BUSINESS APPLICATIONS FOR
BASE, RATE, PERCENTAGE,
RATIO AND PROPORTION
Lesson Objectives:
At the end of this lesson, the students should be able
to:
1. Solve partnership problems;
2. Solve tax problems;
3. Perform vertical analysis of financial statements;
4. Perform horizontal analysis of financial
statements’ and
5. Perform ratio analysis.
Partnership Problems
A lot of partnership problems involve the use of
percentage and ratio and proportion. Determining the
partners’ share in profit/loss and determining the
capital contribution of partners make use of ratio and
proportion.
Example 1:
Partners A,B, and C share profits and losses: 20% to
A, 30% to B, and 50% to C. Compute the share of
each if the partnership earned a net income
P15,000.00.
Given: P/L ratio A = 20%
B= 30%
C= 50%
Net Income = P15,000.00
Find: Share of A, B, and C
Solution: (Partitive Proportion/ Finding the
Percentage)
Solution: P= BxR
A = 15,000.00 x 20% = 3,000.00
B = 15,000.00 x 30% = 4,500.00
C = 15,000.00 x 50% = 7,500.00
15,000.00
Solution: (Partitive Proportion/ Finding the
Percentage)
P/L Ratio: 20%:30%:50% or 2:3:5 =10
A = 2 x15,000.00 = 3,000.00
10
B = 3 x 15,000.00 = 4,500.00
10
C = 5 x15,000.00 = 7,500.00
10
15,000.00
Example 2:
X and Y are partners with capital balance of 20,000.00 pesos and
30,000.00 respectively. They agreed to divide profits and losses
according to their capital ratio. Find the share of each in a net loss
of 10,000.00.
Given: X, Capital = 20,000.00
Y, Capital = 30,000.00
Net Loss = 10,000.00
P/L Ratio = Capital Ratio
Find: Share of X and Y
Solution: (Partitive Proportion/ Finding the
Percentage)
Solution: P= BxR
X = 10,000.00 x 20,000.00
50,000.00
= 10,000.00 x 2
5
X= P 4,000.00
Y = 10,000.00 x 30,000.00
50,000.00
= 10,000.00 x 3
5
Y= P 6,000.00
Solution: (Partitive Proportion/ Finding the
Percentage)
P/L Ratio: 20,000.00:30,000.00 or 2:3=5
X = 2 x10,000.00 = 4,000.00
5
Y = 3 x 10,000.00 = 6,000.00
5
Example 3:
Partners N, L, and M agreed to form a partnership and to share
profits and losses at a ratio of 1:1:2. They further agreed that their
capital should be in the same proportionate relationship as their
P/L ratio. Their agreed capital is P100,000.00. How much capital
contribution should each of them make?
Given: P/L ratio: N:L:M = 1:1:2
Agreed capitalization = P 100,000.00
P/L ratio = Capital ratio
Find: Capital contribution of each partner
Example 3:
Solution: P = BxR
N = P 100,000.00 x 1 = P 25,000.00
4
L = P 100,000.00 x 1 = P 25,000.00
4
M = P 100,000.00 x 2 = P50,000.00
4
Example 4:
D, E, and F are partners sharing profits and losses: 1/6 to D, 2/6 to E, and
3/6 to F. If E’s share in net income is P 8,333.33, find the total income.
Given:
P/L ratio D = 1/6
E = 2/6
F = 3/6
E’s share in net income = P 8,333.33
Find : Total of Net Income
Example 4:
Solution: Net Income (Base) = P
R
= P 8,333.33
2/6
= P 8, 333.33 x 6
2
= P 24,999.99 or 25,000.00
Example 4:
To Check:
D’s share + E’s share + F’s share = P 25,000.00
D = 1 x P 25,000.00 = P 4,166.67
6
E= 2 x P 25,000.00 = P 8, 333.33
6
F= 3 x P 25,000.00 = P 12, 500.00
6
= P 25,000.00
Example 5:
Partners D and E agreed to share profits and losses in their
capital ratio. If the total capital is P 24,000.00 and E’s capital
is P 16,000.00, what part of the profit and loss is his or her
share?
