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Fundamentals of Accountancy, Business and Management 2 – Grade 12
Alternative Delivery Mode
Quarter 1 – Module 6: Analysis and Interpretation of Financial Statements
First Edition, 2020
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Published by the Department of Education, Division of Palawan

Schools Division Superintendent:
Natividad P. Bayubay, CESO VI
Assistant Schools Division Superintendents:
Loida Palay-Adornado, Ph.D.
Felix M. Famaran
Development Team of the Module

Writer: Daisy S. Dela Peña
Language Editor: Marianne R. Valdez
Reviewer: Eric N. Quillip
Management Team: Aurelia B. Marquez
Rodgie S. Demalinao
Eric N. Quillip
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Introductory Message
For the facilitator:
Welcome to the Fundamentals of Accountancy, Business and Management 2 –

Grade 12 Modular Distance Learning (MDL) Self-Learning Module on the Analysis
and Interpretation of Financial Statements!
This module was collaboratively designed, developed and reviewed by educators

from public institution to assist you, the teacher or facilitator in helping the
learners meet the standards set by the K to 12 Curriculum Most Essential Learning
Competencies (MELCs) in the “New Normal” situation while overcoming their
personal, social, and economic constraints in schooling.
This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration
their needs and circumstances.
In addition to the material in the main text, you will also see this box in the body of
the module:
Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.
As a facilitator, you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to
manage their own learning. Furthermore, you are expected to encourage and assist
the learners as they do the tasks included in the module.
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For the learner:
Welcome to the Fundamentals of Accountancy, Business and Management 2 –

Grade 12 Modular Distance Learning (MDL) Self-Learning Module on the Analysis
and Interpretation of Financial Statements!
This module was designed to provide you with fun and meaningful opportunities
for guided and independent learning at your own pace and time. You will be
enabled to process the contents of the learning resource while being an active
learner.
This module has the following parts and corresponding icons:
What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in
the module.
What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.
What’s In This is a brief drill or review to help you link

the current lesson with the previous one.
What’s New In this portion, the new lesson will be

introduced to you in various ways; a story, a
song, a poem, a problem opener, an activity
or a situation.
What is It This section provides a brief discussion of

the lesson. This aims to help you discover
and understand new concepts and skills.
What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.
What I Have Learned This includes questions or blank

sentence/paragraph to be filled in to process
what you learned from the lesson.
What I Can Do This section provides an activity which will

help you transfer your new knowledge or
skill into real life situations or concerns.
Assessment This is a task which aims to evaluate your

level of mastery in achieving the learning
competency.
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Additional Activities In this portion, another activity will be given
to you to enrich your knowledge or skill of
the lesson learned.
Answer Key This contains answers to all activities in the

module.
At the end of this module you will also find:
References This is a list of all sources used in

developing this module.
The following are some reminders in using this module:
1. Use the module with care. Do not put unnecessary mark/s on any part of
the module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.
We hope that through this material, you will experience meaningful learning
and gain deep understanding of the relevant competencies. You can do it!
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What I Need to Know
This module was designed and written with you in mind. It is here to help you
master the Statement of Financial Position. The scope of this module permits it to
be used in many different learning situations. The language used recognizes the
diverse vocabulary level of students. The lessons are arranged to follow the
standard sequence of the course. But the order in which you read them can be
changed to correspond with the textbook you are now using.
The module is divided into two lessons, namely:

• Lesson 1 – define the measurement levels, namely, liquidity, solvency,
stability, and profitability
• Lesson 2 – perform vertical and horizontal analyses of financial statements of
a single proprietorship
After going through this module, you are expected to:

Lesson 1:
1. Identify and define measurement levels;
2. Differentiate the various financial ratios;
3. Solve exercises and problems that require computation and interpretation
using various financial ratios.
Lesson 2:
1. Compare and contrast vertical and horizontal analyses;
2. Perform vertical and horizontal analyses of financial statements of a single
proprietorship; and
3. Determine the importance of vertical and horizontal analyses of financial
statements of a single proprietorship.
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What I Know
Directions: Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.
1. It pertains to the company’s capacity to pay long term debts or liabilities.

a. Solvency c. Liquidity
b. Profitability d. Stability
2. What do we call the company’s ability to pay short-term debts that are coming
due?
3. What is the process of evaluating risk, performance, financial health, and

future prospects of a business by subjecting financial statement data to
computational and analytical techniques with the objective of making economic
decisions?
a. Financial statement technique c. Financial statement comparison
b. Financial statement analysis d. Financial statement evaluation
4. It refers to the company’s ability to be structurally firm and can support its
long-term debts by its equity.
5. What is the company’s ability to convert its sales into cash flow and profit?
6. It is a technique used that compares the relationship between each line item of
the financial statements in one given period.
a. Horizontal Analysis c. Vertical Analysis
b. Sequential Analysis d. Situational Analysis
7. It is a technique used in analyzing and evaluating financial statements using a

series of financial statement data over a period of time that determine if each
item increases or decreases.
8. In vertical analysis of financial statements, what will be the base amount if the
Statement of Financial Position will be analyzed for the period?
a. Total Assets c. Total Equity
b. Total Liabilities d. Total Liabilities and Equity
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9. What is the other term used for horizontal analysis because it shows the
percentage of change from one period to another?
a. Time analysis c. Total analysis
b. Change analysis d. Trend analysis
10. A business has liabilities of PhP 200, 000.00 and equity of PhP 800, 000.00.
What is the percentage of total liabilities to total assets?
a. 20% c. 60%
b. 40%s d. 80%
11. A business had owner’s equity of PhP 2, 000,000.00 for 2018 and PhP 2,
700,000.00 for 2019. What is the increase in owner’s equity?
a. 39% c. 37%
b. 38% d. 35%
12. If current assets are PhP 550, 000.00 and total assets are PhP 3,050,000.00,
what is the percentage of non-current assets?
a. 82.97% c. 83.75%
b. 81.97% d. 84.20%
13. During the period, Dale Merchandising reported net sales amounting to PhP 2,
875,000.00, gross profit of Php 1,515,000.00 and operating expenses of PhP
718,000.00. What is the percentage of cost of goods sold to net sales?
a. 43% c. 46%
b. 45% d. 47%
14. Based on the data given on item no. 13, what is the percentage of Net
Income to Net Sales??
a. 28% c. 26%
b. 25% d. 27%
15. A business had net sales of PhP5, 956,000.00 for 2018 and PhP4, 898,000.00
for 2019. What is the percentage of net sales?
a. -19% c. -17%
b. -16% d. -18%
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Define the Measurement

