FINANCIAL

STATEMENT
ANALYSIS
USING RATIOS
 • I. Usage: measures the firm’s ability to convert

Liquidity
non-cash assets into cash within one year to meet
its current liabilities
• II. Liquidity Measures:

Ratios
• Working Capital
• Current Ratio
• Quick (Acid-test) Ratio
 • Formula: Current Assets minus Current Liabilities

Liquidity • Implications: It is a safety cushion to creditors

when extending credit to borrowers. A greater
balance is required as an evidence that the borrower

Measure:
can settle its dues on time.
• Case: Soni Company is borrowing P200,000 from
BDO. The firm has current assets of P600,000 and
current liabilities of P100,000 in 2019 , and
P700,000 and P50,000, respectively in 2020. Is it
safe to lend funds to Soni Company?
• Analysis: Computing for working capital, Soni

Working Company has P500,000 (600,000-100,000) for 2019

andP650,000 (700,000-50,000) for 2020. The
increase in working capital is a favorable indication
of the company’s ability to settle its loan within a

Capital year.
• BDO Decision: Extend the P200,000 loan of Soni
Company .
 • Formula: Current Assets / Current Liabilities
• Implications: It measures the ability of the firm to

Liquidity
meet its current liabilities out of its current assets.
Ideal current ratio is 2:1
• Case: Chan Company is applying for a loan from
Matzu Financing House in the amount of P500,000.

Measure: The company has total current assets of P800,000,

with current liabilities of P200,000 in 2019. In 2020,
the company has current assets of P900,000 while
current payables reached P300,000.

Current • Analysis: Computing for Current Ratio, Chan Co.

has current ratio of 4:1 (800,000/200,000) in
2019;and, 3:1( 900,000/300,000)

Ratio • in 2020.
• Matzu Financing House Decision: Extend loan to
Chan Company since its current ratio reveals that its
current assets is enough to settle its current
liabilities.
Liquidity
• Formula: Quick Assets/ Current Liabilities
• Quick Assets refers to Cash, Marketable
Securities ,

Measure
• Accounts Receivable
• Implications: this is a stringent test of liquidity
since it involves quick assets which can be

Quick
converted into cash quickly, and thus, is capable of
settling payables when these fall due.
• Case: Sin Company has quick assets of P500,000 in
2019 and P600,000 in 2020. Current liabilities of

(Acid- P250,000 in 2019

• and P300,000 in 2020. It is applying for a loan at
PNB amounting to P100,000. Should PNB extend

Test)
the loan based on its evaluation of quick assets.
• Analysis: Acid-test ratio in 2019 is
2.00(500,000/250,000); in 2020 is 2.00( 600,000/

Ratio
300,000)
• PNB Decision: Based on the quick asset ratio of
2:1, extend loan.
Activity • I. Usage: measures the firm’s use of assets to

Ratios or
generate revenue. The higher the turnover, the
more efficiently the firm is managing its assets.
• II. Activity / Turnover Measures:

Turnover •
•
•
Accounts Receivable Ratios
Inventory Ratios
Total Assets Turnover

Ratios
 • Formulas:
• Accounts Receivable Turnover
• Net Credit Sales

Activity • Average Accounts Receivable

• Average Collection Period

Measure • 365 days________

• Accounts Receivable Turnover

Accounts •
• Implications:

Receivable • Accounts Receivable turnover gives the no. of

times AR are collected during the year. The
higher the AR Turnover, the better since the firm
Ratios is collecting quickly from customers.
• Average Collection period is the no. of days,
sales remains in AR. The higher collection period
is a sign of ineffective collection which may lead
to bad debts.
 Case : Roa Company has net credit sales of P600,000, and
average accounts receivable of 2 years is P200,000. How

Activity long does it take AR to be collected, and number of days

credit sales stay as AR? BPI needs these 2 information to
decide on the collection efficiency of Roa Co.
Measure Analysis: AR Turnover is 3 times a
year(600,000/200,000), meaning AR is being collected 3x
annually. Meanwhile, the average AR collection period is
121 days( 365 days/ 3), meaning credit sales remain as AR
Accounts for 121 days.

Receivable BPI Decision: Roa Co. should exert more effort in

collecting its AR since it is only able to collect its AR three

Ratios
times a year, and its credit sales remain as AR for 4 months
(30days x 4mts). Chances of its AR becoming bad debts or
uncollectible are not remote.
 • Formulas:

Activity •
•
Inventory Turnover
Cost of Goods Sold

Measure
• Average Inventory
• Average Age of Inventory
• 365 days
• Inventory Turnover
• Implications:

Inventory • Inventory Turnover is indicative of the number of

times goods/inventory are sold in a year and if
business has excessive inventory in comparison

Ratios to its sales level.

• Average Age of Inventory indicates the length of
time needed to buy, sell and replace inventory.
 • Case: In 2019,Dexter Company has Cost of
Goods Sold amounting to P500,000. Inventory,
beginning is P120,000 and Inventory, end is

Activity
P30,000. In 2020, Cost of Sales was pegged at
P400,000 while Invty, beg is P100,000 and end is
P20,000. BDO wishes to know its inventory
turnover and average age of inventory.

Measure • Analysis: Inventory turnover(2019) is 6.67times

(500,000/150,000/2) while in 2020, it is 3.3times
(200,000/120,000/2). Average inventory age in
2019 is 55 days (365/6.67) and, in 2020, it is
111days (365/3.3)
• BDO Decision: Dexter Co. should be asked to

Inventory look into inventory items not selling well as can

be seen by the significant decrease in its
inventory sales. Its average age of inventory has

Ratios increased, meaning the holding period of

inventory in its stock room is longer, thus may
lead to obsolescence of the goods .
Activity • Formula: Sales
• Total assets

Measure
• Implications: measures the level of capital
investments relative to sales volume, revealing
how the firm is able to manage its assets to
generate sales or revenue.
• Case: Sion Co. has sales of P400,000 (2019) and
P300,000 (2020). It has assets of P
P600,000(2019) and P 500,000(2020). RCBC

Total
wants to know the Asset turnover of said
company.
• Analysis: 2019: 400,000/600,000= 67 times

Assets • 2020: 300,000/ 500,000= 60 times

• RCBC Decision: Sion Co. should be advised to
utilize well its assets to generate better sales, as

Turnover
revealed by the decrease in its asset turnover.