EXAMPLE FOR

CREDIT AND
ABC COMPANY
FINANCIAL
 INTERPRETATION OF FINANCIAL STATEMENT

KEY PERFORMANCE INDICATORS USED:

a. CURRENT RATIO
-Formula: Current asset/Current liabilities

Computation
-
Year 1 Year 2 Year 3
Current assets P 32, 514 P 32,499 P 32,755
Current liabilities P 13,075 P 13,952 P 14,884
Current ratio 2.5:1 2.3:1 2.2:1
Findings: The 0.05% decreased from year 1 to 2 and 0.78% increase from year 2 to 3 in current assets indicates that ABC
Company maintain its normal operation. In addition, the increase in liabilities from year 1 to 3 indicates a decreasing
ability to pay its bills. However, the current ratios of 2.5:1 in year 1, 2.3:1 in year 2, and 2.2:1 in year 3 are preferred.
Based on this information the creditors can extend credit to ABC company.

b. QUICK RATIO
-Formula: Current asset - Inventory/Current liabilities

-
Computation
Year 1 Year 2 Year 3
Current assets - Inventory P 32, 514 - 9,124 P 32,499 - 9,671 P 32,755 - 10,251
Current liabilities P 13,075 P 13,952 P 14,884
Quick ratio 1.8:1 1.6:1 1.5:1
Findings: The component breakdown in year 1, 2, and 3 reveals that 28%, 30%, and 32% of ABC company current assets
are in the inventory area, where short term liquidity is not questionable. The 1.8:1, 1.6:1, and 1.5:1 quick ratio result in
each year indicates that the business has sufficient assets that are immediately convertible to cash to pay its bills. Base
on this information the creditors can extend credit to ABC company.

(NOTE: FOR COVERAGE OF FIXED CHARGES TO DIVIDEND YIELD PLEASE JUST FOLLOW THE PROCESS IN A AND B,
IDENTIFY SA FINANCIAL STATEMENT THE AMOUNTS REQUIRED IN THE FORMULA, COMPUTE AND INCLUDE YOUR
FINDINGS)