HORIZONTAL ANALYSIS:

JAMES CORPORATION
Comparative Statement of Financial Position
December 31, Year 2 and Year 1

Changes
Increase (Decrease)
Year 2 Year 1 Peso % Ratio
Amoun
t
ASSETS
Current Assets 114% 100% 114
Cash 2,400 2,100 300 14.3% 1.14
Marketable securities 1,350 900 450 50.0% 1.50
Accounts receivables, net 36,000 33,000 3,000 9.1% 1.09
Inventory 60,000 51,000 9,000 17.6% 1.18
Prepaid expenses 750 900 (150) -16.7% 0.83
Total Current Assets 100,500 87,900 12,600 14.3% 1.14

Long-Term investments 1,500 1,650 (150) -9.1% 0.91

Property and equipment
Land 18,000 18,000 - 0.0% 1.00
Building, net 165,000 156,000 9,000 5.8% 1.06
Equipment, net 75,000 69,000 6,000 8.7% 1.09
Total Property&Equip. 258,000 243,000 15,000 6.2% 1.06

TOTAL ASSETS 360,000 332,550 27,450 8.3% 1.08

LIABILITIES AND STOCKHOLDER’S
EQUITY

Current Liabilities:
Account payable 22,500 21,150 1,350 6.4% 1.06
Accrued expense 6,600 6,300 300 4.8% 1.05
Note payable 10,900 8,700 2,200 25.3% 1.25
Total Current Liabilities 40,000 36,150 3,850 10.7% 1.11

Long term liabilities 110,000 108,000 2,000 1.9% 1.02

Total Liabilities 150,000 144,150 5,850 4.1% 1.04

Stockholders’ Equity
Preferred stock, P100 par, 8% 18,000 18,000 - 0.0% 1.00
Common stock, P10 par 75,000 72,000 3,000 4.2% 1.04
Additional paid in capital 12,000 11,400 600 5.3% 1.05
Retained earnings 105,000 87,000 18,000 20.7% 1.21
Total Stockholders’ Equity 210,000 188,800 21,600 11.5% 1.11

TOTAL LIAB. & STOCKHOLDERS’ EQUITY 360,000 332,550 27,450 8.3% 1.08
 JAMES CORPORATION
Comparative Income and Retained Earnings Statement
December 31, Year 2 and Year 1

Changes
Increase (Decrease)
Year 2 Year 1 Peso % Ratio
Amount

Net Sales 261,000 246,000 15,000 6.1% 1.06

Cost of Sales 182,790 169,050 13,740 8.1% 1.08
Gross Profit 78,210 76,950 1,260 1.6% 1.02
Operating Expenses 21,000 20,100 900 4.5% 1.04
Net Operating Income 57,210 56,850 360 0.6% 1.01
Interest Expenses 12,090 11,670 420 3.6% 1.04
Net Income Before Tax 45,120 45,180 (60) -1.0% 0.99
Tax Expense 11,280 11,400 (120) -1.1% .99
Net Income 33,840 33,780 60 0.2% 1.00
Add: Retained Earnings, Beg. 87,000 68,460 18,540 27.1% 1.27
Total 120,840 102,240 18,600 18.2% 1.18
Less: Dividends 15,840 15,240 600 3.9% 1.04
Retained Earnings, Ending 105,000 87,000 18,000 20.7% 1.21
Net Income 33,840 33,780 60 0.2% 1.00
Dividends to preferred stock 1,440 1,440 - 0.0% 1.00
Net Income available to common 32,400 32,340 60 0.2% 1.00
Dividends to common stock 14,400 13,800 600 4.3% 1.04
Net Income 18,000 18,540 (540) -2.9% 0.97

RULES (Horizontal Analysis):

1. To compute for the peso change, current year less prior year.
2. To compute for the percentage changes, peso change divided by the prior year
(serve as the base figure). If there is no amount in prior year, no percentage
change will be shown, as a matter of rule in mathematics.
3. To compute for the ratio presentation, current year divided by the prior year.
Again, if the base year is zero or no amount in prior year, no ratio will be shown
in the analysis, thus, peso amount presentation is important.
VERTICAL ANALYSIS:
JAMES CORPORATION
Comparative Common-Size Statement of Financial Position
December 31, Year 2 and Year 1
January 1, Year 2, beg. AR 33,00; end @ Dec. 31 36,000
Year 2 Year 1 Year 2 Year1
ASSETS
Current Assets
Cash 2,400 2,100 0.7% 0.6%
Marketable securities 1,350 900 0.4% 0.3%
Accounts receivables, net 36,000 33,000 10.0% 9.9%
Inventory 60,000 51,000 16.7% 15.3%
Prepaid expenses 750 900 0.2% 0.3%
Total Current Assets 100,500 87,900 27.9% 26.4%