Lesson
Levels, namely, Liquidity,
1 Solvency, Stability, and
Profitability
Evaluating and analyzing how the business is doing is a very important task for
business owners and other financial statement users. It is done by reviewing its
financial statements because it will give them a clearer picture as to where their
business is heading and will help them in making good economic decisions.
Analysis and interpretation of financial statement have measurement levels as to
the firm’s liquidity, solvency, stability and its profitability. These ratios and other
financial ratios will be discussed further on the succeeding module. Each
measurement level has various financial ratios that gauge the firm’s performance.
What’s In
As what you have learned from the previous modules, the financial statements,
Statement of Financial Position (SFP), Statement of Comprehensive Income (SCI),
Statement of Changes in Equity (SCE) and Cash Flow Statement (CFS), are needed
by the business because these are the sources of data and information needed to
calculate the financial ratio and analysis for each measurement level (liquidity,
solvency, stability and profitability).

Begin the lesson by letting the students do Activity No 1.
“MATCH IT”. Let the students answer the given worksheet which
will help them define the measurement levels, namely, liquidity,
solvency, stability, and profitability.
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What’s New
Activity 1: “MATCH IT”

Directions: Match Column A with its corresponding answer on Column B and
write the letter of your choice at the space provided before each number.
COLUMN A COLUMN B
________1. Liquidity Ratios a. Ratio of current assets to

current liabilities
________2. Solvency Ratios b. Ratio of total debts to
total assets
________3. Stability Ratios c. Ratio of total debts to
total assets
________4. Profitability Ratios d. Ratios that shows the
capacity of the business to
pay its short- term debts.
________5. Current Ratio e. Ratio of net income to
sales
________6. Debt to Asset Ratio f. Ratios that shows the
pay its long- term debts.
________7. Debt to Equity Ratio g. Ratio of operating profit to
sales
________8. Gross Margin Ratio h. Ratios that shows the
capacity of the business
to convert its sales into
cash flow and profit.
________9. Operating Margin Ratio i. Ratio of gross profit to
sales
________10. Net income Ratio j. Ratios that shows the
pay its short- term debts
by its equity.
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What is It
In Activity 1, you were able to define the measurement levels, namely, liquidity,
solvency, stability, profitability and some of the financial ratios in relation to the
analysis and interpretation of financial statements. In this part of the module, you
will learn further the most common ratios for the following measurement levels
with its corresponding formulas and sample problems.
The most common ratios for the following measurement levels are as follows:
1. Liquidity - the company’s ability to pay debts that are coming due /short
term debt.
a. Current ratio- the ratio of current assets to current liabilities, meaning

the firm’s ability to pay its current debt.
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Example:
Dale’s Apparel Store applies a loan for the store’s remodeling. He presented
his detailed Statement of Financial Position for the bank to compute its
Current Ratio. The Statement of Financial Position includes the following
accounts:
Cash P 25,000.00
Accounts Receivable 18,000.00
Merchandise Inventory 8,000.00
Investments 10,000.00
Prepaid Expenses 1,500.00
Current Liabilities 18,000.00
Current Ratio computation is:
𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎 + 𝟏, 𝟓𝟎𝟎

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟖, 𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟑. 𝟒𝟕
Interpretation:
Dale’s current ratio of 3.47 means that the store is liquid considering it can
pay off all of its current liabilities with current assets and still have some
current assets that will be left for them.
b. Quick ratio – also called Acid Test Ratio, is a stricter measure of

liquidity. It does not consider all the current assets, only those that are
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easier to liquidate such as cash, cash equivalents, short-term investments or
marketable securities and accounts receivable are referred to as quick
assets. Quick assets are current assets that can be converted to cash within
90 days or shorter period.
𝐂𝐚𝐬𝐡+𝐂𝐚𝐬𝐡 𝐄𝐪𝐮𝐢𝐯𝐚𝐥𝐞𝐧𝐭𝐬+𝐒𝐡𝐨𝐫𝐭−𝐭𝐞𝐫𝐦 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬+𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Example:
Using the same example above, Dale’s Apparel Store applies a loan for the
store’s remodeling. He presented his detailed Statement of Financial Position
for the bank to compute its Quick Ratio. The Statement of Financial Position
includes the following accounts:
Cash P 25,000.00
Merchandise Inventory 8,000.00
Investments 10,000.00
Prepaid Expenses 1,500.00
Current Liabilities 18,000.00
Quick Ratio computation is:
𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟖, 𝟎𝟎𝟎
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 = 𝟐. 𝟗𝟒
Interpretation:
Dale’s quick ratio of 2.94 means that the store can pay off all of its current
liabilities with its quick assets and still have some current assets that will be
left for them.
c. Working Capital Ratio – pertains to the business’ ability to pay its

current liabilities with the use of its current assets. There are four examples
of changes that can affect the working capital:
Current Assets increase = increase in working capital

Current Assets decrease = decrease in working capital
Current Liabilities increase = decrease in working capital
Current Liabilities decrease = increase in working capital
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 − 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Example:
Amor’s Water Station has made loans from banks to purchase its water and
sanitation equipment five years ago. This made its working capital decreases
because these loans are becoming due. At the end of the year, Amor’s
statement of financial statement showed a balance of P350,000.00 for its
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Current Assets and P180,000.00 for its Current Liabilities. Compute for its
Working Capital.
Computation of Working Capital:
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟑𝟓𝟎, 𝟎𝟎𝟎 − 𝟏𝟖𝟎, 𝟎𝟎𝟎
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟏𝟑𝟎, 𝟎𝟎𝟎. 𝟎𝟎
Interpretation:
Amor’s Water Station showed a positive working capital ratio shows that the
business can pay all its current liabilities and still have current assets left
over.
2. Solvency- pertains to the company’s capacity to pay long term debts or

