the firm and study the industry in which the firm
operates
3. Perform mathematical analysis using the applicable tools
4. Make conclusions relative to establish objectives
In this section, the methods of analyzing the financial statements include the following:
1. Horizontal or comparative approach 3. Trend approach
2. Vertical or common-size approach
Reference:
33
3.2 HORIZONTAL OR COMPARATIVE APPROACH

The horizontal or comparative analysis approach is an analytical tool that evaluates the
present performance of an entity compared to last year. The analysis reflects the differences in
absolute amount and in percentage between two periods only, namely the present year and the
previous year.
The primary objective of horizontal or comparative analysis is to determine the present
status of the business particularly in terms of financial position, result of operation, and cash flows
against last year only. The financial statements ended December 31, 2019 can be compared with
and evaluated against those ended in December 31, 2018
The two methods of performing horizontal or comparative analysis:
1. Absolute amount comparison – the absolute amount of each item appearing in the financial
statements is determined by deducting the amount of the current date financial statements
from the amount of the previous year. This method identifies the items that are changing
the most.
2. Percentage comparison – this method works on percentage of change which is determined
by dividing the absolute amount of change by the base figure.
The basic concept in analyzing the financial statement using horizontal or comparative
analysis is to look for significant changes, and to determine their probable causes.
The following simple guidelines may be observed in the horizontal analysis:
1. Present the current and previous year’s financial statement in comparative format.
2. Compute the absolute amount of change or difference. The difference could be either an
increase or a decrease.
3. Express the difference in percentage by dividing the amount of change by the base.
4. The computation of percentage of change will not apply if the base amount is negative or
zero.
5. Interpret the change of an item by relating it with the change or movement of other related
items.
Reference:
34
Illustration 1. Horizontal or Comparative Approach

MAGRE Corporation presents the horizontal and comparative analysis of the financial
position appears as follows:
MARGRE CORPORATION
JP Laurel Ave., Davao City
STATEMENTS OF FINANCIAL POSITION
As Of December 31, 2019 & 2018
(In Philippine Peso)
2019 2018 Increase Peso
(Decrease) percent
ASSETS
Current Assets
Cash 6,498,975 10,373,940 - 3,874,965.00 -37%
Trade Receivables 114,844,193 317,737,251 - 202,893,058.00 -64%
Inventories 295,626,612 304,323,313 - 8,696,701.00 -3%
416,969,780 632,434,504 - 215,464,724.00 -34%
Non-current Assets -
Property and Equipment,net 8,683,849 10,600,111 - 1,916,262.00 -18%
Other Assets 1,012,803 1,169,751 - 156,948.00 -13%
Deferred Income Tax Assets 355,898 355,898 - 0%
10,052,550 12,125,760 - 2,073,210.00 -17%
TOTAL ASSETS 427,022,330 644,560,264 - 217,537,934.00 -34%
LIABILITIES & SHAREHOLDERS' EQUITY -
Current Liabilities -
Trade and Other Payables 234,891,918 465,565,532 - 230,673,614.00 -50%
Income Tax Payable 186,665 194,211 - 7,546.00 -4%
TOTAL LIABILITIES 235,078,582 465,759,743 - 230,681,161.00 -50%
SHAREHOLDRERS' EQUITY -
Capital Stock 60,000,000 60,000,000 - 0%
Additional Paid-in Capital 8,590,947 8,590,947 - 0%
Retained Earnings, restricted 75,000,000 75,000,000 - 0%
Retained Earnings,unrestricted 48,352,800 35,209,575 13,143,225.00 37%
TOTAL SHAREHOLDERS' EQUITY 191,943,747 178,800,522 13,143,225.00 7%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 427,022,330 644,560,264 - 217,537,934.00 -34%
Reference:
35
The horizontal analysis of the statement of comprehensive income with peso and percentage
changes appears as follows:
MARGRE CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2019 & 2018
Sched 2019 2018 Increase Peso
(Decrease) percent
SALES 2,403,908,859 2,506,178,812 - 102,269,953.00 -4%
COST OF SALES 2,323,489,519 2,414,764,762 - 91,275,243.00 -4%
GROSS PROFIT 80,419,340 91,414,050 - 10,994,710.00 -12%
OPERATING EXPENSES 60,908,404 70,031,756 - 9,123,352.00 -13%
NET PROFIT FROM OPERATIONS 19,510,936 21,382,294 - 1,871,358.00 -9%
OTHER INCOME(CHARGES) -
Interest Income - Bank 18,985 22,335 - 3,350.00 -15%
-
18,985 22,335 - 3,350.00 -15%
NET PROFIT BEFORE INCOME TAX 19,529,921 21,404,629 - 1,874,708.00 -9%
PROVISION FOR INCOME TAX -
Current 6,386,696 6,431,531 - 44,835.00 -1%
NET PROFIT 13,143,225 14,973,099 - 1,829,874.00 -12%
The Horizontal analysis of MARGRE Corporation indicates of the following:

1. There is a decrease in the total current assets by -34%. The total current liabilities, however,
decreased by -50%. This change may indicate that the inflow or conversion of resources
into current assets was a bit faster compared to the incurrences of obligation. Though the
year 2019 may not be favorable to the corporation.
2. Generally, trade receivable comes from sales. The percentage of decrease of both the trade
receivable and sales prepared to be at -64% and -4% respectively. This relationship may
indicate that sale on account had been collected promptly.
3. The inventories, which are intended for sale, decreased by 34%. The sales of the business,
on the other hand, also decreased by -4%. This relationship may indicate non-favorable
relationship of business with the customers since goods were immediately purchased.
4. The non - favorable conversion of receivable and inventories into cash contributed to the
decrease of cash and cash equivalents by -37%.
5. The decrease in other liabilities contributed to the reduction of total liabilities by 50%.
Conclusion. The different changes in current assets, current liabilities, and other related
items indicated non-favorable liquidity status of MARGRE Corporation at the end of 2019
operations compared with that of 2018.
Reference:
36
1. Discuss the concept of horizontal analysis.
2. Identify the steps to take or follow when performing a horizontal analysis.
3. State the primary objective of horizontal analysis.
Reference:
37
3.3 VERTICAL OR COMMON-SIZE APPROACH

The vertical or common-size approach is an analytical tool that determines the size or
proportion of an item in the financial statements in relation to the total.
This approach involves the process of determining the proportional component of each
item in the financial statements in relation to the base. The accounting period involved in the
mathematical process is one or single period only.
For example, if the cash and cash equivalents on December 31, 2019 are analyzed using
the vertical analysis method, the amount shall be evaluated against the chosen base of 2019
accounting period. No other reference accounting period shall be used in the evaluation process
except that of year 2019 only.
Vertical analysis is a tool that determines whether the business is operating according to
its nature. It is expected that the business allocates more funds for the accounting element that
contributes mainly to corporate profitability, liquidity, and solvency.
The following guidelines may be observed in the preparation of common-size financial
statements:
1. Convert the absolute peso amount of the items in the financial statements into percentage by
dividing each item by the base. The base shall be equal to 100%
2. Use the following as a base:
a. Total assets for statement of financial position;
b. Total or net sales for statement of comprehensive income; and
c. Total cash available for the statement for cash flows.
3. Make a conclusion on the allocation and indications of possibilities.
Illustration 2. The common-size statement of financial position appears as follows:

MARGRE CORPORATION
STATEMENTS OF FINANCIAL POSITION
As Of December 31, 2019 & 2018
2019
ASSETS
Current Assets
Cash 6,498,975 1.52%
Trade Receivables 114,844,193 26.89%
Inventories 295,626,612 69.23%
416,969,780 97.65%
Non-current Assets
Property and Equipment,net 8,683,849 2.03%
Other Assets 1,012,803 0.24%
Deferred Income Tax Assets 355,898 0.08%
10,052,550 2.35%
TOTAL ASSETS 427,022,330 100.00%
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Trade and Other Payables 234,891,918 55.01%
Income Tax Payable 186,665 0.04%
TOTAL LIABILITIES 235,078,582 55.05%
SHAREHOLDRERS' EQUITY
Capital Stock 60,000,000 14.05%
Additional Paid-in Capital 8,590,947 2.01%
Retained Earnings, restricted 75,000,000 17.56%
Retained Earnings,unrestricted 48,352,800 11.32%
TOTAL SHAREHOLDERS' EQUITY 191,943,747 44.95%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 427,022,330 100.00%
Reference:
38
Analysis: The common-size financial position shows that the total resources of the
company have been allocated as follows: 97.65% for current assets and 2.35% for non-current
assets. This allocation shall be evaluated in the light of the nature of the business and based on the
priorities of the management. It is also indicated in the common-size financial position that 55.05%
of the total resources have been provided by the creditors, and the remaining 44.95% have been
provided by the owner and the accumulated earnings of the business. It can be noted that vertical
analysis is very useful in determining the proportional allocation of resources. It provides valuable
information to the management and to prospective investors as to the resource’s allocation and
management priorities of the company or business.
MARGRE CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2019 & 2018
Sched 2019
SALES 2,403,908,859 100.00%
COST OF SALES 2,323,489,519 96.65%
GROSS PROFIT 80,419,340 3.35%
OPERATING EXPENSES 60,908,404 2.53%
NET PROFIT FROM OPERATIONS 19,510,936 0.81%
OTHER INCOME(CHARGES)
Interest Income - Bank 18,985 0.00%
18,985 0.00%
NET PROFIT BEFORE INCOME TAX 19,529,921 0.81%
PROVISION FOR INCOME TAX
Current 6,386,696 0.27%
NET PROFIT 13,143,225 0.55%
Analysis: the gross profit of the business at 3.35% was fairly enough to cover the operating
expenses of 2.53%. This operating performance resulted in an operating income of 0.81%. The
income tax provision, however, had reduced to operating income by 0.27%. Since the cost of sales
has a substantial share in operating cost and expenses of the business, the management should find
the necessary measures to reduce the cost of selling the goods. The management should also review
their pricing policy.
3.4 TREND PERCENTAGE APPROACH

