ALAMINOS CITY NATIONAL HIGH SCHOOL – SENIOR

HIGH SCHOOL DEPARTMENT

LEARNING ACTIVITY SHEET IN FABM 2

I. Title: Financial Statement Analysis Part 2

II. Learning Competency with code.
LC 13. 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. Background Information for Learners

Ratio analysis - expresses the relationship among selected items
of financial statement data. The relationship is expressed in terms
of a percentage, a rate, or a simple proportion (Weygandtet.al.
2013). A financial ratio is composed of a numerator and a
denominator. For example, a ratio that divides sales by assets will
find the peso amount of sales generated by every peso of asset
invested. This is an important ratio because it tells us the efficiency
of invested asset to create revenue. This ratio is called asset
turnover. There are many ratios used in business. These ratios are
generally grouped into three categories: (a) profitability, (b)
efficiency, and (c) financial health.

Profitability ratios - measure the ability of the company to

generate income from the use of its assets and invested capital as
well as control its cost. The following are the commonly used
profitability ratios:
- Gross profit ratio - reports the peso value of the gross profit
earned for every peso of sales. We can infer the average pricing
policy from the
gross profit margin.
- Operating income ratio- expresses operating income as a
percentage of sales. It measures the percentage of profit earned
from each peso of sales in the company’s core business operations
(Horngren et.al. 2013). A company with a high operating income
ratio may imply a lean operation and have low operating expenses.
Maximizing operating income depends on keeping operating costs
as low as possible (Horngren et.al. 2013).
- Net profit ratio- relates the peso value of the net income earned to
every peso of sales. This shows how much profit will go to the
owner for every peso of sales made.
- Return on asset(ROA) measures the peso value of income
generated by employing the company’s assets. It is viewed as an
interest rate or a form of yield on asset investment. The numerator
of ROA is net income. However, net income is profit for the
shareholders. On the other hand, asset is allocated to both creditors
and shareholders. Some analyst prefers to use earnings before
interest and taxes instead of net income. There are also two
acceptable denominators for ROA – ending balance of total assets
or average of total assets. Average assets is computed as beginning
balance + ending balance divided by 2.

- 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

Operational efficiency ratio - measures the ability of the

company to utilize its assets. Operational efficiency is measured
based on the company’s ability to generate sales from the
utilization of its assets, as a whole or individually. The turnover
ratios are primarily used to measure operational efficiency.

- Asset turnover -measures the peso value of sales generated for

every peso of the company’s assets. The higher the turnover rate,
the more efficient the company is in using its assets.

- Fixed asset turnover - is indicator of the efficiency of fixed assets

in generating sales.

- Inventory turnover is measured based on cost of goods sold and

not sales. As such both the numerator and denominator of this ratio
are measured at cost. It is an indicator of how fast the company can
sell inventory. An alternative to inventory turnover is “days in
inventory”. This measures the number of days from acquisition to
sale.

- Accounts receivables turnover the measures the number of times

the company was able to collect on its average accounts receivable
during the year.
An alternative to accounts receivable turnover is “days in accounts
receivable”. This measures the company’s collection period which
is the number of days from sale to collection.

Financial Health Ratios - look into the company’s solvency and liquidity
ratios.
Solvency - refers to the company’s capacity to pay their long-term
liabilities. On the other hand, liquidity ratio intends to
measure the company’s ability to pay debts that are coming due (short
term debt).
- Debt ratio - indicates the percentage of the company’s assets that are
financed by debt. A high debt
to asset ratio implies a high level of debt.
- Equity ratio - indicates the percentage of the company’s assets that are
financed by capital. A high
equity to asset ratio implies a high level of capital.
- Debt to equity ratio - indicates the company’s reliance to debt or liability
as a source of financing
relative to equity. A high ratio suggests a high level of debt that may result
in high interest expense.
- Interest coverage- ratio measures the company’s ability to cover the
interest expense on its liability with its operating income. Creditors prefer
a high coverage ratio to give them protection that interest due to them can
be paid.
- Current ratio- is used to evaluate the company’s liquidity. It seeks to
measure whether there are sufficient current assets to pay for current
liabilities. Creditors normally prefer a current ratio of 2.
- Quick ratio- is a stricter measure of liquidity. It does not consider all the
current assets, only those that are easier to liquidate such as cash and
accounts receivable that are referred to as quick assets.

IV. Activities
1
Problem1:VeryBerryCompany

StatementofComprehensiveIncome
FortheYear-endedDecember31

2014 2013

Sales 10,040,000 8.760.000

CostofGoodsSold 5,680,000 5,860,000

GrossProfit 4,360,000 2,800,000

OperatingExpenses 1,160,000 1,680,000

OperatingIncome 3,200,000 1,220,000

InterestExpense 100.000 28,000

NetIncome 3,1000,000 1,192,000

V. Rubric for scoring

1 Point per correct item

VI. References for Learners:

Fundamentals of Accountancy, Business, and Management 1, First
Edition by Joselito G. Florendo
Fundamentals of Accountancy, Business, and Management 1, 2017
by Benedick Manalaysay
Fundamentals of Accountancy, Business, and Management, 2018-
2019 ed. By Rodiel C. Ferrer and Zeus Vernon B. Millan
Fundamentals of Accountancy, Business, and Management, 2017
by Feme M. Palencia et. Al
Basic Accounting Made Easy, 18th ed. by Win Ballada and Sudan
Ballada

Prepared by: Checked by:

Approved by:

Romualdo F. Credo Lovelie V. Verceles

Jose Ramil A. Sibun
Teacher III Master Teacher I OIC-Asst.
Principal II, Academics