liabilities.
a. Debt to asset ratio- it pertains to the ratio of total debt to total assets. It
shows a company’s ability to pay off its liabilities with its assets.
𝐓𝐨𝐭𝐚𝐥 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Example:
Annie’s Tailoring Shop would like to expand its shop and buy additional
sewing and tailoring equipment. The owner consulted the bank for a new
loan. She presented the shop’s financial statement. It showed total assets of
P250,000.00 and total liabilities of P 85,000.00. Debt to Asset ratio is
computed as:
𝐏𝟖𝟓, 𝟎𝟎𝟎
𝐏𝟐𝟓𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟒
Interpretation:
The debt to asset ratio of the shop shows that the shop’s total liabilities is
34% of its total assets. It can be considered as less risky because the owner
owns more of the shop’
b. Debt to equity ratio- it pertains to the ratio of total debt to owner’s

equity/ shareholder’s equity (Asset – liabilities = Equity).
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲
Example:
Let us assume that a business has P250,000.00 credit from a bank and a
P450,000.00 loan mortgage on its property. The owners of the business
invested P1.8 million. The debt to equity ratio is computed as:
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𝐏 𝟕𝟎𝟎, 𝟎𝟎𝟎
𝐏 𝟏, 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟗
Interpretation:
A debt ratio of .39 means that there is still more equities than liabilities.
c. Equity ratio- it pertains to the ratio of the business assets that are
financed by capital. A high ratio shows a high level of capital.
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Example:
John Dale’s Infotech has just started its business with some investors. It is
looking for additional investors to finance its future expansion. It had
reported its total assets to P 350,000.00, total liabilities of P80,000.00 and
total equity of P 270,000.00. The equity ratio is computed as:
𝐏 𝟐𝟕𝟎, 𝟎𝟎𝟎
𝐏 𝟑𝟓𝟎, 𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟕𝟕
Interpretation:
John Dale’s showed a healthy ratio because 77 percent of its total assets are
owned by the owners and not creditors. It means that investors/ owners
rather than creditors are funding more assets.
3. Stability – It is the long- term counter part of liquidity or the company’s

ability to be structurally firm and can support its long-term debts by its
equity.
a. Debt to equity ratio- it pertains to the ratio of total debt to owner’s

equity/ shareholder’s equity (Asset – liabilities = Equity).
b. Interest Cover Ratio- it shows how many times a business’s interest

expense on its loans/ credits are covered by its operating profit. The higher
multiple the better.
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐄𝐱𝐩𝐞𝐧𝐬𝐞
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Example:
Arlene’s Flower Shop has generated P 95,000.00 operating profit for the year
and spent P 13,800 on its Interest expense. Interest Cover ratio is computed
as follows:
𝐏 𝟗𝟓, 𝟎𝟎𝟎
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟏𝟑, 𝟖𝟎𝟎
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 = 𝟔. 𝟖𝟖
Interpretation:
The interest cover ratio of 6.88 shows that the Shop’s operating profit can
cover up its interest expense 6.88 times.
4. Profitability - the company’s ability to convert its sales into cash flow and
profit.
a. Gross margin ratio- it is the ratio of gross profit to sales (Gross profit=
Sales- Cost of goods sold).
𝐆𝐫𝐨𝐬𝐬 𝐌𝐚𝐫𝐠𝐢𝐧
𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
Example:
Assume Dale’s Apparel Store showed Inventory of P250,000.00 for the year.
They were able to made a sale of P840,000.00. Some of it were returned and
refunded amounting to P35,000.00. Dale’s gross margin ratio is computed as
follows:
( 𝐏 𝟖𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟓, 𝟎𝟎𝟎) − 𝐏 𝟐𝟓𝟎, 𝟎𝟎𝟎

𝐏 𝟖𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟓, 𝟎𝟎𝟎
𝐏 𝟓𝟓𝟓, 𝟎𝟎𝟎
𝐏 𝟖𝟎𝟓, 𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟔𝟗

Interpretation:
Dale’s gross margin ratio of 69 percent shows a high ratio in the apparel
industry. It means that after Dale pays off its inventory costs, it still has 69
percent of the sales revenue to cover its operating costs.
b. Operating margin ratio - it is the ratio of operating profits to sales

(Operating profit = Gross profit- Operating expenses).
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
10
Example:
Josefina’s Café reported Gross Profit of P500,000.00, Operating Expenses of
P 115,000.00 and Net Sales of P 785,000.00 on its Statement of
Comprehensive Income. Operating Margin Profit is computed as:
𝐏𝟓𝟎𝟎, 𝟎𝟎𝟎 − 𝟏𝟏𝟓, 𝟎𝟎𝟎

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟕𝟖𝟓, 𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟒𝟗
Interpretation:
Josefina’s operating margin ratio shows that after paying off operating
expenses it still has 49 percent remaining portion of net sales that could
cover other expenses.
c. Net income margin ratio - it is the ratio of net income margin to sales
(Net income = Operating profit – interest and taxes). Also referred to as Profit
Margin Ratio. It measures how much net profit is produced at a certain level
of sales.
𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
Example:
Josefina’s Café reported Net Sales of P910,000.00 and Net Income of
P 315,000.00 on its Statement of Comprehensive Income. Net Income Margin
ratio is computed as:
𝐏 𝟑𝟏𝟓, 𝟎𝟎𝟎
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝐏 𝟗𝟏𝟎, 𝟎𝟎𝟎
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟓
Interpretation:
It shows that Josefina’s converted 35 percent of her sales into profits.
d. Return on asset (ROA) - it is the ratio that measures the peso value of
income generated by using the business assets.
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
Note: Average assets are computed by adding the beginning balance and
ending balance and then divide it by 2. It may be only ending of total assets if
beginning balance is not given.
Example:
Kiko’s Trading and Construction is a fast- growing construction business
that caters building construction and real estate development in Puerto
Princesa City. Its Statement of Financial Position showed beginning assets of
PhP 2, 500,000.00 and an ending balance of PhP 3,800,000.00. During the
year, it had made a net income of PhP 15,825,000.00. Kiko’s return on
assets ratio will be:
11
P 15,825,000
(P 2,500,000 + 3,800,000)/ 2
P 15,825,000
(P 2,500,000 + 3,800,000)/ 2
P 5,825,000
3,150,000
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟓𝟎𝟐. 𝟑𝟖
Interpretation:
The ROA of 502.38 percent means that for every peso that Kiko invested in
assets during the year produced PhP 5.02 of net income.
e. Return on equity (ROE) measures the return (net income) generated by

the owner’s capital invested in the business. Similar to ROA, the
denominator of ROE may also be total equity or average equity.
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐄𝐪𝐮𝐢𝐭𝐲
Note: Average equity is computed by adding the beginning balance and

ending balance and then divide it by 2. It may be only ending of total equity if
beginning balance is not given.
Example:
John’s Trading is engaged in retail business. It had reported a Net Income
for the year of PhP 235,000.00 and Owner’s Capital of PhP 580,000.00
ending balance.
𝐏𝐡𝐏 𝟐𝟑𝟓, 𝟎𝟎𝟎
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝐏𝐡𝐏 𝟓𝟖𝟎, 𝟎𝟎𝟎
𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =. 𝟒𝟏
Interpretation:
ROE of 41 percent shows that for every peso of investment there is a P.41
return on the owner’s investment.
12
What’s More
Activity 2: Gerlie’s Bread and Pastries