The trend percentage approach is used to analyze financial statements that extend beyond
two years through the use of index numbers or percentage. It covers the absolute peso into
percentage.
The trend analysis, however, makes a comparative study of an operating performance of
the business over a number of years. Data for three years are the minimum requirements for this
type of analysis.
The reader of the financial statements is cautioned that the upward trend does not
necessarily indicate a favorable financial performance. The trend in one account of the financial
statements should be cross-referenced with the accounts that directly or indirectly affect it forming
a conclusion.
Reference:
39
The trend analysis assumes no change in the purchasing power of money. It is likewise
assumed that the changes occurring in the different items of the financial statements are mainly
attributed to the operating performance of the business and not because if the changes in general
price level.
The following guidelines may be followed in conducting a trend analysis:
1. Present tabular format the financial statements covering several years. The arrangement is
usually in ascending order of the dates.
2. Select a base year that is purely judgmental. The base year should, however, serves as
normal operating activity if an entity. Normally, the base year is the earliest year using in
the analysis and has an index of 100 or 100%.
3. Divide each absolute amount by the base year in order to determine the relationship of each
item with the base year. Multiply the result by 100 in order to express the data in
percentage.
Reference:
40
1. Discuss vertical analysis.
2. Describe the nature of trend analysis.
3. State the steps that may be observed in performing vertical analysis.
4. Explain how trend analysis is conducted.
Reference:
41
Topic : Unit 2 Analysis and Interpretation of Financial Statements

: Chapter 4 Analysis of Financial Statements: Financial Mix Ratio Approach
Week/Date :
Learning Outcomes
1. Explain financial mix ratio analysis;
2. Identify measures of liquidity;
3. Describe solvency ratios; and
4. Evaluate the business using profitability measures.
4.1 FINANCIAL MIX RATIO
Financial mix ratio analysis is an analytical tool employing the ratio or proportion of a
certain item in the financial statement vis-a-vis other related items in the same financial statement
or other statements to determine comparative performance.
In a financial ratio analysis, the item in the statement of financial position or statement of
comprehensive income being evaluated or compared is assumed to have a direct relationship with
other items in the statement.
The broad classifications of financial ratios are as follows
1. Liquidity ratios
2. Solvency or stability ratios
3. Profitability ratios
The focus of the evaluation is to determine the tendencies of the company’s liquidity,
solvency, profitability, and efficiency of management performance. The result of the studies assists
the management in identifying deficiencies and appropriate actions to improve the operating
performance.
4.2 LIQUIDITY RATIOS
Liquidity ratios area a group of ratios that measure the ability of the business firm to pay
off short-term obligations as they mature. These ratios show the relationship of the firm’s current
assets to current liabilities.
Current assets, on the one hand, are assets that are used, consumed, or sold within one year
or within the normal operating cycle of the business. Current liabilities, on the other hand, are
liabilities expected to be settled within 12 months after the date of the statement of financial
position.
The liquidity position of the firm often answers the question: Will the business firm be able to pay
off its currently maturing obligations when they fall due?
The liquidity ratios are as follows:

1. Current ratio 3. Receivable turnover
2. Quick or acid test ratio 4. Inventory turnover
Reference:
42
Current Ratio
The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables.
The current ratio compares all of a company’s current assets to its current liabilities. These
are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities
that will be paid in a year or less.
The current ratio is sometimes referred to as the “working capital” ratio and helps
investors understand more about a company’s ability to cover its short-term debt with its current
assets.
Weaknesses of the current ratio include the difficulty of comparing the measure across
industry groups, overgeneralization of the specific asset and liability balances, and the lack of
trending information.
Formula and Calculation for Current Ratio
To calculate the ratio, analysts compare a company's current assets to its current liabilities.
Current assets listed on a company's balance sheet include cash, accounts receivable, inventory
and other assets that are expected to be liquidated or turned into cash in less than one year. Current
liabilities include accounts payable, wages, taxes payable, and the current portion of long-term
debt.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
A current ratio that is in line with the industry average or slightly higher is generally
considered acceptable. A current ratio that is lower than the industry average may indicate a higher
risk of distress or default. Similarly, if a company has a very high current ratio compared to their
peer group, it indicates that management may not be using their assets efficiently.
The current ratio is called “current” because, unlike some other liquidity ratios, it
incorporates all current assets and liabilities.
Reference:
43
Illustration 1. Current Ratio
The records of YVONE Merchandising for two comparative periods are as follows:
Yvone Merchandising
Comparative Statement of Financial Position
December 31,2017 and 2018
2018 2017
Current assets
Cash and cash equivalents 7,500 10,000
Trade and other receivables 113,500 138,000
Inventory 302,000 238,000
Prepaid expenses 10,000 7,500
Total current assets 433,000 393,500
Non-current assets
Property, plant, and equipment 1,500,000 1,112,500
Investment in stocks 500,000 500,000
Total non current assets 2,000,000 1,612,500
Total assets 2,433,000 2,006,000
Current liabilities
Trade and other payables 118,500 104,500
Other current liabilites 50,000 42,500
Total current liabilites 168,500 147,000
Non-current liabilities
Bonds payable - 10% 500,000 500,000
Total liabilities 668,500 647,000
Owner's equity
Yvone capital 1,764,500 1,359,000
Total liabilties and owner's equity 2,433,000 2,006,000
Yvone Merchandising
Comparative Statement of Comprehensive Income
December 31,2017 and 2018
2018 2017
Sales 1,635,000 1,457,500

