KARYSSE ARIELLE NOEL JALAO FINANCIAL MANAGEMENT

BSAC-2B

2. HORIZONTAL AND VERTICAL ANALAYSIS

2014 2015
Sales 45,000php 50,000php
Sales Returns 1,000 2,000
Net Sales 44,000 48,000
COGS 24,000 35,000
Gross Profit 20,000 13,000
Selling and General Expenses 12,000 10,000
Operating Income 8,000 3,000
Other Expenses 3,000 3,500
Income (loss) before income 5,000 (500)
tax
Income Tax (refund) 2,000 (200)
Profit(loss) 3,000php (300php)

1. Prepare a comparative income statement showing the peso changes and percentage changes
for 2015 as compared with 2014.

2014 2015 INCREASE/ %

DECREASE
Sales 45,000php 50,000php 5,000php 11.11%
Sales Returns 1,000 2,000 1,000 100.00%
Net Sales 44,000 48,000 4,000 9.09%
COGS 24,000 35,000 11,000 45.83%
Gross Profit 20,000 13,000 (7,000) -35.00%
Selling and General 12,000 10,000 (2,000) -16.67%
Expenses
Operating Income 8,000 3,000 (5,000) -62.50%
Other Expenses 3,000 3,500 500 16.67%
Income (loss) 5,000 (500) (5,500) -110.00%
before income tax
Income Tax 2,000 (200) (2,200) -110.00%
(refund)
Profit(loss) 3,000php (300php) (3,300) -110.00%
 2. Prepare a comparative income statement offering a percentage analysis of component revenue
and expense items of net sales for each year.
2014 2015 2014 2015
Sales 45,000php 50,000php 102.22% 104%
Sales Returns 1,000 2,000 2.22% 4.%
Net Sales 44,000 48,000 100% 100%
COGS 24,000 35,000 54.55 72. 92%
Gross Profit 20,000 13,000 45.45% - 27.08%
Selling and General Expenses 12,000 10,000 27.27% 20.83%
Operating Income 8,000 3,000 18.18% 6.25%
Other Expenses 3,000 3,500 6.82% 7.29%
Income (loss) before income tax 5,000 (500) 11.36% (1.04%)
Income Tax (refund) 2,000 (200) 4.55% (0.42%)
Profit(loss) 3,000php (300php) 6.82% (0.63%)

1. Based on the above percentages, comment on the Metro Company’s results of operations for
2015.
As of 2015, Metro Company’s performance showed unfavorable results. Based on the data above,
we can observe that Metro Company incurred a big loss as compared to last year’s profit. This is
due to their other expenses which caused a loss before income tax.

3. COMMON-SIZE BALANCE SHEET

SOUTH NORTH
ASSETS
Current Assets 51,000php 240,000php
Long-term investments 5,000 280,000
Land, buildings, and equipment 48,000 520,000
(net)
Intangible assets 6,000 100,000
Other assets 5,000 60,000
Total Assets 115,000php 1,200,000php
Liabilities and Shareholder’s Equity
Current liabilities 15,000php 180,000php
Long-term liabilities 25,000 300,000
Deferred Revenues 5,000 70,000
Preferred stock 5,000 100,000
Share Capital 30,000 200,000
Share Premium 25,000 185,000
Retained earnings 10,000 165,000
Total liabilities and shareholder’s 115,000php 1,200,000php
equity
 1. Prepare a comparative common-size statement of financial position for South corporation and
North Corporation.
SOUTH NORTH SOUTH NORTH
ASSETS
Current Assets 51,000php 240,000php 44.35% 20.00%
Long-term investments 5,000 280,000 4.35% 23.33%
Land, buildings, and 48,000 520,000 41.74% 43.33%
equipment (net)
Intangible assets 6,000 100,000 5.22% 8.33%
Other assets 5,000 60,000 4.35% 5.00%
Total Assets 115,000php 1,200,000php 100% 100%
Liabilities and Shareholder’s Equity
Current liabilities 15,000php 180,000php 13.04% 15.00%
Long-term liabilities 25,000 300,000 21.74% 25.00%
Deferred Revenues 5,000 70,000 4.35% 5.83%
Preferred stock 5,000 100,000 4.35% 8.33%
Share Capital 30,000 200,000 26.09% 16.67%
Share Premium 25,000 185,000 21.74% 15.42%
Retained earnings 10,000 165,000 8.70% 13.75%
Total liabilities and 115,000php 1,200,000php 100% 100%
shareholder’s equity

2. Based on your prepared common-size statement of financial position, which company is better,
financial position wise? Why?
Based on the given data of the financial position, North Company is performing better than
the South. This is because its total assets of North has a difference of 1,085,000 compared to
South.

