BUSINESS

FINANCE
Grade 12 - ABM

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Financial Statement
Analysis,
and Interpretation
Pt.2

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Specific Learning Outcomes
The learners shall be able to:
❖ Define liquidity
❖ Solve liquidity ratios (current and quick)
❖ Analyze, interpret, and compare the
liquidity ratios of sample companies

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Elements of Financial Statements

❖ Income Statement
❖ Statement of Owners Equity
❖ Balance Sheet
❖ Cash Flow Statement

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Question to Ponder

If a business does not pay its

obligations on time, what
could possibly happen to the
business? Short-run? Long-
run?

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Four main categories of financial ratios:

❖ Liquidity
❖ Profitability
❖ Efficiency
❖ Leverage

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 Liquidity
Liquidity refers to the company’s
ability to satisfy its short-term
obligations as they come due.
Example:
Current Ratio
Quick Ratio

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 Liquidity
Current Ratio
Quick Ratio
Current Assets
Current Ratio =
Current Liabilities
Cash + Marketable Secuties + Accounts Receivable
Quick Ratio =
Current Liabilities

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Current Assets - Inventory
Quick Ratio =
Current Liabilities
Practice
● Current assets is ₱2,000, current liabilities
is ₱3,500. What is current ratio?
● Inventory is ₱150. Accounts payable is
₱450. Cash and accounts receivable
total ₱800. What is the current ratio?
Quick ratio?

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Practice
● If current ratio is 1.7, what is the total
accounts receivable if cash is ₱20,000,
inventory is ₱7,500, and accounts
payable is ₱30,000.
● Cash is 30% of total current assets. If
current ratio is 2.3, what is the new
current ratio if total non-cash current

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assets grow by 50%?
Questions to Ponder

● What is a good current ratio? 1? 2?

0.5?
● Can a current ratio be lower than
the quick ratio?
● Is a high current ratio always good?
Is a low current ratio always bad?

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Questions to Ponder

● What factors affect company’s

decisions in managing current
ratio?
● If company A has current ratio of 1.3
while company B has a current ratio
of 2.3, which is a better company?

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 Activity

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 Activity

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 Activity

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 Activity

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Activity
● Compute the ratios of the sample
companies.
● Compare the three companies using
the ratios computed.

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Questions to Ponder

● What are the possible reason why

the sample companies have
different ratios. What could have
possibly caused these differences?
What are the implications?

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Questions to Ponder

● Which ratio is more relevant - quick ratio

or current ratio?
● What other factors would a bank or
supplier look into in deciding whether to
lend short-term credit? (Reflection
question for the next topics)

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POST
TEST
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Post Test
1. A higher current ratio indicates better
short-term liquidity.
2. Quick ratio includes inventory in its
calculation.
3. If a company's current ratio is less
than 1, it suggests that the company
may have difficulty meeting its short-

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term obligations.
Post Test
4. Quick ratio is considered a more
stringent measure of liquidity than the
current ratio.
5. Including prepaid expenses in the
calculation of the current ratio will
increase the ratio.

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Post Test
Question 1:
What does the current ratio measure?
A. Long-term solvency
B. Short-term liquidity
C. Profitability
D. Asset turnover

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Post Test
Question 2:
Which of the following is excluded in the
quick ratio but included from the current
ratio?
A. Accounts Receivable
B. Inventory
C. Prepaid Expenses

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D. Current Liabilities
Post Test
Question 3:
If a company's current ratio is 2, it
means:
A. The company is insolvent
B. The company has twice as many
current assets as current liabilities
C. The company is profitable

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D. The company is facing liquidity issues
Post Test
Question 4:
What is the formula for the quick ratio?
A. (Current Assets - Inventory) / Current
Liabilities
B. Current Assets / Current Liabilities
C. Current Assets / (Current Liabilities -
Inventory)
D. (Current Assets - Prepaid Expenses) /

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Current Liabilities
Post Test
Question 5:
If a company has a quick ratio of 0.8, what
does it suggest about its liquidity?
A. The company is highly liquid
B. The company may have difficulty meeting
its short-term obligations
C. The company is not profitable

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D. The company has low long-term solvency
 Thank you!
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