Expenses
Cost of sales 1,050,000 950,000
Selling expenses 185,000 170,000
Administration expenses 100,000 107,500
Total 1,335,000 1,227,500
Operating income 300,000 230,000
Interest expense 50,000 50,000
Income before tax 250,000 180,000
Income tax - 30% 75,000 54,000
Income after tax 175,000 126,000
Required: Compute the current ratio and make a simple analysis of the result
Reference:
44
Answer: The current ratios for years ended 2018 and 2017 appear as follows:
433,000
2018 ( ) = 2.57: 1.00
168,500
393,500
2017 ( ) = 2.68: 1.00
147,000
The current ratio of 2.68:1.00 in year 2017 indicates that for every ₱1.00 current liability,
Yvone Merchandising has an available amount of ₱2.68 current assets.
The current ratio of Yvone Merchandising maybe evaluated as follows:
a. The current ratio of 2.57:1.00 in 2018 indicates that the business appears to be liquid since
it has more current assets to settle its current liabilities.
b. The decrease of current ratio from 2.68 to 2.57 may appear to be an unfavorable trend since
the increase in current liabilities is faster than that of the current assets.
To see the significance of the current ratio, it should be compared with the industry average.
In case the industry has a current ratio of ₱3.08:1.00, then the liquidity status of Yvone
Merchandising may not appear favorable.
Quick Ratio or Acid-Test Ratio
In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio,
which measures the ability of a company to use its near cash or quick assets to extinguish or retire
its current liabilities immediately. The quick ratio is a measure of how well a company can meet
its short-term financial liabilities. It is defined as the ratio between quickly available or liquid
assets and current liabilities. Quick assets are current assets that can presumably be quickly
converted to cash at close to their book values. These include cash, marketable or trading
securities, and trade or accounts receivables. Marketable or trading securities and trade or accounts
receivables are convertible easily into cash without reducing much the value of the assets.
𝑸𝒖𝒊𝒄𝒌 𝒂𝒔𝒔𝒆𝒕𝒔 = 𝑪𝒂𝒔𝒉 + 𝑻𝒓𝒂𝒅𝒊𝒏𝒈 𝒔𝒆𝒄𝒖𝒕𝒊𝒆𝒔 + 𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
A normal liquid ratio is considered to be 1:1. A company with a quick ratio of less than 1
cannot currently fully pay back its current liabilities.
The quick ratio is similar to the current ratio, but provides a more conservative assessment
of the liquidity position of firms as it excludes inventory, which it does not consider as sufficiently
liquid.
It does this by eliminating all but the most liquid of current assets from consideration.
Inventory is the most notable exclusion, because it is not as rapidly convertible to cash and is often
sold on credit. Some analysts include inventory in the ratio, though, if it is more liquid than certain
receivables.
𝑸𝒖𝒊𝒄𝒌 𝑨𝒔𝒔𝒆𝒕𝒔
𝑸𝒖𝒊𝒄𝒌 𝒓𝒂𝒕𝒊𝒐 𝒂𝒄𝒊𝒅 − 𝒕𝒆𝒔𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Reference:
45
Illustration 2. Quick Ratio or Acid-Test Ratio
To illustrate the quick ratio, the information provided in illustration 1 will be used.
Required: Compute the quick ratio for two years and make a simple analysis
Answer: The quick assets of the business appear as follows:
2018 2017
Cash and cash equivalents 7,500 10,000

Quick assets 121,000 148,000
Substituting the data to the formula, the acid-test ratio of Yvone Merchandising is
computed as follows:
121,000
2018 ( ) = 0.72: 1
168,500
148,000
2017 ( ) = 1.00: 1
147,000
The acid-test ratio maybe evaluated as follows:
1. The exclusion of inventories and prepaid expenses from the current assets resulted in a
significant drop of the ratios between the current asset ratio and quick acid test. The
business has a current ratio of 2.57 as computed in illustration 1, but it has a quick ratio of
0.72 in 2018. This result clearly indicates that the business has a significant amount of
resources in the inventory.
2. The quick ratio of the business has dropped in 2018 from ₱1.00 to ₱0.72 for every ₱1.00
of current liability. This trend is usually considered unfavorable. Similarly, it must be
evaluated in line with the industry standards in order to appreciate the significance of the
indicator.
Receivable Turnover
Receivable Turnover Ratio is an accounting measure used to measure how effective a

company is in extending credit as well as collecting debts. The receivables turnover ratio is an
activity ratio, measuring how efficiently a firm uses its assets. It answers the question: How many
times during the year has a receivable been converted into cash?
This ratio is also used to quantify a company's effectiveness in collecting its receivables or
money owed by clients. The ratio shows how well a company uses and manages the credit it
extends to customers and how quickly that short-term debt is collected or is paid.
Reference:
46
The formula to compute the receivable turnover is as follows:
𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝑵𝒆𝒕𝑪𝒓𝒆𝒅𝒊𝒕𝑺𝒂𝒍𝒆𝒔/𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝑻𝒓𝒂𝒅𝒆𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆
The average trade receivable is computed as follows:
𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 + 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑬𝒏𝒅