Given: Total Capital = P 24,000.00
E’s capital = P 16,000.00
P/L ratio = Capital Ratio
Find: Fractional part of E in the profit or loss
Example 5:
Solution: R = P
B
E’s part= P 16,000.00 = 16 = 2
P 24,000.00 24 3
TAX PROBLEMS
Another use of the concept of percentage is taxation.
Tax rates are established for various purposes-
income tax, sales tax, value-added tax (VAT), etc.
Following are some examples:
EXAMPLE OF TAX PROBLEMS
1. A corporation earned P36,800.00 in net income
before tax. If the corporation’s income tax is 35%,
compute for the net income after tax.
Given: Net income before tax (NIBT) = P 36,800.00
Income Tax Rate (ITR) = 35%
Find: Net Income After Tax (NIAT)
EXAMPLE OF TAX PROBLEMS
Solution for #1:
NIAT = NIBT – (NIBT x Income Tax Rate )
= P 36,800.00 – ( P 36,800 x 35%)
= P 36,800.00 – (12,880.00)
= P 36,800.00 – P 12,880.00
NIAT = P 23,920.00
EXAMPLE OF TAX PROBLEMS
Other Solution for #1:
If ITR is 35%, and NIAT = NIBT –Income Tax Rate, then:
NIAT Rate = 100% - ITR
= 100% - 35%
= 65%
Therefore,
NIAT = NIBT x NIAT rate
= P 36,800 x 65%
NIAT = P 23, 920.00
Vertical Analysis
Is primarily involves the comparison of one number
with another to identify significant relationships.
This is used in the preparation of common-size
statements.
Common-size statements are financial statements
expressed in percent.
To convert the regular financial statements into
common-size statements, a figure is taken as 100%
and the rest of the items in the financial statements
are restated in terms of the base chosen to represent
100%.
For the INCOME STATEMENT, the Net Sales is
taken as the Base representing 100%. For the Balance
Sheet, the Total Assets is taken as 100%.
Example of Conversion of Regular Income
Statement to Common-size Statement:
Excelsior Enterprises
Income Statement
For the Month Ended June 30,2010
Net Sales ……………………………P 150,000.00
Less: Cost of Sales…………………... 90,000.00
Gross Profit…………………………. 60,000.00
Less: Operating Expenses…………… 35,000.00
Net Income………………………….. P 25,000.00
Example of Conversion of Regular Income
Statement to Common-size Statement:
Excelsior Enterprises
Common-Size Income Statement
For the Month Ended June 30,2010
Net Sales …………………………………… 100%
Less: Cost of Sales (90/150)………………... 60%
Gross Profit (60/150)………………………. 40%
Less: Operating Expenses…………… ………23.33%
Net Income……………………………………16.67%
Example of Conversion of Regular
Balance Sheet to Common-size statement:
Onairam Amron International
Balance Sheet
June 30,2010
ASSETS
Cash..…………………………………….......................................................… .....P10,000.00
Accounts Receivable, Net…..………………... ………….... ………….... ……. 20,000.00
Merchandise Inventory.………………..…………….... ………….................…. 30,000.00
Furniture and Equipment, Net……………….... …………................……… …. 40,000.00
Total Assets……………………………………………………………………P 100,000.00
LIABILITIES AND EQUITY
Accounts Payable……………………………. ………….... …………......... P 20,000.00
Notes Payable……………………..............….... ………….... …………....….10,000.00
Onairam Amron, Capital……………………….........….......................................70,000.00
Total Liabilities and Equity…………………………………………………P 100,000.00
Example of Conversion of Regular
Balance Sheet to Common-size statement:
Onairam Amron International
Balance Sheet
June 30,2010
ASSETS
Cash (10,000/100,000)…..…………….......................................................… .....10%
Accounts Receivable, Net (20,000/ 100,000). ………….... ………….... ……. 20%
Merchandise Inventory(30,000/100,000)..………….... ………….................…. 30%
Furniture and Equipment, Net (40,000/100,000).………................……… …. ..40%
Total Assets……………………………………………………………………P 100%
LIABILITIES AND EQUITY
Accounts Payable (20,000/ 100,000). ………. ………….... …………......... ..20%
Notes Payable(10,000/100,000).............….... ………….... …………....…….10%
Onairam Amron, Capital (70,000/100,000)….........…........................................70%
Total Liabilities and Equity…………………………………………………..100%
Ratio Analysis
Is a form of vertical analysis.