4. FINANCIAL MIX RATIOS

Required: Compute the following for 2015
1. Net Working Capital:
= Accounts Receivable + Inventory – Accounts Payable
= 85,000 + 25,000 + 245,000php + 220,000php +10,000 – 165,000php – 25,000 – 10,000
= 585,000php – 200,000php
= 385,000php

2. Current Ratio:
Current Assets 585,000 php
= =¿ 2.93:1
Current Liabilities 200,000 php

3. Acid-test Ratio:
 Quick Assets 85,000 php+ 25,000 php+245,000 php 355,000 php
= = =¿ 1.78:1
Current Liabilities 200,000 php 200,000 php

4. Accounts Receivable Turnover:

Net Sales 1,000,000 php
=¿ =4.08׿
Average Accounts Receivable 245,000
Days in Accounts Receivable:
360 days 360
= =88.24 days
Accounts Receivable Turnover 4.08

5. Inventory Turnover:
COGS 750,000 php
= =¿
Average Inventory 250,000 php+220,000 php 3.19 times
2
Days in Inventory:
360 days 360
= =¿ 112.85 days
Inventory Turnover 3.19

6. Gross Profit on Sales:

= Sales – COGS
= 1,000,000php – 750,000php
= 250,000php
= 250,000php/1,000,000php
= 0.25 or 25%

7. Book Value per Share:

Ordinary Shareholde r ' s Equity 300,000 php
= =¿ 100php
Number of Ordinary Shares Outstanding 3,000

8. Rate of Return on sales:

Net Income 90,000 php
= =¿ 0.09 or 9%
Net Sales 1,000,000 php

9. Earnings per Share:

Net Income−Preference Share Dividend Required 90,000 php 90,000 php
= = =¿
Number of Ordinary Shares Outstanding 300,000 3,000 30php
100

10. Rate of return on invested capital:

Net Income 90,000 php 90,000 php
= = =¿ 0.1452 or 14.52%
Invested Capital 300,000+320,000 620,000

11. Debt to equity Ratio:

Total Liabilities 320,000 php
= =¿ 0.5333 or 53.33%
Owne r ' s Equity 600,000 php
 12. Debt Ratio:
Total Liabilities 320,000 php
= =¿ 0.3478 or 34.78%
Total Assets 920,000 php

5. TRIANGLE COMPANY
1. Rate of Return on net sales:
 Old Management-
Net Income 87,000 php
= =¿0.0540 or 5.40%
Net Sales 1,610,000 php
 New Management-
Net Income 483,000 php
= =¿ 0.0859 or 8.59%
Net Sales 5,620,000 php

2. Rate of return on assets:

 Old Management-
Net Income 87,000 php
= =¿ 0.0892 or 8.92%
Total Assets 975,000 php
 New Management-
Net Income 483,000 php
= =¿ 0.1683 or 16.83%
Total Assets 2,870,000 php

3. Rate of return on stockholders’ equity:

 Old Management-
Net Income 87,000 php
= =¿0.1217 or 12.17%
Stockholders ’ Equity 715,000 php
 New Management-
Net Income 483,000 php
= =¿ 0.4847 or 48.47%
Stockholders ’ Equity 996,500 php

4. Percentage of debt-to-equity structure:

 Old Management-
Total Liabilities 260,000 php
= =¿0.3636 or 36.36%
Stockholders ’ Equity 715,000 php
 New Management-
Total Liabilities 1,873,000 php
= =¿ 1.8796 or 187.96%
Stockholders ’ Equity 996,500 php

I support the request of additional investment or loan because as we can see from the given data,
the new management is receiving more returns which is a good thing.
6. TREND RATIOS
1. Use 2010 as the base year.
2014 2013 2012 2011 2010
Sales 8,775php 7,800php 7,475php 7,020php 6,500php
Trend Percentage 135.00% 120.00% 115.00% 108.00% 100.00%
Current Assets 1,009 1,012 1,022 1,033 1,020
Trend Percentage 98.92% 99.22% 100.20% 101.27% 100.00%
Current Liabilities 475 450 350 325 250
Trend Percentage 190.00% 180.00% 140.00% 130.00% 100.00%