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 =
𝟐
In computing the receivable turnover, the amount of receivable should be net of allowance
for doubtful accounts. In case data on net sales is not provided, the data on gross sales may be used
to compute the turnover.
Illustration 3. Receivable Turnover
The following information, which is taken from the records of Yvone Merchandising in
Illustration 1, will be used to compute for the receivable turnover.
2018 2017
Sales 1,635,000 1,457,500

Required: Compute the receivable turnover for two years and make a simple analysis.
Answer: The receivable turnover of Yvone Merchandising is computed as follows:
1,635,000
2018 = = 13.00 𝑡𝑖𝑚𝑒𝑠
(113,500 + 138,000)/2
1,457500
2017 = = 10.56 𝑡𝑖𝑚𝑒𝑠
138,000
Since no data is available on the beginning balance of 2017 accounts receivable, the ending
balance serves as the denominator.
In 2018, Yvonne Merchandising converted its receivable into cash 13 times during the year
against 10.56 times in 2017. This may indicate two tendencies:
a. First, the quality of receivable may have improved which means that good credit policy
may have been adopted
b. Second, the company may have instituted a better collection strategy, or has selected a
good collection agent.
Inventory Turnover
Inventory turnover is a ratio showing how many times a company has sold and replaced
inventory during a given period. A company can then divide the days in the period by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory
turnover can help businesses make better decisions on pricing, manufacturing, marketing and
purchasing new inventory.
Reference:
47
The inventory turnover is computed using this formula:
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅

𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
The average inventory is computed as follows:
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒃𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 + 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒆𝒏𝒅

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 =
𝟐
Illustration 4. Inventory Turnover
The records of Yvone Merchandising as presented in Illustration 1 relative to the

computation of inventory turnover are as follows:
2018 2017
Inventory 302,000 238,000
Cost of sales 1,050,000 950,000
Required: Based on the given data, compute the inventory turnover for two years and make a
simple analysis.
Answers: The inventory turnover of Yvone Merchandising is computed as follows:
1,050,000
2018 = = 3.89 𝑡𝑖𝑚𝑒𝑠
(302,000 + 4,238,000)/2
950,000
2017 = = 4.00 𝑡𝑖𝑚𝑒𝑠
238,000
The results of the computation may indicate the following:
1. The inventory turnover in 2017 of 4.0 times may indicate better performance in the
conversion of inventory into cash compared to the operating performance in 2018 with
3.89 times.
2. It may appear that it takes basically four months for the business to convert inventories into
cash in 2017, and more than four months on 2018.
3. The business may appear to be selling and buying goods that are not considered fast moving
items similar to the items sold in the supermarket.
4.3 SOLVENCY RATIOS
The solvency ratios, otherwise known as the stability ratios, are a group of financial ratios
that measure the ability of a business to settle its financial obligation when they mature and remain
still financially stable.
A business with favorable solvency ratios appears to have most of the funds provided by
the owner or owners instead of the creditors. The different ratios under this category also reflect
the extent to which a firm utilizes debt financing; hence, they are also called financial leverage
ratios. The concept of leverage or an act of increasing from current status is divided into two:
a. Operating leverage b. Financial leverage

Reference:
48
Operating leverage affects the short-term investment and non-current assets of an entity
or the left-hand side of the statement of financial position. It is also concerned with how fixed cost
influences the operations of the company.
Financial leverage, on the other hand, primarily affects the right-hand side of the statement
of financial position or the short-term debt, long -term debt, and owner’s equity. It reflects the
amount of debts utilized in the capital structure of the business firm.
The commonly used financial leverage ratios are the following:
1. Debt ratio
2. Equity ratio
3. Debt-to-equity ratio
4. Times-interest earned
Debt Ratio
The debt ratio measures the proportion of funds provided by the creditors on the total
resources of the business. In other words, this ratio reflects the percentage of total assets that are
financed with debts or by the creditors.
Creditors prefer low debt ratio because their investments are generally protected by higher
proportion of owner’s funds in the event of liquidation. On the other hand, most owners prefer to
have high leverage because it will improve the expected return on their investments.
Generally, a debt of 50% debt and 50% is considered the fair maximum level for both
creditors and owners.
The formula of debt ratio is:
𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒔
𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
Illustration 5. Debt Ratio
The information provided by the statement of financial position of Yvone Merchandising

in Illustration 1 shows, among others, the following:
2018 2017

Total assets 2,433,000 2,006,000
Total current liabilities 168,500 147,000
Required: Based on the data given, compute the debt ratio of Yvone Merchandising and make
simple analysis.
Reference:
49
Answers: The current ratios of Yvone Merchandising for two years appear as follows:
668,500
2018 ( ) = 27.48% 𝑜𝑟 0.2748: 1.00
2,433,000
647,000
2017 ( ) = 32.25% 𝑜𝑟 0.3225: 1.00
2,006,000
The debt ratio may indicate the following:
1. Of the total resources of the business in 2017, 32.25% has been provided by the creditors.
This information may indicate that 67.75% of the total assets have been provided by the
owners.
2. The debt ratio in 2018 has improved to 27.48%. the information may indicate that the
business does not rely heavily on funds provided by creditors.
3. In general, the debt ratio for the two years is considered highly favorable from the
perspective of creditors because it does not reach the generally considered maximum level.
Equity Ratio
The equity ratio determines the proportion of resources provided by the owner or owners
of the business. It represents the financial strengths of the business as it provides the margin of
safety that the company affords to creditors.
A business with high equity ratio, which is normally 50% of the total resources is
considered having a favorable financial standing from the perspective of the creditors. There is
great possibility that creditors, most especially the banks, will extend financial assistance when
immediate needs arise from the business.
The equity ratio is computed as follows:
𝑻𝒐𝒕𝒂𝒍 𝒆𝒒𝒖𝒊𝒕𝒚
𝑬𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
The equity ratio may also be computed as follows:
𝑬𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 = 𝟏 − 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐
Illustration 6. Equity Ratio
Illustration 1 provide, among others, the following information relative to the computation
of the equity ratio:
2018 2017
Total assets 2,433,000 2,006,000

