Module in

Business Finance

(Specialized course for

Grade 12 ABM Students)
2nd Semester 2020-2021

Prepared by Ms. Rovi Charisse pua

Contents
DepEd SHS Curriculum Guide ....................................................................................................... 5
DepEd SHS MELC- Most Essential Learning Competencies ...................................................... 10
Foreword ................................................................................................................................... 13
About this Module..................................................................................................................... 13
How to use this Module ................................................................................................................ 13
Parts of this Module ...................................................................................................................... 14
Chapter 1: Introduction to Financial Management ........................Error! Bookmark not defined.
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Pre-Test ......................................................................................Error! Bookmark not defined.
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Post Test .....................................................................................Error! Bookmark not defined.
Chapter 2: Review of Financial Statement Preparation, Analysis, and Interpretation ................. 15
Objectives .................................................................................................................................. 15
Pre-Test ..................................................................................................................................... 15
Looking Back ............................................................................................................................ 15
Lesson........................................................................................................................................ 17
Chapter 3: Financial Planning: Tools and Concepts ......................Error! Bookmark not defined.
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Chapter 9: Investment Management ..............................................Error! Bookmark not defined.
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Chapter 10: Managing Personal Finance .......................................Error! Bookmark not defined.
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DepEd SHS Curriculum Guide
DepEd SHS MELC- Most Essential Learning
Competencies
Business Finance
Module-New Normal Finance for Grade 12 ABM Students
Specialized Subject: First Edition, 2020
Author: Rovi Charisse B. Pua

Foreword

The Department of Education (DepEd) maintained creating modules for blended learning a
collective effort which requires participation from teachers who will be using these in the upcoming
school year. This Module is protected by Republic Act No. 8293-Intellectual Property Code of the
Philippines. An act prescribing the intellectual property code and establishing the intellectual property
office, providing for its powers and functions, and for other purposes.

As a precaution during this Covid-19, we are strictly advised to stay at home so that both we
and our families would be safe. Online learning is new to us and we must do a collective effort in order
for us to continuously learn inside or outside the school or university premises, besides, learning never
stop, doesn’t it? This Economics module will shed light to both theories and application of economics.
This encompasses the day to day experience that involves economics. It is made sure that Gr. 12
students can comprehend the lessons being tackled in this module to be an alternative to the face to
face learning. Module includes activities every end of the chapter to reinforce the learning capabilities
of the student.

About this Module

This module consists of both lesson and activities. This will help the students to practice and
hone their reading and analytical skills. Activities, tests, and performance tasks will make them aware
of the lessons they needed to learn about Business Finance. This will inform the students how to assess
financial statements of other companies, their soon-to-establish business, and their personal finances.
This module is comprised with 10 chapters. Chapter 1 discusses the fundamental concepts of finance.
This will give them an idea of what are the terms and importance of studying business finance. Chapter
2 outlines horizontal, vertical, trade analysis and also financial ratios. Chapter 3 tackles about
budgeting and planning. Chapter 4 is all about working capital management. Chapter 5-6 gives you the
idea about sources and uses of short and long-term funds. Next to those are Risk and Rates of return
and Time Value of money which will support the former chapters. Lastly, Chapters 9-10 which will be
tackling about Investment Management and Managing Personal Finance.

How to use this Module

Before answering the activities, read first the lesson and write the concepts and things that
you need to remember and also the things you have learned in your notebook. Read and follow all
the instructions provided in each activity. Always do your best in answering and performing the
tasks that has been given. Let your Facilitator or your guardian assess your answer using the key
card found in the end of this module. After the activities, please answer the posttest and keep in
mind the lessons that you have learned. Happy learning!

Parts of this Module

 Objectives – stating the learning goals to be achieved in every chapter.

 Pre-test – activities that will test your prior knowledge about the concepts that would be
mastered in this module
 Looking back to your lesson – will measure your knowledge and skills about the previous
lesson
 Lesson – concepts and ideas about the lesson being tackled
 Activities – set of activities that should be performed
 Check your understanding – this will verify what you have learned from the lesson
 Post-test – measure how much you have learned from the entire module
Chapter 2: Review of Financial Statement
Preparation, Analysis, and Interpretation
Objectives
1. Discuss the elements, preparation, and limitations of financial statements.
2. Reconstruct balance sheet and income statement through financial ratios.
3. Analyze and interpret trend ratios.
4. Evaluate the past performance of the company through financial ratios.
5. Interpret the changes in the financial structure of the company.
6. Differentiate the different activities of the firm, operating, investing and financing.