Directions: Use the following ratio to complete Gerlie’s Bread and Pastries
Statement of Financial Position:
a. Current ratio is 0.70.
b. Acid-test ratio is 0.50.
Gerlie’s Bread and Pastries’ incomplete Statement of Financial Position is given

below:
Cash P 45,000 Total current liabilities P 109,800.00

Receivables 1. Long term note payable 5.
Inventories 19,800.00 Other long term 24,500.00
liabilities
Prepaid Expenses 2.
Total Current Assets 3.
Baking Equipment 4. Owner’s capital 50,000.00
Other assets 60,000.00
Total assets 191,860.00 Total liabilities and 6.
equity
Activity 3: Aysid Wash and Wear Supplies- Part 1

Directions: Use the following information given by Aysid Wash and Wear Supplies
to compute for Liquidity Ratios.
Cash P 400,000 Sales P 1,500,000

Accounts Receivable 500,000 Cost of Goods Sold 700,000
Inventory 550,000 Gross Profit 800,000
Equipment 850,000 Operating Expenses 300,000
Total Assets P 2,300,000 Operating income 500,000
Accounts Payable P 600,000 Interest Expense 50,000
Notes Payable 400,000 Net Income P 450,000
Owner, Capital 1,800,000
Total Liabilities and P 2,300,000
equity
13
Activity 4: Aysid Wash and Wear Supplies- Part 2
Directions: Use the following information given by Aysid Wash and Wear Supplies
to compute for Solvency Ratios.
Cash P 400,000 Sales P 1,500,000

Accounts Receivable 500,000 Cost of Goods Sold 700,000
Inventory 550,000 Gross Profit 800,000
Equipment 850,000 Operating Expenses 300,000
Total Assets P 2,300,000 Operating income 500,000
Accounts Payable P 600,000 Interest Expense 50,000
Notes Payable 400,000 Net Income P 450,000
Owner, Capital 1,800,000
Total Liabilities and P 2,300,000
equity

Activities 2, 3 and 4 are designed to develop and enrich students’
knowledge on the Analysis and interpretation of financial
statement that have measurement levels as to the firm’s liquidity,
solvency, stability and its profitability and computation of
financial ratio. The activities ensure that students’ full
understanding of the lesson is achieved.
14
What I Have Learned
At this point, let us see how much you have gained from the discussions and
activities you have undergone.
Activity 5: “LET PROBLEM SOLVE IT”

Directions: Analyze the given situations, solve and give the appropriate answers.
Use a separate sheet of paper.
1. Wash and Wear Laundry has given the following information to its
bank as follows: Cash - Php 300,000; Accounts Receivable - PhP
68,000; Inventory - PhP 45,000; Prepaid Rent - PhP 18,000, and
Current Liabilities- P 85,000. Compute the current ratio and interpret
its result.
2. Read Me Book Shop has financial information as follows: Inventory - P

10,000; Prepaid Supplies - PhP 5,000; Total Current Assets - PhP
35,800 and Current Liabilities - PhP 15,000. Compute the quick ratio
and interpret its result.
3. No Melt Ice Cream parlor has Net Income of PhP 850,000 and Asset
with beginning of PhP 524,000 and ending balance of PhP 256,000.
Compute for Return on Assets (ROA) and interpret the result.
4. Everyday Bake Shop sold baked goodies and products costing PhP
250,000 for a 50% mark-up on cost. There were no products returned.
Compute for gross margin ratio and interpret the result.
5. Choose Me Boutique had the following accounts at year end: Current

Assets- PhP 450,000.00 and total liabilities of PhP 280,000. Compute
for debt ratio and interpret the results.
15
What I Can Do
This activity will help you transfer into real-life situations the knowledge and skills
you have gained or learned from this module.
Activity 6: TJ’s Bakes

Based on the financial information of TJ’s Bakes from its Statement of
Comprehensive Income, compute for Profitability Ratio and interpret the result:
Net Sales P 238,000

Cost of goods sold 84,000
Operating Expenses 39,800.00
Interest expense 3,500.00
Income tax expense 5,600.00
16
Perform vertical and

Lesson
horizontal analyses of
2 financial statements of a
single proprietorship
Financial statement analysis is needed by every business in understanding and

analyzing its operation and financial condition. It gives them the real picture of how
well the business is doing or what should be done to improve its business
condition. It is very helpful in evaluating business’ activities from the past, the
present and project future financial performance that will help in making sound
economic decision.
What’s In
You have learned from Lesson 1 of this module the different financial ratios for
each measurement level (liquidity, solvency, stability and profitability). Liquidity is
the company’s ability to pay debts that are coming due /short term debt. Solvency
is the company’s capacity to pay long term debts or liabilities. Stability is the
company’s ability to be structurally firm and can support its long-term debts by its
equity. Profitability is the company’s ability to convert its sales into cash flow and
profit. Let us now study the other two techniques of financial statement analysis
(the vertical and horizontal analyses of financial statements of a single
proprietorship).