Yvone, Capital 1,764,500 1,359,000
Required: Compute the equity ratio of Yvone Merchandising and make a simple analysis.
Reference:
50
Answer: The equity ratio of Yvone Merchandising is computed as follows:
1,764,500
2018 ( ) == 72.52% 𝑜𝑟 0.7252: 1.00
2,433,000
1,359,000
2017 ( ) = 67.75% 𝑜𝑟 0.6775: 1.00
2,006,000
The equity ratio of Yvonne Merchandising may indicate the following tendencies:
1. It may appear in 2017 that the owner of the business provided 67.75% of the total resources
used in the operation. This ratio may also suggest that the owner supplied 67.75 cents for
every one peso on the total assets of the business while the 32.25 cents are provided by
then creditors.
2. The trend of the equity ratio improved in 2018 to 72.52%. it is clear indication that the
business is not highly dependent on creditor’s fund in financing its operation for year 2018
and 2017.
3. The equity ratio appears to be attractive to the eyes of the prospective creditors since more
than 50% of the total resources have been provided by the owner.
Debt-to-Equity Ratio
The debt-to-equity ratio measures the proportion of the debt and equity in the capital
structure of the business. This measures also indicates whether the company favors risk in its
capital structure or not.
When the debt-to-equity ratio is more than 1 or more than 100%, the company has a riskier
capital structure since debts imply payment of interest. More than 1 suggests that the creditors
provide more fund to the business than what is provided by the owner or owners.
A business with debt-to-equity ratio higher than 1 may appear not attractive to conservative
creditors most especially of the liquidity status is not favorable in terms of industry standards.
The formula for debt-to-equity ratio is:
𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝒆𝒒𝒖𝒊𝒕𝒚
Illustration 7. Debt-To-Equity Ratio
The following information relative to the computation of debt-to-equity ratio is taken from
the records of Yvonne Merchandise as presented in Illustration 1.
2018 2017
Total assets 2,433,000 2,006,000

Yvone, Capital 1,764,500 1,359,000
Required: Compute the debt-to-equity ratio of Yvone and make a simple analysis.
Reference:
51
Answer: The debt-to-equity ratio of Yvone is computed as follows:
668,500
2018 ( ) = 37.89% 𝑜𝑟 0.3789: 1.00
1,764,500
647,000
2017 ( ) = 47.61% 𝑜𝑟 0.4761: 1.00
1,359,000
This ratio may indicate the following information:
1. The ratio of 7.61% in 2017, in its simplest term, may suggest that the creditors have
provided 47.61 cents for every ₱1.00 supplied by the owner of the business.
2. The ratio of the business improved in 2018 to 37.89%. suggesting that the owners now has
more funds provided than what is provided by the creditors.
3. The trend seems favorable for creditors as it appears that the business does not rely heavily
on funds from outside in managing its operating activities.
Times Interest Earned
The times interest earned (TIE) is a tool that measures the debt paying ability of the
business. It reflects the degree of protection provided by an entity to its long-term creditors.
Similarity, it is favorable to investors if the business firm has higher ratio of times interest earned.
The computation of this is applicable only once the business has an interest-bearing
obligation. The interest usually arises when the obligation is considered long-term in nature. This
measure will test the ability of the operating activities of the business to cover the amount of
interest expense.
In accounting, interest expense is not classified as operating expense. It is separately

presented as financing charge.
The formula to compute TIE is as follows:
𝑰𝒏𝒄𝒐𝒎𝒆 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙𝒆𝒔

𝑻𝑰𝑬 =
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
Illustration 8. Times Interest Earned
The statement of comprehensive income of Yvone Merchandising as shown in

Illustration 1 provides the following:
2018 2017
Income tax - 30% 75,000 54,000
Required: Compute the TIE and make a simple analysis.
Reference:
52
Answer: The TIE for two years is computed as follows:
300,000
2018 ( ) = 6.0 𝑡𝑖𝑚𝑒𝑠
50,000
230,000
2017 ( ) = 4.6 𝑡𝑖𝑚𝑒𝑠
50,000
The result may indicate the following:
1. The TIE earned in 2017 indicates that the operating income of the business before payment
of interest can cover the interest expense 4.6 times.
2. The TIE ratio in 2018 improved to 6.0 times. The income from operation is sufficient
enough to shoulder the cost of borrowing.
3. A higher TIE ratio of the business appears to be favorable from creditors.
4.4 PROFITABILITY RATIOS
Profitability ratios are a group of ratios that reflect the combined effects of liquidity and
management efficiency in handling the assets and liabilities relative to the operations of the
business. In short, the ratios show the effectiveness of business operations.
The measures of profitability are as follows:
1. Gross profit rate

