FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

First Quarter

Name: Jones Clarence M. Zepeda Section: Keynes

I. FINANCIAL RATIOS, VERTICAL & HORIZONTAL ANALYSIS

II. LEARNING COMPETENCIES

1. Compute and interpret financial ratios such as current ratio, working capital,
gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-
to-equity ratio, and the like.

III. OBJECTIVE(S)
1. Compute and interpret financial ratios such as current ratio, working capital,
gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-
to-equity ratio, and the like.

IV. ACTIVITY
Presented below is the Comparative Financial Statements of Tan General
Merchandise for the year 2018 and 2019:
Required:

1. Compute the following ratios for the comparative periods (2018 and 2019). The
company used 365 days in its computation for some of the ratios. Show your
solution.

a. Working Capital
2018
Working Capital= Current Assets-Current
Liabilities
Working Capital= 380,190.00 - 400,000.00
Working Capital= -19,810.00
2019
Working Capital= Current Assets-Current
Liabilities
Working Capital= 341,000.00 – 500,000
Working Capital= -159,000.00

b. Current Ratio
2018 2019
Current Ratio = Current Assets/ Current Current Ratio = Current Assets/ Current
Liabilities Liabilities
Current Ratio = 380,190.00/400,000.00 Current Ratio = 341,000.00/500,000
Current Ratio = 0.95 Current Ratio= 0.68

c. Acid Test Ratio

2018
Acid Test Ratio= (Current assets -
inventory) / Current liability
Acid Test Ratio= 380,190.00-218,500/
400,000.00
Acid Test Ratio= 0.40
2019
Acid Test Ratio= (Current assets -
inventory) / Current liability
Acid Test Ratio= 341,000.00-129,000.00/
500,000
Acid Test Ratio= 0.42

d. Accounts Receivable Turnover Ratio

2018 2019
= Net Credit Sales/ Average Accounts = Net Credit Sales/ Average Accounts
Receivable Receivable
= 686,000.00 / 69,920.00 = 810,000.00 / 90,000
= 9.81 times = 9.00 times

e. Average Collection Period

2018 2019
 =365 days /A/R Turnover Ratio =365 days /A/R Turnover Ratio
= 365 days/9.81 = 365 days/9.00
= 37.21 =40.56

f. Inventory Turnover Ratio

2018 2019
= CGS / Average Inventory = CGS / Average Inventory
= 348,300.00/218,500 = 301,750.00/129,000.00
= 1.594050343 or 1.59 = 2.339147287 or 2.34

g. Average Days in Inventory

2018 2019
=365/Inventory turnover ratio =365/Inventory turnover ratio
=365/1.59 =365/2.34
= 228.98 days = 156.04 days

h. Number of days in Operating Cycle

2018 2019
=Average days in inventory + average =Average days in inventory + average
collection period collection period
= 229.56 days + 37.21 = 155.98 days+40.56
= 266.18 days =196.60 days

i. Debt to Total Assets Ratio

2018 2019
= Total liabilities (LT) / Total assets = Total liabilities (LT) / Total assets
= 310,000.00/1,374,000.00 = 380,000.00/1,491,000.00
= 0.23 = 0.25

j. Debt to Equity Ratio

2018 2019
= Total Liabilities (LT) / Total Equity = Total Liabilities (LT) / Total Equity
= 310,000.00/664,000.00 = 380,000.00/611,000.00
= 0.47 = 0.62

k. Times Interest Earned Ratio

2018 2019
= Income before interest and taxes / = Income before interest and taxes /
Interest expense Interest expense
= 131,900.00/17,150.00 = 273,350.00/40,500.00
= 7.69 times = 6.75 times

l. Gross Profit Ratio

2018 2019
= Gross profit / Net sales = Gross profit /Net sales
= 337,700.00/686,000.00 = 508,250.00/810,000.00
= 49.23% = 62.75%

m. Profit Margin Ratio

2018 2019
= NIAT / sales = NIAT/sales
= 80,325.00/686,000.00 = 162,995.00/810,000.00
 = 11.71% = 20.12%

n. Return on Assets
2018 2019
=Profit / total assets =Profit / total assets
=80,325.00/1,374,000.00 = 162,995.00/1,491,000.00
= 0.058 or 5.85% = 0.109 or 10.93%

o. Return on Equity
2018 2019
=Profit / total equity =Profit / total equity
=80,325.00/664,000.00 =162,995.00/611,000.00
= 0.121 or 12.10% = 0.267 or 26.68%

p. Assets Turnover Ratio

2018 2019
=Net Sales / Average Total Assets =Net Sales / Average Total Assets
= 686,000.00/1,374,000.00 =810,000.00/1,491,000.00
= 0.50 = 0.54

2. Select at least three (3) financial ratios above per measurement level or category,
then interpret or compare its results from 2018 to 2019.

Liquidity
-Based on the Working Capital of the company in 2018-2019 the ratio shows a very
low or negative results for both years. It means that the company isn’t running
efficiently and can’t cover its current debt properly.
-In the Current Ratio of the company it shows that current liabilities are larger than
the company’s current assets since the result is less than 1. It means that the
company cannot pay current liabilities using current assets.
- Acid test ratio of the company is both not favorable since they are less than 1, it
signifies that the company cannot pay its current liabilities using their quick assets.

Solvency
-Debt to Total Assets Ratio for both years shows less than 1, it means that it is
favorable since the company owns more assets than liabilities and can meet its obligations
by selling its assets if needed. 
-Debt to Equity ratio of the company in 2018-2019 is both favorable since they are
both less than 1, it means that the company’s equity has more weight than debt. But
it shows increase from 0.47 to 0.62 it means that debt slightly increase but it is
considered to be favorable since equity is greater than its liabilities.
-The Time Interest Earned ratio from 2018 to 2019 shows decrease from 7.69 in
2018 it decreases to 6.75 it means that it is not favorable since it shows decrease in
the company’s ability of operating income to cover interest payments.

Profitability
- The return on assets shows that it increases from 2018 to 2019 this is something
good to the company. It means that the company is more efficient in using assets to
generate a profit
- Gross Profit Ratio shows increase from 2018-2019, 2018 gross profit ratio is not
favorable since it is less than 50%, but 2019 gross profit ratio is favorable since it is
greater than 50%. It means that the company is selling their inventory at a higher
profit percentage.
- Asset turnover ratio of the company slightly increased from 2018 to 2019. This is
something good to the company. This can be attributed to bigger net sales
generated for 2019.

Note: For further understanding of the topic, please refer to the SLM uploaded in
your google classroom. See key answers in your SLM or it will be provided to your
learning facilitator (will send thru GC).

References: Fundamentals of Accountancy, Business and Management 2 – Senior High

School Alternative Delivery Mode First Edition, 2020