MABALACAT CITY COLLEGE

Rizal St. Brgy. Dolores, Mabalacat City, Pampanga

CYCLE 1
1st Semester | A.Y. 2021-
2022

September 13 - September 18,

2021

FINMAN
Financial Management
1
Ian Paulo N. Punsalan,
MM

Institute of Business Education

BSA 2-A

Start Here, Be Successful Page 1 of 12

 MABALACAT CITY COLLEGE
Institute of Business Education
Cycle 1, 1st Semester, Academic Year 2021-2022

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Income Statement
The income statement provides a financial summary of the firm’s operating results during
a specified period. Most common are income statements covering a 1-year period ending at
a specified date, ordinarily December 31 of the calendar year. In addition, monthly income
statements are typically prepared for use by management, and quarterly statements must
be made available to the stockholders of publicly owned corporations.

XYZ Company Income Statements (in 000)

For the Years Ended December 31
2019 2018
Sales Revenue P3,074 P2,567
Less: Cost of Goods Sold 2,088 1,711
Gross Profits P986 P856
Less: Operating Expenses
Selling Expenses P100 P108
General and Administrative Expenses 194 187
Lease Expenses 35 35
Depreciation Expenses 239 223
Total Operating Expenses P568 P553
Operating Profits P418 P303
Less: Interest Expenses 93 91
Net Profits before Tax P325 P212
Less: Taxes 94 64
Net Profits after Tax P231 P148
Less: Preferred Stock Dividends 10 10
Earnings Available for Common Stockholders P221 P138

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Balance Sheet
The balance sheet presents a summary statement of the firm’s financial position at a given
time. The statement balances the firm's assets (what it owns) against its financing, which
can be either debt (what it owes) or equity (what was provided by owners). XYZ Company’s
balance sheets as of December 31 of 2019 and 2018 are presented. They show a variety of
asset, liability (debt), and equity accounts.

XYZ Company Balance Sheet (in 000)

For the Years Ended December 31
Assets 2019 2018
Cash P363 P288
Marketable Securities 68 51
Accounts Receivable 503 365
Inventories 289 300
Total Current Assets PJ,223 PJ,004
Lands and Buildings P2,072 PJ,903
Machinery and Equipment 1,866 1,693
Furniture and Fixtures 358 316
Vehicles 275 314
Other Assets 98 96
Total Gross Fixed Assets P4,669 P4,322
Less: Accumulated Depreciation 2,295 2,056
Net Fixed Assets P2,374 P2,266
Total Assets P3,597 P3,270

Liabilities and Stockholder’s Equity

Accounts Payable P382 270
Notes Payable 79 99
Accruals 159 114
Total Current Liabilities P620 P483
Long-term Debt 1,023 967
Total Liabilities PJ,643 P1,450
Preferred Stock — Cumulative 5%, P100 par, 2,000 P200 P200
shares authorized and issued
Common Stock — P2.50 par, 100,000 shares 191 190
authorized, shares issued and outstanding in
2019; 76,262; in 2018: 76,244
Paid-in Capital in Excess of Par on Common 428 418
Stock
Retained Earnings 1,135 1,012
Total Stockholder’s Equity 1,954 1,820
Total Liabilities and Stockholder’s Equity P3,597 P3,270

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Statement of Retained Earnings
The statement of retained earnings is an abbreviated form of the statement of stockholders’
equity. Unlike the statement of stockholders’ equity, which shows all equity account
transactions that occurred during a given year, the statement of retained earnings
reconciles the net income earned during a given year, and any cash dividends paid, with the
change in retained earnings between the start and the end of that year.

XYZ Company Statement of Retained Earnings (in 000)

For the Year Ended December 31, 2019
Retained Earnings Balance (January 1, 2019) P1,012
Plus: Net Profits after Taxes (for 2019) 231
Less: Cash Dividends (Paid during 2019)
Preferred Stock 10
Common Stock 98
Total Dividends Paid P108
Retained Earnings Balance (December 31, 2019) P1,135

Statement of Cash Flows

The statement of cash flows is a summary of the cash flows over the period of concern. The
statement provides insight into the firm’s operating, investment, and financing cash flows
and reconciles them with changes in its cash and marketable securities during the period.