2. Operating profit margin
3. Net profit margin
4. Return on investments
Gross Profit Rate
The gross profit rate measures the percentage of gross profit to sales. It also measures the
percentage of gross profit margin available to cover the operating expenses for the period. The
gross profit rate also reveals the percentage of cost of sales to sales.
The gross profit or gross margin is the difference between sales and cist of sales. Since
profit may grow by increasing the selling price or quantity, or by reducing the cost of selling the
product, the gross profit margin may also indicate the measures adopted by the business to control
the elements affecting the sales and the cost of sales.
The formula to compute the gross profit rate is:
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 𝒓𝒂𝒕𝒆 =
𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔
Reference:
53
Illustration 9. Gross Profit Rate
The comparative statement of comprehensive income of Yvone as shown in Illustration 1

presents the following information relative to gross profit computation:
2018 2017
Sales 1,635,000 1,457,500
Cost of sales 1,050,000 950,000
Required: Compute the gross profit rate of Yvonne and make a simple analysis.
Answer: Since the gross profit for two years has not been provided, it will be determined first as
follows:
Gross profit:
2018 (1,635,000 − 1,050,000) = 585,000
2017 (1,457,500 − 950,000) = 507,500
The gross profit rate is computed as follows:
585,500
2018 ( ) = 37.78%
1,635,000
507,500
2017 ( ) = 34.82%
1,457,500
The gross profit rate may indicate the following:
1. The cost of sales of the business is more or less 65% of the total sales. The rate may appear
to be high for the operations of the business.
2. The gross profit rate in 2018 slightly improved against 2017 operations. The rate may
indicate that in 2018 the business has 35.78% margin available to cover the operating
expenses.
3. Under a normal situation, it is favorable for the business to have a higher gross profit rate.
Operating Profit Margin
The operating profit margin measures the percentage of profit available after deducting the
cost of sales and operating expenses from the sales. The operating profit margin is the difference
between the gross profit and the operating expenses.
This measure reflects the overall efficiency of the management in handling the production,
selling, and administrative costs of the business.
The formula is as follows:
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
Reference:
54
Illustration 10. Operating Profit Margin
Yvone Merchandising, as presented in Illustration 1, contains the following details:
2018 2017
Sales 1,635,000 1,457,500
Expenses
Cost of sales 1,050,000 950,000
Selling expenses 185,000 170,000
Administration expenses 100,000 107,500
Total 1,335,000 1,227,500
Required: Compute the operating profit margin of Yvone and make a simple analysis
Answer: The operating profit margin is computed as follows:
300,000
2018 ( ) = 18.35%
1,635,000
230,000
2017 ( ) = 15.78%
1,457,500
The operating profit rate may provide the following information:
1. The operating profit rate improved in 2018 from 15.78% to 18.35%.

2. Since the only figure between the gross profit and operating profit margin is the operating
expenses, the increase in operating profit margin may indicate that the business has
instituted some controls to effectively manage the incurrence of cost and expenses.
Net Profit Margin
The net profit margin, also called return of sales, measures the overall operating results
of an entity. The measure considers all income recognized and all expenses incurred during the
period.
In computing the net profit margin, gains or losses from transactions not directly related to
the normal operations of the business such as sale of property, plant, and equipment or sales of
investments stocks or bonds are included.
The formula to compute the net profit margin is as follows:
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
Reference:
55
Illustration 11. Net Profit Margin
2018 2017
Sales 1,635,000 1,457,500
Less: Cost and expenses 1,335,000 1,227,500
Income tax - 30% 75,000 54,000
Required: Compute the net profit margin and make a simple analysis
Answer: The net profit margin of the business is computed as follows:
175,000
2018 ( ) = 10.70%
1,635,000
126,000
2017 ( ) = 8.64%
1,457,500
The results indicate the following:
1. The net profit margin of the business has provided the positive contributions to the equity
of the owner after the provisions for interest and taxes.
2. The contribution of the business operating performance to the owner’s equity has improved
in 2018 at 10.70% compared to the performance in the immediately preceding year at
8.64%.
3. Though the net profit margin contributed positively to the capital of the owner’s equity,
the level of net profit margin should be compared with the industry average to determine
whether such level of performance is on a par with other businesses in the industry.
Return on Investments
The return on investment (ROI), also called return on assets, measures the amount of
net income per peso of investment in a business. The ratio reflects the profitability of every peso
invested by the owner.
Higher ROI is generally favorable to the business. However, the industry average serves
as a good benchmark to compare the profitability performance of the business.
The formula for ROI:
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
Reference:
56
However, if the business entity has interest-bearing liabilities, the ROI is computed as
follows:
𝑵𝒆𝒕𝒊𝒏𝒄𝒐𝒎𝒆 + [𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕(𝟏 − 𝑻𝒂𝒙 𝒓𝒂𝒕𝒆)]