2. Use 2014 as the base year.

2014 2013 2012 2011 2010
Sales 8,775php 7,800php 7,475php 7,020php 6,500php
Trend Percentage 100.00% 88.89% 85.19% 80.00% 74.07%
Current Assets 1,009 1,012 1,022 1,033 1,020
Trend Percentage 100.00% 100.30% 101.29% 102.38% 101.09%
Current Liabilities 475 450 350 325 250
Trend Percentage 100.00% 94.74% 73.68% 68.42% 52.63%

7. FINANCING RATIOS

East Company
1. Debt Ratio = Total Liabilities/Total Assets = 200,000/500,000 = 40%
2. Equity Ratio = Total Equity/Total Assets = 300,000/500,000 = 60%
3. Debt-equity Ratio = Total Liabilities/Total Equity = 200,000/300,000 = 66.67%
4. Equity Multiplier Ratio = Total Assets/Total Equity = 500,000/300,000 = 166.67%
5. Times Interest Earned = EBIT/Annual Interest Charges = 10,000/2,000 = 5 times
6. Financial Leverage = Total debt/Total Equity = 200,000/300,000 = 0.67

West Company
1. Debt Ratio = Total Liabilities/Total Assets = 300,000/500,000 = 60%
2. Equity Ratio = Total Equity/Total Assets = 200,000/500,000 = 40%
3. Debt-equity Ratio = Total Liabilities/Total Equity = 300,000/200,000 = 150%
4. Equity Multiplier Ratio = Total Assets/Total Equity = 500,000/200,000 = 250%
 5. Times Interest Earned = EBIT/Annual Interest Charges = 12,000/6,000 = 2 times
6. Financial Leverage = Total debt/Total Equity = 300,000/200,000= 1.50

8. PROFITABILITY RATIOS
1. Calculate the following ratios for horizons, Inc., for the year ended December 31, 2014
a. Return on Sales = Net Profit/Net Sales = 7,000/350,000 = 2%
b. Return on Asset = Net Profit/Average Total Asset = 7,000/20,000 = 35%
c. Return on Shareholder’s Equity = Net Profit/ Ave. Shareholder’s Equity = 7,000/8,400 = 83.33%
d. Return on Ordinary Shareholder’s Equity = EAT/Total Shareholders Equity = 9,000/8400 = 1.07
e. Times Preference Dividend Earned = Net Income After Taxes/Preferred Dividends Requirement
= 7,000/120 = 58.33 times
f. Earnings per Share = P6,880,000 / 200,000 Shares = P34.40
g. Degree of Operating Leverage = Change in EBIT/Change in Sales =

2. ROA = 35% X 2 = 70%

70% = 5% X Asset Turnover
= 70% / 5 = 14
3. ROE = 833.333% x 2
ROE = ROS x Asset Turnover x Equity Multiplier
166.67 = 60% x 20 x EM
EM = 166.67% / 120% = 1.3889

9. GROWTH RATIOS
Mindoro Corporation
1. Price Earning Ratio = Market Value per Share of Ordinary Shares/Earnings per share of
Ordinary Shares = 200/50 = 4:1
2. Payout ratio = Dividends per Share/Earnings per Share = 20/50 = 0.40 or 40 %
3. Yield ratio = Annual Dividends per Share/ Market Value per Share of Ordinary Shares =
20/200 = 0.10:1
4. Book Value per preference share = 4,200,000/40,000 = 105
5. Book Value per ordinary share = 5,800,000/40,000 = 145
 6. Market Value to Book Value per ordinary share = 200/145 = 1.38
Tarlac Corporation
1. Price Earning Ratio = Market Value per Share of Ordinary Shares/Earnings per share of
Ordinary Shares = 90/30 = 3 or 300%
2. Payout ratio = Dividends per Share/Earnings per Share = 25/30 = 83.33%
3. Yield ratio = Annual Dividends per Share/ Market Value per Share of Ordinary Shares =
25/90 = 0.28
4. Book Value per preference share = 4,000,000/40,000 = 100
5. Book Value per ordinary share = 8,000,000/40,000 = 200
6. Market Value to Book Value per ordinary share = 90/200 = 0.45

10. GROWTH RATIOS

1. Market Price per share = 4 x P50 = 200
2. Dividend per share = 40% x P50 = 20
3. Yield rate = Annual dividends per share/ market value per share = 20/200 = 0.10