Begin the lesson by letting the students do Activity No 1. Let the
students answer the given worksheet which will help them
perform the vertical and horizontal analyses of financial
statements of a single proprietorship.
17
What’s New
The activity below will help you check how much you know about the vertical and
horizontal analyses of financial statements of a single proprietorship
Activity 1: “PERFORM ME”

Directions: Based on the following information showing the Statement of
Financial Position (SFP) as of and Statement of Comprehensive Income for the year
endings December 31, 2018 and December 31,2019 of Aysid Wash and Wear
Supplies, compute the changes for each year in terms of peso value and
percentage. Write your answer on the columns provided.
2018 2019 Change in Change in

Peso Percentage
Cash P 400,000 P600,000
Accounts Receivable 500,000 420,000
Inventory 550,000 350,000
Equipment 850,000 1,080,000
Total Assets P 2,300,000 P 2,450,000
Accounts Payable P 600,000 270,000

Notes Payable 400,000 200,000
Owner, Capital 1,800,000 1,980,000
Total Liabilities and P 2,300,000 P 2,450,000
equity
Sales P 1,500,000 P 1,850,000

Cost of Goods Sold 700,000 980,000
Gross Profit 800,000 870,000
Operating Expenses 300,000 355,000
Operating income 500,000 515,000
Interest Expense 50,000 80,000
Net Income P 450,000 P 435,000
Guide questions:
1. What have you noticed about the changes in terms of Peso value and
percentage?
2. Can you give some of the factors that had caused these changes?
18
What is It
Analysis and Interpretation of Financial Statements

Financial statement (FS) analysis is the process of evaluating risks, performance,
financial health, and future prospects of a business by subjecting financial
statement data to computational and analytical techniques with the objective of
making economic decisions (White et.al 1998). There are three kinds of FS analysis
techniques:
- Horizontal analysis
- Vertical analysis
- Financial ratios (this will be discussed further on the succeeding module)
1. Horizontal analysis- it is a technique used for evaluating financial statements

data over a period of time. It also called trend analysis because it shows the
increases and decreases of each item in comparison with the previous years.
These changes may be presented in monetary value (Phil. Peso) and
percentages using the following formulas:
Change in Peso = Current year’s balance – Prior year’s balance
Change in Percentage = (Current year’s balance – Prior year’s balance)

Prior year’s balance
Example:
2018 2019
PhP 655,000.00 PhP 932,000.00
Net Income
Change in Peso = PhP 932,000.00 – 655,000.00 = PhP 277,000.00
Change in Percentage = (PhP 932,000.00 – 655,000.00)

PhP 277,000.00
= 42.29%
It can be interpreted as: Net income for year 2015 has increased by PhP
277,000.00, with a percentage of 42.29% as compared to year 2014.
2. Vertical analysis- it is a technique used that compares the relationship

between each line item of the financial statements in one given period. It is also
called common size analysis and may be used to analyze the Statement of
Financial Position (SFP) and Statement of Comprehensive Income (SCI). For
Statement of Financial Position (SFP), base amount will be the Total Assets ( it
concludes the composition of assets and the company’s financing mix- portion
19
of assets financed by debt and equity) while for the Statement of
Comprehensive Income (SCI), base amount is Net Sales ( it shows how “Net
Sales” is used up by the different business’ expenses).
Example:
For Statement of Financial Position (SFP)

2019 % of Assets
Cash PhP 500,000.00 500,000/1,650,000 = 30.3%
Accounts Receivable 150,000.00 150,000/1,650,000 = 9.1%
Inventory 200,000.00 200,000/1,650,000 = 12.1%
Equipment 800,000.00 800,000/1,650,000 = 48.5%
PhP 1,650,000.00
TOTAL ASSETS Total of the components is 100%
================
Accounts Payable PhP 400,000.00 400,000/1,650,000 = 24.2%

Notes Payable 150,000.00 150,000/1,650,000 = 9.1%
Owner’s Capital 1,100,000.00 1,100,000/1,650,000 = 66.7%
TOTAL LIABILITIES Total of the components is 100%

PhP 1,650,000.00
AND OWNER’S EQUITY
================
It can be interpreted as:
o The largest component of asset is Equipment with 48.5%. Accounts

Receivable is the smallest component at 9.1%.
o 33.3% of assets are financed by debt and the rest is financed by equity.
For Statement of Comprehensive Income (SCI)
2019 % of Sales
Sales PhP 5,300,000.00
Cost of Goods Sold 3,850,000.00 3,850,000/5,300,000 = 72.6%
Gross Profit 1,450,000.00 1,450,000/5,300,000 = 27.4%
Operating Expenses
Rent 120,000.00 120,000/5,300,000 = 2.3%
Salaries 385,000.00 385,000/5,300,000 = 7.3%
Utilities 155,000.00 155,000/5,300,000 = 2.9%
Administrative and 545,000.00 545,000/5,300,000 = 10.3%
other expenses
NET PROFIT PhP 245,000.00 245,000/5,300,000 = 4.6%
================
It can be interpreted as:
o Cost of Goods Sold is 72.6% of Sales. Gross Profit rate is 27.4% of

Sales. Total Expenses is 22.7% of Sales.
o For every peso of Sales the business earns PhP0.046. Gross Profit
generates PhP0.274 for every peso of Sales.
20
What’s More
Activity 2: “PRAKTISADO AKO 1”

Directions: Based on the given information showing the Statement of Financial
Position (SFP) as of December 31, 2018 and December 31,2019 of Dale
Merchandising, prepare a horizontal analysis with interpretation.
Dale Merchandising
Statement of Financial Position
As of Years 2018 and 2019
2018 2019
Cash PhP 500,000.00 PhP 350,000.00
Accounts Receivable 150,000.00 340,000.00
Inventory 200,000.00 515,000.00
Equipment 800,000.00 1,400,000.00
TOTAL ASSETS PhP 1,650,000.00 PhP 2,605,000.00
================ ================
Accounts Payable PhP 400,000.00 PhP 700,000.00
Notes Payable 150,000.00 355,000.00
Owner’s Capital 1,100,000.00 1,550,000.00
TOTAL LIABILITIES AND
OWNER’S EQUITY PhP 1,650,000.00 PhP 2,605,000.00
================ ================

