Unit 4 Lesson 5: Evaluate Business Situations Using

Financial Tools (Major Output)

TAN GENERAL MERCHANDISE

Financial Tools Used

 Horizontal
 Vertical Analysis
 Financial Ratio Analysis
- Liquidity Ratios
- Leverage Ratios
- Profitability Ratios
HORIZONTAL ANALYSIS

TAN GENERAL MERCHANDISE

COMPARATIVE INCOME STEMENT
FOR THE YEAR ENDED December 31, 2018 AND 2019

2019 2018 Increase/Decrease Percentage

Net Sales 810,000.00 686,000.00 124,000.00 18.08%

Cost of Good Sold 301,750.00 348,300.00 -46,550.00 -13.4%
Gross Profit 508,250.00 337,700.00 176,550.00
50.50%
Operating Expense 234,900.00 205,800.00 29,100.00 14.14%
Earning Before
Interest 107.2% 273,350.00 131,900.00 141,450.00
and Taxes
Interest Expense 40,500.00 17,150.00 23,350.00
136.6%
Net Income Before 230,850.00 114,750.00 188,100.00 102.9%
Tax
Income Tax 69,855.00 34,425.00 35,430.00 102.9%
Net Income After 162,995.00 80,325.00 82,670.00
102.9% Tax

VERTICAL ANALYSIS

TAN GENERAL MERCHANDISE

 BALANCE SHEET
FOR THE YEAR ENDED December 31, 2018 AND 2019

2019 Percentage 2019 2018 Percentage 2018

ASSETS

Current Assets
Cash 87,400.00 23% 110,000.00 32.3%
Account Receivable 89,920.00 23.7% 90,000.00 26.4%
Inventory 218,500.00 57.5% 129,000.00 37.83%
Prepaid Rent 4,370.00 1.12% 12,000.00 3.52%
Total Current Assets 380,190.00 100% 341,000.00 100%

Non-Current Assets
Land 493,810.00 49.7% 550,000.00 47.8%
Building 500,000.00 50.3% 600,000.00 52.2%
Total Non-Current 993,810 100% 1,150,000.00 100%
Assets

TOTAL ASSETS 1,374,000.00 1,491,000.00

LIABILITIES
Current Liabilities
Accounts Payable 250,000.00 62.5% 200,000.00 40%
Notes Payable 150,000.00 37.5% 300,000.00 60%
Total Current 400,000.00 100% 500,000.00 100%
Liabilities

Non-Current Liabilities
Mortgage 160,000.00 51.6% 160,000.00 44.44%
Loan Payable 150,000.00 48.4% 200,000.00 55.56%
Total Non-Current 310,000.00 100% 360,000.00 100%
Liabilities

TOTAL 710,000.00 860,000.00

LIABILITIES

OWNER’S EQUITY
Tan Capital 664,000.00 48.33% 661,000.00 35%
Total Liabilities and 1,374,000.00 1,491,000.00
Owner’s Equity

Financial Ratios Analysis (as of 2019)

TAN GENERAL MERCHANDISE

BALANCE SHEET
FOR THE YEAR ENDED December 31, 2018 AND 2019

2019 Percentage 2018 Percentag

2019 e 2018

ASSETS

Current Assets

Cash 87,400.00 23% 110,000.00 32.3%

Classification of Financial Ratios:
1. Liquidity Ratios
2. Leverage Ratios
3. Profitability Ratios

1. LIQUIDITY RATIOS
a. Current Ratio = Current Assets/ Current Liabilities
Current Ratio = 314,000
500,000
Current Ratio = 0.68
Interpretation: the current ratio means that the business has
P0.68 current assets for every P1 of current liabilities.
b. Quick Ratio = Quick assets (cash+ms+accounts
reliable)
Quick Ratio = 110,000.00+90,000
500,000
Quick Ratio = 0.4
Interpretation: the quick ratio means the business has P0.4 quick
fund on hand for every P1 of a current liability.
c. Working Capital = Current Assets – Current
Liabilities
Working Capital = 341,000-500,000
Working Capital = (159,000)
Interpretation: the business has a negative working capital
(i.e, current liabilities are greater that current assets)

2. LEVERAGE RATIOS

a. Debt Ratio = Total Liabilities

Total Assets
TAN GENERAL MERCHANDISE
BALANCE SHEET
FOR THE YEAR ENDED December 31, 2018 AND 2019

2019 Percentage 2018 Percentag

2019 e 2018

ASSETS

Current Assets
 Debt Ratio = 880,000
1,491,000
Debt Ratio = 0.59
Interpretation: The result above shows that for every P1 of
an asset, P0.59 pertains to the creditors (or 59% of the total
assets pertaining to the creditors.

b. Equity Ratio = Total Equity

Total Ratio
Equity Ratio = 661,000
1,491,000
Equity Ratio = 0.44
Interpretation: The result above means that for every P1 of
an assets, P0.44 pertains to the owner (or the 44% pertains to
the owner).

c. Debt-to-Equity = Total Liabilities

Total Equity
Debt-to-Equity = 880,000
661,000
Debt-to-Equity = 1.33
Interpretation: The P1.33 means that for every P1.33 finance
debt, there is a corresponding P1 that finances through equity.
This indicates that business relies more on the debt financing
than on equity.

3. PROFITABILITY RATIO

TAN GENERAL MERCHANDISE

BALANCE SHEET
a. Gross Profit = Gross Profit FOR THE YEAR ENDED December 31, 2018 AND 2019
Net Sales
2019 Percentage 2018 Percentag
2019 e 2018

ASSETS

Current Assets

Cash 87,400.00 23% 110,000.00 32.3%

Account Receivable 89,920.00 23.7% 90,000.00 26.4%

Inventory 218,500.00 57.5% 129,000.00 37.83%

 Net Profit Ratio = 508,250
810,000
Net Profit Ratio = 0.63
Interpretation: The ratio means that for every P1 of sale,
a P0.63 gross profit is earned.

b. Net Profit Ratio = Profit of the Year

Net Sales
Net Profit Ratio = 162,995
810,000
Net Profit Ratio = 0.20
Interpretation: The ratio means that for every P1 of sale,
a P0.20 net profit is earned.

c. Return on Assets = Profit of the Year

Total Assets
Return on Assets = 162,995
1,491,000
Return on Assets = 0.11
Interpretations: The ratio means that the business is able
to generate a profit of P0.11 for every P1 of its total
resources.

d. Return on Equity = Profit of the Year

Total Assets
Return on Equity = 162,995
661,000
Return on Assets = 0.25
Interpretation: This ratio means that the business is able
to generate a profit of P0.25 for every P1 of owners equity.