Long-Term investments 1,500 1,650 0.4% 0.5%

Property and equipment
Land 18,000 18,000 5.0% 5.4%
Building, net 165,000 156,000 45.8% 46.9%
Equipment, net 75,000 69,000 20.8% 20.7%
Total Property&Equip. 258,000 243,000 71.7% 73.1%

TOTAL ASSETS 360,000 332,550 100.0% 100.0%

LIABILITIES AND STOCKHOLDER’S
EQUITY

Current Liabilities:
Account payable 22,500 21,150 6.4% 6.4%
Accrued expense 6,600 6,300 1.9% 1.9%
Note payable 10,900 8,700 2.6% 2.6%
Total Current Liabilities 40,000 36,150 10.9% 10.9%

Long term liabilities 110,000 108,000 32.5% 32.4%

Total Liabilities 150,000 144,150 43.3% 43.3%

Stockholders’ Equity
Preferred stock, P100 par, 8% 18,000 18,000 5.4% 5.4%
Common stock, P10 par 75,000 72,000 21.7% 21.6%
Additional paid in capital 12,000 11,400 3.4% 3.4%
Retained earnings 105,000 87,000 26.2% 26.3%
Total Stockholders’ Equity 210,000 188,800 56.7% 56.7%

TOTAL LIAB. & STOCKHOLDERS’ EQUITY 360,000 332,550 100.0% 100.0%

JAMES CORPORATION
 Comparative Income Statement
December 31, Year 2 and Year 1
COMMON SIZE PRESENTATION

Year 2 Year 1 Year 2 Year 1

Net Sales 261,000 246,000 100% 100%
Cost of Sales 182,790 169,050 70.0% 68.7%
Gross Profit 78,210 76,950 30.0% 31.3%
Operating Expenses 21,000 20,100 8.0% 8.2%
Net Operating Income 57,210 56,850 21.9% 23.1%
Interest Expenses 12,090 11,670 4.6% 4.7%
Net Income Before Tax 45,120 45,180 17.3% 18.4%
Tax Expense 11,280 11,400 4.3% 4.6%
Net Income 33,840 33,780 13.0% 13.7%

RULES (Vertical Analysis):

1. For the balance sheet, Total Assets and Total Liabilities and Capital are both
considered 100% and each item in the particular section are presented as a
certain percent of the total. In James Corporation, Cash is 7.8% of total assets
while Accounts Payable represents 6.3% of total liabilities and stockholders’
equity.
2. For the income statement, Net Sales is considered as the 100%. Each item in the
income statement represents a certain percent of sales. In James Corporation,
Cost of Sales is 70% of sales.

RATIO ANALYSIS
Use the illustration presented in JAMES CORPORATION’s Financial Statements.
YEAR 1 YEAR2
1. Working capital
Current Assets 100,500 87,900
Less: Current Liabilities 40,000 36,150
Working Capital 60,500 51,750
Interpretation: The bigger the working capital of an entity, the better as it would
mean more current assets are available for operations

2. Current Asset Ratio

Current Assets 100,500 87,900
Divided by Current Liabilities 40,000 36,150
Current Asset Ratio 2.6:1 2.43:1
Interpretations: For every ₱ 1 of Current Liabilities, an entity has ₱ 2.60 worth of
current assets to pay the current liabilities.

3. Quick Asset Ratio

Quick assets 39,750 36,000
Divided by CL 40,000 36,150
Quick Asset Ratio 0.99:1 1:1
Interpretation: For every ₱ 1 of CL, the entity has ₱ 0.99 worth of quick assets
(Cash, Marketable Securities and Accounts Receivable, net) to pay its CL.

4. Accounts Receivable Turnover

Net sales / Ave. AR = 261,000 / [(36,000 + 33,000) / 2] = 7.56 times
Interpretation: The company was able to collect its Account Receivables on
average of 7.56 times within the year.