Is used to determine certain ratios important in
business decision-making, like determining
profitability ratios, liquidity ratios, solvency ratio, asset
utilization ratios, etc.
The following ratios are often used in
business:
Profitability Ratios
These ratios show how profitable a firm is and also
measures the return or earnings on investments.
Some of these ratios are:
The following ratios are often used in
business:
1. Return on Owner’s Investment (ROI)
Example: If a company earns a net profit of
P100,000.00 and the capital of the owner(s) is
P1,000,000.00, the ROI would be:
ROI = Net Profit = P 100,000.00 = 10%
Owner’s Investment P 1,000,000.00
The following ratios are often used in
business:
2. Profit Margin or Return on Sales (ROS)
-this ratio is used to measure the profit generated by
the sales made by the company. If a company earned a
net profit of P100,000.00 from the generated sales of
P900,000.00 , the return on sales or profit margin
would be:
ROI = Net Profit = P 100,000.00 = 11.11%
Net Sales P 900,000.00
The following ratios are often used in
business:
Liquidity and Solvency Ratios
Liquidity Ratios- refer to the ratios used to gauge if the
company can meet its current liabilities, those that need
to be paid within the current year.
Solvency Ratios- are concerned with meeting the long-term
obligations of the company, those maturing in more than
one year.
Note: Creditors and suppliers are interested in knowing the
liquidity and solvency ratios of companies they grant loans to.
The following ratios are often used in
business:
Liquidity and Solvency Ratios
1. Current Ratio
-this liquidity ratio shows if the company has enough current assets to meet its current
liabilities. If a company has P 300,000.00 current assets and P 100,000.00 current liabilities, its
current ratio would be:
Current Ratio = Current Assets
Current Liabilities
= P 300,000.00
P 100,000.00
=3
1
= 3:1
Note: This means that for every P1.00 of a liability or debt, the company has P3.00 to pay it. The
creditors are secured.
The following ratios are often used in
business:
Liquidity and Solvency Ratios
1. Debt Ratio
-this solvency ratio shows the relationship between the total liabilities and the total assets of the
firm. Assuming a firm with total liabilities of P450,000.00 and total assets of P900,000.00, the
debt ratio would be:
Debt Ratio = Total Liabilities
Total Assets
= P 450,000.00
P 900,000.00
=1
2
= 1:2
Note: This means that the firm has P 1.00 liability for P 2.00 total assets. Again, the firm is
secured, meaning, the company can pay its obligations.
Horizontal Analysis
Is also known as “trend analysis”, refers to
comparing figures of financial statement of one
period with the figures of financial statement of
another period.
Is called trend analysis because it shows the trend,
whether increasing or decreasing, of certain accounts,
say, sales or net income. The increases or decreases
are expressed both in amounts and in percent.
Horizontal Analysis
Let us study the following trend analysis of the comparative income
statements of a certain firm:
INCREASE/ (DECREASE)
201B 201A Amount %
(P 000) (P 000) (P 000) R
Q2Q1
Sales 150 125 25 20%
Cost of Sales 90 70 20 28.57%
Gross Profit 60 55 5 9.09%
Operating Exp. 35 45 (10) (22.22%)
Net Income 25 10 15 150%
The formula used in horizontal analysis is:
R = Q2 –Q1
Q1
