MODULE 5

TEST OF PRODUCTIVITY AND PROFITABILITY

Objectives:
1. Discuss the profitability ratios of an income statement.
2. Identify the different analytical measurements used to determine productivity and
profitability of operations.
3. Illustrate different analytical measurement to determine the significance of ratios to
productivity and profitability of operation.

Learning Content:

Profitability ratios.
In analyzing the income statement, profitability is first measured by the gross profit
percentage. This is the mark on or margin obtained on sales; and to measure over-all profitability,
operating profit percentage is computed.

The different analytical measurements being used by some analysts to determine

productivity and profitability of operation are:

R AT I O S FORMULAS SIGNIFICANCE

Asset Turnover Net Sales Reflects of effectiveness of asset

Rate Ave. Bus. Asset utilization. Increase in ratio
means better utilization, low ratio
indicates over investment in Asset.
Note: Exclude long-term investment from business asset figure.
If sales unit (instead of pesos) are used, significance is more
meaningful because it is not affected by price fluctuation.

Plant Turnover Net Sales Reflects effectiveness of

Rate Ave. Fixed Assets, Net management in keeping
plant properties employed; or over
expansion of the facilities.

Note: Sometimes intangible assets may be included in the

denominator; and some analysts use ending fixed asset
balance only.
Asset Productivity Net Income After Tax Indicates adequacy or
Rate Total Assets Employed inadequacy of income.

Note: If income of permanent investments is excluded, the

permanent investments which earn the same must
likewise, be excluded.

Plant earned on Net Income After Tax Reflects how profitable

+ Owners’ equity Ave. Capital is the owners’ investment.

Note: Sometimes capital at the beginning or at the end is used

if average capital is not obtainable. This is also called
“ Net income ratio”.

Rate of return Net Sales Determine how will

On Total Investment Owners’ Equity + Fixed permanent funds are used
Liabilities It measures earning power
of “Net Assets”.

Note: Net Assets means net working Capital

Plus other assets.
Learning Activity:

Assume the following data of BSAB-AB Company.

2 0 1 9

Beginning Ending

CURRENT ASSET-------------------------------- ₱ 45, 000.00 55, 000.00

Fixed Assets, Net------------------------------- 65, 000.00 60, 000.00
Permanent Investment------------------------ 10, 000.00 10, 000.00
₱ 120, 000.00 ₱ 125, 000.00
Current Liabilities------------------------------- ₱ 14, 000.00 ₱ 12, 000.00
Mortgage Payable--------------------------------- 20, 000.00 20, 000.00
Capital Stock: Preferred-------------------------- 75, 000.00 75, 000.00
Common Stock 11, 000.00 18, 000.00
₱ 120, 000.00 ₱ 125, 000.00
SALES--------------------------------------------------------------------------------------₱ 300, 000.00
Less: CGS & Expense---------------------------------------------------------------------260, 000.00
Net Profit-------------------------------------------------------------------------------- ₱ 40, 000.00
Add: Dividend Income---------------------------------------------------------------- 1, 200.00
Net Income Before Income Tax---------------------------------------------------- 41, 200.00
Less: Income Tax at 25%------------------------------------------------------------ 10, 300.00
Net Income After Income Tax----------------------------------------------------- ₱ 30, 900.00
Analytical Measurements: (Solutions)
1. ( 45, 000.00 + 65, 000.00) = ₱ 112, 500.00 Ave. Business Assets.
2
₱ 300, 000.00 ÷ ₱ 112, 500.00 = 2.67 Asset Turnover rate
2. (65, 000.00 + 60, 000.00) ÷2 ₱ 62, 500.00 Ave. Fixed Assets. Net
₱ 300, 000.00 ÷ ₱ 62, 500.00 = 4.8 Plant Turnover Rate
3. ₱ 40, 000.00 - .25 (40, 000.00) =₱ 30, 000.00 Net Income after Tax
excluding dividend income
₱ 30, 000.00 ÷ ₱ 112, 500.00 = .2667 or 26.6% Asset Productivity Rate
OR: (₱ 120, 000.00 + ₱ 125, 000.00) ÷ 2 = ₱ 122, 500.00 Ave. Total Assets
₱ 30, 900.00 ÷ ₱ 122, 500.00 = .2522 or 25.22% Asset Productivity rate
4. ( ₱ 75, 000.00 + ₱ 11, 000.00 ) + ( ₱75, 000.00 + ₱ 18, 000.00 ) = ₱ 89, 500.00 Ave. Capital
2
₱ 30, 000.00 ÷ ₱ 89, 500.00 = .3352 or 33.52% Rate earned on owner’s equity
5. ₱ 30, 000.00 = .274 or 27.4% Rate of return on total investment.
₱ 20, 000.00 + ₱ 89, 500.00

Learning Assessment
Based on the given data/Activity of BSAB-AB Company, write down/encode the significance
for the following:
1. Asset Turnover Rate
2. Plant Turnover Over Rate
3. Asset productivity Rate
4. Use Short size Bond paper.
5. Font style is “Calibri, size 12”.

RUBRICS:
Rationality/Relevance------------ 70%
Grammar Construction---------- 25%
Neatness---------------------------- 0.05
TOTAL---------------------- 100%
Reference:
Management Accounting
V. A. Francisco
Accounting
Win Ballada, CPA, MCA