Directions: Based on the given information showing the Statement of
Comprehensive Income (SCI) for December 31,2018 and December 31,2019 of Dale
Merchandising, prepare a horizontal analysis with interpretation.
Dale Merchandising
Statement of Comprehensive Income
For Years 2018 and 2019
2018 2019
Sales PhP 5,300,000.00 PhP 6,980,000.00
Cost of Goods Sold 3,850,000.00 4,050,000.00
Gross Profit 1,450,000.00 2,930,000.00
Operating Expenses 660,000.00 1,450,000.00
Administrative and other 545,000.00 568,000.00
expenses
NET PROFIT PhP 245,000.00 PhP 612,000.00
================ ================
21
Directions: Based on the given information showing the Statement of Financial
Position (SFP) as of December 31, 2019 of Dale Merchandising and the Statement
of Comprehensive Income (SCI) for December 31, 2019, prepare a vertical analysis
with interpretation.
Dale Merchandising
As of December 31,2019
Cash PhP 350,000.00
Inventory 515,000.00
Equipment 1,400,000.00
TOTAL ASSETS PhP 2,605,000.00
================
Accounts Payable PhP 700,000.00
Notes Payable 355,000.00
Owner’s Capital 1,550,000.00
TOTAL LIABILITIES AND
OWNER’S EQUITY PhP 2,605,000.00
================
Dale Merchandising
For the year ending December 31,2019
Sales PhP 6,980,000.00
Cost of Goods Sold 4,050,000.00
Gross Profit 2,930,000.00
Operating Expenses 1,450,000.00
Administrative and other expenses 568,000.00
NET PROFIT PhP 612,000.00
================

Activities 2, 3 and 4 are designed to develop and enrich students’
knowledge on the Analysis and Interpretation of Financial
Statements- Horizontal and Vertical Analyses. The activities
ensure that students’ full understanding of the lesson is
achieved.
22
What I Have Learned
At this point, let us see how much you have gained from the discussions and
activities you have undergone.
Activity 5: “PROBLEM MO, SOLVE KO”

Directions: Analyze the given situations, solve and give the appropriate answers.
Use a separate sheet of paper.
1. Wash and Wear Laundry has current assets amounting to Php

300,000. Noncurrent assets for the year totaled Php 89,000. What
percentage of the laundry’s total assets is current assets?
2. Read Me Book Shop has assets of PhP 2,000,000 and owner’s equity
of PhP 600,000. What percentage of the book shop’s assets are
financed by liabilities?
3. No Melt Ice Cream parlor has liabilities of PhP 395,000 and assets of
PhP 524,000. What percentage of the ice cream parlor’s assets are
financed by the owner’s equity?
4. Everyday Bake Shop has total liabilities amounting to Php 35,000.
Total equity had an ending balance of Php 42,000. What percentage of
the bake shop’s asset is financed by the liabilities?
5. Choose Me Boutique had the following accounts at year end: Cash-
PhP250,000, Accounts Payable-PhP70,000, Prepaid Expense-
PhP15,000, Non- current assets- PhP 500,000.00. What percentage of
the boutique’s total assets is current assets?
6. A hotel company has owner’s equity of PhP 5,000,000, liabilities of
PhP 2,560,000 and Current Assets of 1,500,000. What percentage of
the hotel’s total assets is non-current assets?
7. The assets of Dale’s Services showed PhP 560,000 for 2018. In 2019 it
had an increase of PhP 280,000. What was the percentage of incre ase
for total assets?
8. Happy Selling’s Accounts Receivable amounted to Php 500,000 for
year 1, and had increased by 50% in year 2. What is the change in
peso of the Accounts receivable?
9. Company’s Total Liabilities and Equity amounted to Php 285,000 for
year 2018. The financial statement for 2019 showed total assets of
PhP 542,000. How much is the percentage of increase for the total
assets?
10. Total assets amounted to Php575,000 for 2018. Total equity
amounted to Php 850,000 for 2019. What is the percentage of
increase of the total equity?
23
What I Can Do
This activity will help you transfer into real-life situations the knowledge and skills
you have gained or learned from this module.
Activity 6: Vertical Analysis and Interpretation of SFP and SCI

Directions: From these randomly ordered accounts of Dale Merchandising prepare
a Statement of Financial Position and Statement of Comprehensive Income. Make a
Vertical Analysis and interpret the results. The balances shown are as of and for
the year ending 12/31/2019.
Sales Returns and Allowances PhP 11,000.00

Accumulated Depreciation 50,000.00
Merchandise Inventory, December 31, 2019 80,000.00
Sales 1,050,000.00
Merchandise Inventory, January 1, 2019 100,000.00
Purchases 400,000.00
Selling Expenses 190,000.00
Accounts Payable 100,000.00
Purchase Returns and Allowances 2,000.00
Cash 50,000.00
Office Equipment 220,000.00
Withdrawals 50,000.00
Sales Discounts 29,000.00
Transportation-In 10,000.00
General and Administrative Expense 200,000.00
Office Supplies 30,000.00
Notes Payable 200,000.00
Prepaid Rent 100,000.00
Josh, Capital, Jan. 1, 2019 200,000.00
Purchase Discounts 8,000.00
Net Income from operation 200,000.00
24
Assessment
Directions: Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.
1. What is the process of evaluating risk, performance, financial health, and

future prospects of a business by subjecting financial statement data to
computational and analytical techniques with the objective of making economic
decisions?
a. Financial statement technique c. Financial statement comparison
b. Financial statement analysis d. Financial statement evaluation
2. What is the other term used for horizontal analysis because it shows the
percentage of change from one period to another?
a. Time analysis c. Total analysis
b. Change analysis d. Trend analysis
3. A business had owner’s equity of PhP 2,000,000.00 for 2018 and PhP
2,700,000.00 for 2019. What is the increase in owner’s equity?
a. 39% c. 37%
b. 38% d. 35%
4. What is the company’s ability to convert its sales into cash flow and profit?
5. A business has liabilities of PhP 200,000.00 and equity of PhP800,000.00.