11. LIQUIDITY RATIOS

1. Calculate the following ratios for JS corporation and DV corporation for 2014

JS corporation
a. Inventory Turnover = COGS/Average Merchandise Inventory = 110,000/2,750 = 40 times
Inventory days = 360/40 = 9 days
b. Receivables Turnover = Net Credit Sales/Average trade Receivables = 190,000/9,500 = 20 times
Collection Period = 360/20 = 18 days
c. Payables Turnover = Net credit Purchases/Average Trade Payables = 96,000/2,400 = 40 times
Payment Period = 360/40 = 9 days
d. Operating Cycle = Ave. Conversion Period of Inventories + Average Collection Period of
Receivable + Days Cash = 9 + 18 + 12 = 39 days
Days Cash = Ave. Cash balance/Cash Operating Expenses ÷ 360 days = 600/(18,000 ÷ 360)= 12 days
e. Net Cash Cycle = Days Inventories outstanding + Days Sales Outstanding – Days Payable
Outstanding = 9 + 18 – 9 = 18 days
f. Net Working Capital = Current Assets – Current Liabilities = 9,500 + 2,750 + 600 – 2,400 = 10,450
g. Working Capital Turnover = COGS + Operating Expenses = 110,000 + 18,000 = 128,000
h. Cash Turnover = Net Sales/Cash = 200,000/600 = 333.33 times
i. Asset Turnover = Net Sales/Asset = 200,000/80,000 = 2.5 times

DV Corporation
a. Inventory Turnover = COGS/Average Merchandise Inventory = 180,000/7,200 = 25 times
Inventory days = 360/25 times = 14.4 days
b. Receivables Turnover = Net Credit Sales/Average trade Receivables = 240,000/16,000 = 15 times
Collection Period = 360/15 times = 24 days
c. Payables Turnover = Net Credit Purchases/Average Trade Payables = 112,000/3,500 = 32 times
Payment Period = 360/32 times = 11.25 days
d. Operating Cycle = Ave. Conversion Period of Inventories + Average Collection Period of Receivable +
Days Cash = 14.4 days + 24 days + 16.36 = 54.76 days
Days Cash = Ave. Cash balance/Cash Operating Expenses ÷ 360 days = 800/(17,600÷360) = 16.36
days
e. Net Cash Cycle = Days Inventories outstanding + Days Sales Outstanding – Days Payable Outstanding
= 14.4 days + 24 days – 11.25 days = 27.15 days
f. Net Working Capital = Current Assets – Current Liabilities = 16,000 + 7,200 + 800 – 3, 500 = 20,500
g. Working Capital Turnover = COGS + Operating Expense = 180,000 +17,600 = 197,600
h. Cash Turnover = Net Sales/Cash = 285,000/800 = 356.25
i. Asset Turnover = Net Sales/Asset = 285,000/95,000 = 3 times

COMMENT
For JS corporation, the financial analysis ratio showed that the payable turnover is 40 times
which means that the corporation can pay their payables up to 40 times and within just 9 days. In
this case, it shows that the corporation is excellent in terms of meeting their suppliers credit
terms and they were able to pay it less than 10 days which are the number of days that the
purchase is subject to discount. For DV corporation, the financial analysis ratio showed that the
payable turnover is 32 times, which is less than JS corporation but is still considered as a good
result. They were able to pay their payables just within 11.25. Though JS Corporation performs
better than DV, their results are still considered excellent.

12. LIQUIDITY RATIOS

2014
1. Raw Materials Turnover = Raw Materials Used/ Raw Materials Inventory =
10,000/1,000=10
Materials Inventory Days = 360/10 = 36 days
2. Work-in-Process inventory turnover = Cost of Goods Manufactured/Goods in Process
Inventory = 26,000/800 = 32.5 times
Work-in Process Inventory Days = 360/32.5 = 11 days
3. Finished Goods inventory turnover= COGS/Finished Goods Inventory = 30,800/2,200 =
14 times
Finished Goods inventory Days = 360/14 = 26 days
2015
4. Raw Materials Turnover = Raw Materials Used/Average Raw Materials Inventory =
10,800/1,100=9.82 times
Materials Inventory Days = 360/9.82 = 37 days
5. Work-in-Process inventory turnover = Cost of Goods Manufactured/Ave. Goods in
Process Inventory = 42,000/1,100 = 38.18 times
Work-in Process Inventory Days = 360/38.18 = 9 days
6. Finished Goods inventory turnover= COGS/Ave. Finished Goods Inventory =
40,000/2,350 = 17.02 times
Finished Goods inventory Days = 360/17.02 = 21 days