XYZ Company Statement of Cash Flows (in 000)

For the Year Ended December 31, 2019
Cash Flow from Operating Activities
Net Profits after Taxes P231
Depreciation 239
Increase in Accounts Receivable (138)
Decrease in Inventories 11
Increase in Accounts Payable 112
Increase in Accruals 45
Cash Provided by Operating Activities P500

Cash Flow from Investment Activities

Increase in Gross Fixed Assets (374)
Change in Equity Investments in Other Firms 0
Cash Provided by Investment Activities (P374)

Cash Flow from Financing Activities

Decrease in Notes Payable (20)
Increase in Long-term Debts 56
Changes in Stockholder’s Equity 11
Dividends Paid (108)
Cash Provided by Financing Activities (P61)
Net Increase in Cash and Marketable Securities P92

Notes to The Financial Statements

Included with published financial statements are explanatory notes keyed to the relevant
accounts in the statements. These notes to the financial statements provide detailed
information on the accounting policies, procedures, calculations, and transactions
underlying entries in the financial statements. Common issues addressed by these notes
include revenue recognition, income taxes, breakdowns of fixed asset accounts, debt and
lease terms, and contingencies.

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USING FINANCIAL RATIOS
The information contained in the four basic financial statements is of major significance to a
variety of interested parties who regularly need to have relative measures of the company’s
performance. Relative is the key word here, because the analysis of financial statements is
based on the use of ratios or relative values. Ratio analysis involves methods of
calculating and interpreting financial ratios to analyze and monitor the firm’s performance.
The basic inputs to ratio analysis are the firm’s income statement and balance sheet.

Interested Parties
Ratio analysis involves methods of calculating and interpreting financial ratios to analyze
and monitor the firm’s performance. Current and prospective shareholders are
interested in the firm’s current and future level of risk and return, which directly affect
share price. Creditors are interested in the short-term liquidity of the company and its
ability to make interest and principal payments. Management is concerned with all
aspects of the firm’s financial situation, and it attempts to produce financial ratios that will
be considered favorable by both owners and creditors.

Types of Ratio Comparisons

Cross-sectional analysis is the comparison of different firms’ financial ratios at the same
point in time; involves comparing the firm’s ratios to those of other firms in its industry or to
industry averages. Benchmarking is a type of cross-sectional analysis in which the firm’s
ratio values are compared to those of a key competitor or group of competitors that it
wishes to emulate. Comparison to industry averages is also popular, as in the following
example.

XYZ Company’s calculated inventory turnover for 2019 and the average inventory turnover
were as follows:

Inventory Turnover, 2019

XYZ Company 14.8
Industry 9.7
Average

Time-series analysis is the evaluation of the firm’s financial performance over time using
financial ratio analysis. Comparison of current to past performance, using ratios, enables
analysts to assess the firm’s progress. Developing trends can be seen by using multiyear
comparisons. The most informative approach to ratio analysis combines cross-sectional and
time-series analyses.

Cautions about Using Ratio Analysis

1. Ratios that reveal large deviations from the norm merely indicate the possibility of
a problem.

2. A single ratio does not generally provide sufficient information from which to judge the
overall performance of the firm.

3. The ratios being compared should be calculated using financial statements dated at
the
same point in time during the year.

4. It is preferable to use audited financial statements.

5. The financial data being compared should have been developed in the same way.

6. Results can be distorted by inflation.

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Categories of Financial Ratios
Financial ratios can be divided for convenience into five basic categories: liquidity, activity,
debt, profitability, and market ratios. Liquidity, activity, and debt ratios primarily measure
risk. Profitability ratios measure return. Market ratios capture both risk and return.

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Ratio Analysis Example
We will illustrate the use of financial ratios for analyzing financial statements using the XYZ
Company Income Statements and Balance Sheets presented earlier.

A. Liquidity Ratios
The liquidity of a firm is measured by its ability to satisfy its short-term obligations as
they come due. Liquidity refers to the solvency of the firm’s overall financial position
— the ease with which it can pay its bills. Because a common precursor to financial
distress and bankruptcy is low or declining liquidity, these ratios can provide early
signs of cash flow problems and impending business failure.

1. Current Ratio — The current ratio, one of the most commonly cited financial
ratios, measures the firm’s ability to meet its short-term obligations. A higher
current ratio indicates a greater degree of liquidity.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ÷ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The current ratio for XYZ Company in 2019 is:

1.97 = P1,223,000 ÷ P620,000

2. Quick (Acid-Test) Ratio — The quick (acid-test) ratio is similar to the current
ratio except that it excludes inventory, which is generally the least liquid current
asset. The quick ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot be easily converted into cash. If inventory is liquid, the
current ratio is a preferred measure of overall liquidity.
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 – 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒s

The quick ratio for XYZ Company in 2019 is:

P1,223,000 − P289,000
1.51 =
P620,000

B. Activity Ratios
Activity ratios measure the speed with which various accounts are converted into
sales or cash — inflows or outflows. In a sense, activity ratios measure how
efficiently a firm operates along a variety of dimensions such as inventory
management, disbursements, and collections. A number of ratios are available for
measuring the activity of the most important current accounts, which include
inventory, accounts receivable, and accounts payable. The efficiency with which
total assets are used can also be assessed.