5. No. of Day in AR
365 days / 7.56 = 48.28 days OR
Ave. AR / Ave. daily sales
34,500 / (261,000 / 365 days) = 48.25 days
Interpretation: The entity has 48.28 days before it was able to collect its
Accounts Receivable.

6. Inventory Turnover
= Cost of Sales / Ave. Inventory
= 182,790 / [(60,000 + 51,000) / 2]
= 3.29 times
Interpretation: The entity was able to sold its Inventories, on average of 3.29
times within the year.

7. No. of Days in Inventory

= 365 days / 3.29 = 110.94 days OR
= Ave. Inventory / Ave. daily cost of sales
= 55,500 / [(182,790 / 365)] = 110.82 days
 Interpretation: The entity has an average of 110.94 days before it was able to sell
its inventories. Meaning, the inventory was in stock for 110.94 day before it was sold.

8. Debt Equity Ratio

Total Liabilities 150,000 144,150
Divided by T. Stockholders’ Equity 210,000 188,800
Debt to Equity Ratio 0.71:1 0.76:1
Interpretation: For every ₱ 1 of Total Liabilities which is from the creditors, the
owner/s has an equivalent ₱ 0.71 provided to the business.

9. Book Value of Securities

Formula: Value of Each Securities / Each number of share outstanding
Preferred stock = 18,000 / (18,000/100)
= 18,000 / 180 shares = ₱ 100 per share
Outstanding shares
Common Stock = 192,000 / (75,000 / 10)
= 192,000 / 7,500 shares
= ₱ 25.60 per share
Interpretation: The value of each share of preferred stock in the books of the
entity is worth ₱100. While the value of each share of common stock in the books of the
entity is worth ₱ 25.60.

10. Return on Sales

= Net Income / Net Sales
= 33,840 / 261,000
= 12.97 %
Interpretation: The net income of the entity is equivalent to 12.97% of the net
sales.

11. Return on Total Assets

Formula: Net Income Before Interest, net of tax / Ave. Total Assets
= (33,840 + 8,463*) / [(360,000 + 332,550) / 2]
= (33,840 + 8,463) / 346,275 = 12.22%
TAX SHIELD
*Interest net of tax:
Interest expense 12,090
Less: Assume the tax rate is 30% 3,627
Interest net of tax effects 8,463
Interpretation: The net income generated of the total assets is equivalent to
12.22% of the total net income before interest, net of tax.
1,440 (18,000 x 8%)– Preferred Dividend
12. Return on Equity
Formula: Net Income to Common Stocks / Ave. T. Shareholders’ Equity
= (33,840 – 1,440) / [(192,000 + 170,800) / 2]
= (33,840 – 1,440) / 181,400 = 17.86%
 Interpretation: The share of the common stocks in the net income, excluding the
dividend attributable to preferred stocks is 17.87%.

13. Interest Coverage

Formula: [Operating Income or EBIT} / Interest Expense
= 57,210 / 12,090
= 4.73 times
Interpretation: The entity has the ability to pay its annual interest charges and it
will require 4.73 times before the entity would not be able to pay its annual
interest charges.

14. Earnings Per Share

Formula: Net Income/ # of Common Stock Outstanding (simple)
= (33,840 – 1,440) / 7,500 shares = ₱ 4.32 per share
Interpretation: For every 1 share of common stocks, its earnings is ₱ 4.32.

15. Price Earnings Ratio

Assume that the market value of common stock per share is ₱195.
Formula: Market Value Per Share / Earnings Per Share
= 195 / 4.32
= 45.13
Interpretation: For every ₱1 of earnings of the entity, the investors will pay 45.13.

16. Dividend Pay Out

Assume that the dividends paid by the entity for Year 2 is ₱14,400.
Formula: Dividend Per Share of Common Stock / Earnings Per Share
= (14,400 / 7,500) / 4.32
= 44.44%
Interpretation: For every ₱1 of earnings, 44.44% is distributed to dividends.

17. Dividend Yield

Formula: Dividend Per Share of Common Stock/Market Price Per Share
= (14,400 / 7,500) / 195
= 1%
Interpretation: This ratio indicates that 1% of its dividends are actually being
distributed in relation to its market share price.