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒕𝒐𝒕𝒂𝒍𝒂𝒔𝒔𝒆𝒕𝒔
In the second formula, if the business entity has interest-bearing debt, the amount of interest
net of tax is added back to the net income.
Illustration 12. Return on Investment
From Yvonne Merchandising taken in Illustration 1 details:
2018 2017
Total non current assets 2,000,000 1,612,500
Total assets 2,433,000 2,006,000
Income tax - 30% 75,000 54,000
Required: Compute the ROI and make a simple analysis.
Answer: The return on investment is computed as follows:
(175,000 + [50,000(1 − 30)])

2018 ( ) = 9.46%
(2,433,000 + 2,006,000)/2
(126,000 + [50,000(1 − 30)])

2017 ( ) = 8.03%
2,006,000
The results of the computation may indicate the following:
1. Return on assets slightly increased from 8.03% in 2017 to 9.46% in 2018. This trend may
indicate a favorable movement on the ROI.
2. In 2018, it appears that there were 9.46 cents return for every ₱1.00 invested on the assets
of Yvone. However, in 2017 operation, the return only was 8.03 cents for every ₱1.00
investment on assets.
4.5 QUALITATIVE FACTORS IN THE ANALYSIS OF FINANCIAL STATEMENTS
A sound financial statement analysis is not merely calculating but looking beyond the
results of mathematical computations. The following factors are considered in making a financial
analysis:
1. The presence of one major customer. Is there a key customer that contributes
significantly to the total revenues of the company? If there is, losing such customer may
drastically reduce future income.
Reference:
57
2. The presence of one major product. Is there a single product where revenues heavily rely
upon? If there is, the revenues may be seriously affected when the demand on such product
drops.
3. The competitors in the market. Generally, few competitors are likely to give the company
a bigger share of the market. On the other hand, the presence of more competitors may
force the company to lower its prices resulting usually to lower profit if the sales volume
does not improve.
4. Reliance on a single supplier. Does the company rely on a single supplier? If is does, it
may experience decline in revenues when there are unanticipated shortages of raw
materials or merchandise.
5. The goals of the company. The company may or may not be returning earnings to the
shareholders because of expected future expansion that well be financed from internally
sourced funds.
Date derived from financial statements analysis are not absolute measures of the entity’s
operating performance. They are only indicators of liquidity, solvency, management efficiency,
and profitability.
Reference:

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Business

Unit 1: Introduction to Finance .............................................................................1

Chapter 2 Financial Institutions, Instruments, and Markets ................................16

Unit 2: Analysis and Interpretation of Financial Statements ...........................32

Chapter 4 Analysis of Financial Statements: Financial Mix Ratio Approach .....41

Topic : Unit 1 Introduction to Finance

1.1 DEFINITION AND CONCEPT OF FINANCE

Key Concepts of Finance

Both a Science and an Art

Application of Economic and Accounting Concepts and Principle

Management, Allocation, and Utilization

Financial Resources, Investments and Expenditure

1.2 AREAS OF FINANCE

Figure 1. Areas of Finance

1.3 FINANCE IN A BUSINESS ORGANIZATION

Figure 2. Finance in a Business Organization

Figure 3. Finance in a Business Organization

1.4 FUNCTIONS OF FINANCE OFFICER

Figure 4. Types of Financial Decisions Executed by the Chief Finance Officer

1.5 QUALIFICATIONS OF A FINANCE OFFICER

Topic : Unit 1 Introduction to Finance

2.1 FINANCIAL INSTITUTIONS, INSTRUMENTS, AND MARKET

1. Political system Figure 5. The Business Environment

2.2 THE FINANCIAL SYSTEM

The Financial system at the societal environment or regional level is principally

Figure 6. Typical Financial System

2.3 FINANCIAL INSTIRUITIONS

Figure 7. Illustrations of financial Institutions

Figure 8. Classifications of Banks

Trust Companies. A major division of universal or commercial bank, that acts as a

Insurance companies may offer the following products to the public:

2.4 FINANCIAL MARKETS

2.5 FINANCIAL INSTRUMENTS

The most common types of bonds are as follow:

Unit 1 - Summative Assessment

1.1 True or False

Write True if the statement is correct. If it is not, write False.

1.2 True or False

Write True if the statement is correct. If it is not, write False.

____________1. Finance is a science but not an art.

2.1 True or False

Write True if the statement is correct. If it is not, write False.

2.2 True or False

Write True if the statement is correct. If it is not, write False.

Topic : Unit 2 Analysis and Interpretation of Financial Statements

3.1 NATURE OF FINANCIAL STATEMENT ANALYSIS

3.2 HORIZONTAL OR COMPARATIVE APPROACH

Illustration 1. Horizontal or Comparative Approach

The Horizontal analysis of MARGRE Corporation indicates of the following:

3.3 VERTICAL OR COMMON-SIZE APPROACH

Illustration 2. The common-size statement of financial position appears as follows:

3.4 TREND PERCENTAGE APPROACH

Topic : Unit 2 Analysis and Interpretation of Financial Statements

4.1 FINANCIAL MIX RATIO

The broad classifications of financial ratios are as follows

4.2 LIQUIDITY RATIOS

The liquidity ratios are as follows:

Formula and Calculation for Current Ratio

Illustration 1. Current Ratio

Sales 1,635,000 1,457,500

The current ratio of Yvone Merchandising maybe evaluated as follows:

Quick Ratio or Acid-Test Ratio