What is the percentage of total liabilities to total assets?
a. 20% c. 60%
b. 40%s d. 80%
6. It is a technique used that compares the relationship between each line item of
the financial statements in one given period.
7. It is a technique used in analyzing and evaluating financial statements using a

series of financial statement data over a period of time that determine the
increases or decreases of each item.
8. In vertical analysis of financial statements, what will be the base amount if the
Statement of Financial Position will be analyzed for the period?
a. Total Assets c. Total Equity
b. Total Liabilities d. Total Liabilities and Equity
25
9. During the period Dale Merchandising reported net sales amounting to PhP
2,875,000.00, gross profit of Php 1,515,000.00 and operating expenses of PhP
718,000.00. What is the percentage of cost of goods sold to net sales?
a. 43% c. 46%
b. 45% d. 47%
10. Based on the data given on item no. 9, what will be the percentage of net
income to net sales??
a. 28% c. 26%
b. 25% d. 27%
11. It pertains to the company’s capacity to pay long term debts or liabilities.
12. A business had net sales of PhP 5,956,000.00 for 2018 and PhP 4,898,000.00
for 2019. What is the percentage of net sales?
a. -19% c. -17%
b. -16% d. -18%
13. The company’s ability to pay debts that are coming due (short term debt) is
called what?
14. If current assets are PhP 550,000.00 and total assets are PhP 3,050,000.00.
What is the percentage of non-current assets?
a. 82.97% c. 83.75%
b. 81.97% d. 84.20%
15. The company’s ability to be structurally firm and can support its long-term
debts by its equity.
26
Additional Activities
Let us reinforce the skills/knowledge that you have gained from this lesson by
doing the next activity.
ACTIVITY 7: “BUSINESSIKAT SA PANAHON NI PANDEMIK”

Directions: Identify a particular business in your locality that has boomed during
this time of pandemic and answer following guide questions.
Guide Questions:
1. What did you feel while you were doing the activity?
2. What do you think are the reasons that the particular business you have
identified became a booming business in this time of pandemic?
3. How does this particular business operate? How does it sell its products?
4. How fast will its inventory/ supplies will last?
5. How will it collect its sales or receivables?
6. Do you think it will be able to generate income for every peso of the owner’s
investment? How?
Rubrics in Rating Activity 7: “BUSINESSIKAT SA PANAHON NI PANDEMIK”
Standard Identifying one’s own assets, liabilities and equity
Able to identify a business and comprehensively and clearly

5
answered the guide questions.
Able to identify a business and satisfactorily and clearly

4
answered the guide questions.
Able to identify a business and fairly and clearly answered the
3
guide questions.
Able to identify business and provided short discussions on the
2
guide questions.
Able to identify a business and provided a little idea about the
1
guide questions.
27
28
What I Know LESSON 1- Activity 1
“MATCH IT”
1. A 11. D 1. D
2. C 12. B 2. F
3. B 13. D 3. I
4. D 14. D 4. H
5. B 15. D 5. A
6. C 6. C
7. A 7. B
8. A 8. I
9. G
9. D
10. E
10. A
LESSON 1 - ACTIVITY 2: GERLIE’S BREAD AND PASTRIES
1. P 9,900.00 ( .50 X P109,800)- P45,000
2. P 2,160.00
3. P 76,860.00 (.70X 109,800)
4. P 55,000.00
5. P 7,560.00 ( Total Liabilities and Equity – Total Current Liabilities- Other
Long-term Liabilities – Owner’s Capital )
6. P 191,860.00
LESSON 1 - ACTIVITY 3: AYSID WASH AND WEAR SUPPLY- PART1
1. Current Ratio 2.42
2. Quick Ratio 1.5
3. Working Capital Ratio P850,000
(Interpretations may vary depending on the student’s analysis)
LESSON 1 - ACTIVITY 4: AYSID WASH AND WEAR SUPPLY- PART2
1. Debt to Asset Ratio .43
2. Debt to Equity Ratio .77
3. Equity Ratio .57
LESSON 1 - ACTIVITY 5: LET THE PROBLEM SOLVE IT
1. 5.07
2. 1.39
3. 2.18
4. .50
5. .62
LESSON 1 - ACTIVITY 6: TJ BAKES
a. Gross Margin Ratio - .65
b. Operating Margin Ratio -.48
c. Net Income Margin - .47
Answer Key
29
Lesson 2 – Activity 1 Perform Me
Change in
2018 2019 Change in Peso
Percentage
Cash 400,000 600,000 200,000.00 33%
Accounts Receivable 500,000 420,000 - 80,000.00 -19%
Inventory 550,000 350,000 - 200,000.00 -57%
Equipment 850,000 1,080,000 230,000.00 21%
Total Assets 2,300,000 2,450,000 150,000.00 6%
Accounts Payable 600,000 270,000 - 330,000.00 -122%
Notes Payable 400,000 200,000 - 200,000.00 -100%
Owner, Capital 1,800,000 1,980,000 180,000.00 9%
Total Liabilities and
2,300,000 2,450,000 150,000.00 6%
equity
Sales 1,500,000 1,850,000 350,000.00 19%
Cost of Goods Sold 700,000 980,000 280,000.00 29%
Gross Profit 800,000 870,000 70,000.00 8%
Operating Expenses 300,000 355,000 55,000.00 15%
Operating income 500,000 515,000 15,000.00 3%
Interest Expense 50,000 80,000 30,000.00 38%
Net Income 450,000 435,000 - 15,000.00 -3%
Answer Key
30
LESSON 2- ACTIVITY 2: PRAKTISADO AKO 1
Dale Merchandising
As of Years 2018 and 2019
2018 2019 Difference %
Cash 500,000.00 350,000.00 -150,000.00 -30.0%
Accounts Receivable 150,000.00 340,000.00 190,000.00 126.7%
Inventory 200,000.00 515,000.00 315,000.00 157.5%
Equipment 800,000.00 1,400,000.00 600,000.00 75.0%
TOTAL ASSETS 1,650,000.00 2,605,000.00 955,000.00 57.9%
Accounts Payable 400,000.00 700,000.00 300,000.00 75.0%
Notes Payable 150,000.00 355,000.00 205,000.00 136.7%
Owner’s Capital 1,100,000.00 1,550,000.00 450,000.00 40.91%
TOTAL 1,650,000.00 2,605,000.00 955,000.00 57.9%
LIABILITIES AND
OWNER’S EQUITY
Dale Merchandising
For Years 2018 and 2019
2018 2019 Difference %
Sales 5,300,000.00 6,980,000.00 1,680,000.00 32%
Cost of Goods Sold 3,850,000.00 4,050,000.00 200,000.00 5%
Gross Profit 1,450,000.00 2,930,000.00 1,480,000.00 102%
Operating Expenses 660,000.00 1,450,000.00 790,000.00 120%
Administrative and 545,000.00 868,000.00 323,000.00 59%
other expenses
NET PROFIT 245,000.00 612,000.00 367,000.00 150%
Answer Key
31
LESSON 2- Activity 5:
“PROBLEM MO, SOLVE KO” Assessment
1. 70%
2. 70%
3. 25% 1. B 9. D
4. 45% 2. D 10. A
5. 33% 3. D 11. A
6. 80% 4. B 12. D
7. 50% 5. A 13. C
8. PhP 250,000.00 6. C 14. B
9. 90,000.00 7. A 15. D
10. 48,000.00 8. A
LESSSON 2- ACTIVITY 4: “PRAKTISADO AKO 3”
Dale Merchandising LESSON 2
As of December 31,2019 Activity 7:
Cash 350,000.00 13.4% Students’ answers
Accounts Receivable 340,000.00 13.1% might vary. Scoring
Inventory 515,000.00 19.8% will be based on the
Equipment 1,400,000.00 53.7% Rubrics
TOTAL ASSETS 2,605,000.00
Accounts Payable 700,000.00 26.9%
Notes Payable 355,000.00 13.6%
Owner’s Capital 1,550,000.00 59.5%
2,605,000.00
Dale Merchandising
For the year ending December 31,2019
Sales 6,980,000.00
Cost of Goods Sold 4,050,000.00 58.0%
Gross Profit 2,930,000.00 42.0%
Operating Expenses 1,450,000.00 20.8%
Administrative and
568,000.00 8.1%
other expenses
NET PROFIT 612,000.00 8.8%
Answer Key
References
Monfero, R.P. , et. Al. Teaching Guide for Senior High School: Fundamentals of
Accountancy, Business and Management 2. Philippines: Published by
Commission on Higher Education (CHED), 2016
De Guzman, A. Fundamentals of Accountancy, Business and Management 2 For
Senior High School. Philippines: Lorimar Publishing, Inc., 2018
Ballada, W. Fundamentals of Accountancy, Business and Management 2 Made
Easy. Philippines: DomDane Publishers, 2018
Internet resources:
http://www.business-planning-for-managers.com/main-
courses/finance/financial-ratios/stability-ratios/ Date retrieved: September
30, 2020
http://www.theel1tetrader.com/2015/05/4-financial-stability-ratios.html Date
retrieved: September 30, 2020
32
For inquiries or feedback, please write or call:
Department of Education – SDO Palawan
Curriculum Implementation Division Office