1. Inventory turnover — Inventory turnover commonly measures the activity, or

liquidity, of a firm’s inventory. The resulting turnover is meaningful only when it is
compared with that of other firms in the same industry or to the firm’s past
inventory turnover or industry average. An inventory turnover of 20 would not be
unusual for a grocery store, whose goods are highly perishable and must be sold
quickly, whereas an aircraft manufacturer might turn its inventory just four times
per year.

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 ÷ 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Applying this relationship to XYZ Company in 2019 yields

7.22 = P2,088,000 ÷ P289,000

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 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 365 ÷ 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

50.55 days = 365 ÷ 7.22

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 ÷ 365

P503,000
59.73 days =
𝑃3,074,000 ÷365

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠 ÷ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡s

0.85 = P3,074,000 ÷ P3,597,000

𝐷𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 ÷ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡s

 45.68% = P1,643,000 ÷ P3,597,000

𝑇𝑖𝑚𝑒𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠 ÷ 𝑇𝑎𝑥𝑒s

4.45 = P418,000 ÷ P94,000

𝐹𝑖𝑥𝑒𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 + 𝐿𝑒𝑎𝑠𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝐿𝑒𝑎𝑠𝑒
𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 + {(𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 + 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠) × [ 1 1 − 𝑇 ]}

1.87 = 𝑃418,000 + 𝑃35,000

1
𝑃93,000 + 𝑃35,000 + {(𝑃71,000 + 𝑃10,000) × ]}
[
1 − 0.29

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝑆𝑎𝑙𝑒𝑠
Or = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
𝑆𝑎𝑙𝑒s
 32.08% = P3,074,000 − P2,088,000 P986,000
=
P3,074,000 P3,074,000

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 ÷ 𝑆𝑎𝑙𝑒s

13.6% = P418,000 ÷ P3,074,000

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ÷ 𝑆𝑎𝑙𝑒s

7.19% = P221,000 ÷ P3,074,000

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛g

P2.90 per share= P221,000

76,262 Shares

𝑅𝑂𝐴 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ÷ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡s

6.14% = P221,000 ÷ P3,597,000

𝑅𝑂𝐴 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ÷ Common stock equity

 12.6% = P221,000 ÷ P1,754,000

𝑃 /𝐸 𝑅𝑎𝑡𝑖𝑜 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 ÷ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

11.12 = 𝑃32.25 ÷ 𝑃2.90

𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑒𝑞𝑢𝑖𝑡𝑦

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝑃23.00 = 𝑃1,754,000
76,262 𝑠ℎ𝑎𝑟𝑒𝑠

𝑀𝑎𝑟𝑘𝑒𝑡/𝑏𝑜𝑜𝑘 (𝑀/𝐵) 𝑟𝑎𝑡𝑖𝑜 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑎 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘

𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑎 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘

1.40 = 𝑃32.25
𝑃23.00
SAMPLE PROBLEMS:

1. In an effort to examine Uno Company funds, the finance manager realized that he
was missing the company’s net profits after taxes for the current year. Solve for
the company’s net profits after taxes given the following data:

Return on total assets 4%

Total asset turnover 0.5
Cost of goods sold 195,000
Gross profit margin 40%

2. If Dos Company has cost of goods sold of 300,000 and inventory of 30,000,
then the inventory turnover is and the
average age of inventory is

IV. REFERENCES

Brigham, E.F. & Houston, J.F. (2009). Fundamentals of Financial Management. Mason,
Ohio: South- Western Cengage Learning.

Gitman, LJ., & Zutter, T.J. (2012). Principles of Managerial Finance. Boston, Massachusetts:
Pearson Education, Inc.

V. DISCLAIMER

OFFICIAL MCC MODULE DISCLAIMER

It is not the intention of the author/s nor the publisher of this module to have monetary
gain in using the textual information, imageries, and other references used in its
production. This module is only for the exclusive use of a bona fide student of
Mabalacat City College.

In addition, this module or no part of it thereof may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, and/or otherwise, without the prior permission of Mabalacat City
College.

Prepared by:

IAN PAULO N. PUNSALAN, MM

Instructor
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