2nd Floor Deped Palawan Building
Telephone no. (048) 433-6392
Learning Resources Management Section

LRMS Building, PEO Compound
Telephone no. (048) 434-0099

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Published by the Department of Education, Division of Palawan

Development Team of the Module

Printed in the Philippines by ________________________

Department of Education – MIMAROPA Region – Schools Division of Palawan

Office Address: PEO Road, Bgy. Bancao-Bancao, Puerto Princesa City

Welcome to the Fundamentals of Accountancy, Business and Management 2 –

This module was collaboratively designed, developed and reviewed by educators

Notes to the Teacher

Welcome to the Fundamentals of Accountancy, Business and Management 2 –

This module has the following parts and corresponding icons:

What I Know This part includes an activity that aims to

What’s In This is a brief drill or review to help you link

What’s New In this portion, the new lesson will be

What is It This section provides a brief discussion of

What’s More This comprises activities for independent

What I Have Learned This includes questions or blank

What I Can Do This section provides an activity which will

Assessment This is a task which aims to evaluate your

Answer Key This contains answers to all activities in the

At the end of this module you will also find:

References This is a list of all sources used in

The following are some reminders in using this module:

What I Need to Know

The module is divided into two lessons, namely:

After going through this module, you are expected to:

1. It pertains to the company’s capacity to pay long term debts or liabilities.

3. What is the process of evaluating risk, performance, financial health, and

7. It is a technique used in analyzing and evaluating financial statements using a

Define the Measurement

Notes to the Teacher

Activity 1: “MATCH IT”

________1. Liquidity Ratios a. Ratio of current assets to

a. Current ratio- the ratio of current assets to current liabilities, meaning

𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎 + 𝟏, 𝟓𝟎𝟎

b. Quick ratio – also called Acid Test Ratio, is a stricter measure of

𝐂𝐚𝐬𝐡+𝐂𝐚𝐬𝐡 𝐄𝐪𝐮𝐢𝐯𝐚𝐥𝐞𝐧𝐭𝐬+𝐒𝐡𝐨𝐫𝐭−𝐭𝐞𝐫𝐦 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬+𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞

𝐏 𝟐𝟓, 𝟎𝟎𝟎 + 𝟏𝟖, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎

c. Working Capital Ratio – pertains to the business’ ability to pay its

Current Assets increase = increase in working capital

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 − 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

Computation of Working Capital:

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟑𝟓𝟎, 𝟎𝟎𝟎 − 𝟏𝟖𝟎, 𝟎𝟎𝟎

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝐏 𝟏𝟑𝟎, 𝟎𝟎𝟎. 𝟎𝟎

2. Solvency- pertains to the company’s capacity to pay long term debts or

𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟒

b. Debt to equity ratio- it pertains to the ratio of total debt to owner’s

𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =. 𝟑𝟗

𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =. 𝟕𝟕

3. Stability – It is the long- term counter part of liquidity or the company’s

a. Debt to equity ratio- it pertains to the ratio of total debt to owner’s

b. Interest Cover Ratio- it shows how many times a business’s interest

𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 = 𝟔. 𝟖𝟖

( 𝐏 𝟖𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟓, 𝟎𝟎𝟎) − 𝐏 𝟐𝟓𝟎, 𝟎𝟎𝟎

𝑮𝒓𝒐𝒔𝒔 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =. 𝟔𝟗

b. Operating margin ratio - it is the ratio of operating profits to sales

𝐏𝟓𝟎𝟎, 𝟎𝟎𝟎 − 𝟏𝟏𝟓, 𝟎𝟎𝟎

𝑹𝒆𝒕𝒖𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟓𝟎𝟐. 𝟑𝟖

e. Return on equity (ROE) measures the return (net income) generated by

Note: Average equity is computed by adding the beginning balance and

Activity 2: Gerlie’s Bread and Pastries

Gerlie’s Bread and Pastries’ incomplete Statement of Financial Position is given

Cash P 45,000 Total current liabilities P 109,800.00