Pre-Test
Define each type of business and give 5 business examples for each.

SOLE PARTNERSHIP CORPORATION COOPERATIVE

PROPRIETORSHIP

Looking Back
6 reasons why Finance is important in today’s business?
Nikhil BansalDecember 6th
As the term suggests, finance is the available cash that makes an organization can use.
Whether you want to start a business, or expand an existing one, add more pieces of equipment or
develop new products, finance is the core of every business organization today. Liquid money is
important to run the day to day operations for the organization. Right from the smallest spending
to huge business expenses, finance is a must. Agree? Well, yes. But, is that enough to run a
business venture successfully and without fail? I don't think so.

Businesses today are extremely fragile. Organizations invest an enormous amount of

money in order to keep their business running and fully functional. But you cannot just keep on
spending lavishly or not spend at all. Now for one, it can be said that finance is the fuel of business
today, but its management is equally important for organizations to emerge successful. Only when
you add proper management to the field of finance, can you reap it's benefit?

While this might not convince you about the importance of financial management in every
business, I will magnify the same. But, before getting into the importance of financial management
for every business, let's see what does the term actually means?

Financial Management
Undoubtedly, finance is one of the most important aspects of a business. With huge funds,
daily cash flow and continuous transaction, managing and monitoring all of the above turn
necessary. As a matter of fact, managing finance is influential when it comes to making decisions.
For instance, if the organization has greater funds, a part can be used for investment purposes and
similarly, if the organization has funds lesser than the threshold value, it is important to put
unnecessary spending to a stop.

To be specific, financial management helps the organization determine what to spend,

where to spend and when to spend. It gives a better view of the financial status of the organization,
which further outlines the financial processing of the same. Taking this discussion forward, we
highlight six reasons why financial management is important for your business?

Why Financial Management?

Generate Money
To start a business, you would need money. It is obvious that to make the first step and
launch your business, capital investment is required. Further, as you move up the timeline, getting
materials, hiring professionals, marketing and testing, every single step would need financial
management.

Organize Operations
Businesses generate enormous amounts of money every day. This money has to be used
further to pay bills, delegate funds, invest in multiple engagements and monitor all. Managing the
inflow and outflow of money within your organizations is important. Failing the above, it becomes
tough to allocate funds efficiently and effectively. Not to forget that irregular flow of money can
turn a business insolvent.

Manage Cash Flow

Having excessive funds is at fatal as having lesser ones. For an organization to be carried
on with their day to day processing, it becomes imperative to manage the cash flow. In case you
have higher funds and you aren't using it as needed, it signifies wastage of resources. For an
enterprise that has surplus cash, putting them to use and investing in significant engagements
would yield better returns and help them expand their business.
Strategize Funding
Of course, you would want to allocate funds and use it to map the expenses that take place
on a regular basis. However, spending any or every cash without proper planning is not wise. You
need to keep track of the expenses, monitor the frequency and then decide how to spend and how
much to spend. At times, it is important to cut down extra costs and reduce expenses. And this can
only be done when you manage your financial undertakings effectively. It is advocated that
companies must have sufficient funds to deal with situations of monetary crisis.

Outline Long Term Goals

Organizations work to grow and scale their business high. To do so, it is important to have
significant future goals that the organization aims to accomplish in a span of five or ten years.
Financial Management helps an organization achieve its goals without fail. Consider that you have
planned to expand your organization to three new cities. While actually implementing the plan,
you run out of money. This wouldn't have happened had you managed your organization's finance
and then executed. Pre-planning and working on the available cash of the organization helps you
eliminate the future possibilities of crisis while moving ahead to attain your goal.

To Sustain Economic Downturn

If you look at the growth graph of an organization, you will never find one that rises straight
or is without any bends. The growth of the cycle of business organization is a mix and merge of
highs and lows which of course could be due to various reasons. Recession, depression, boom or
failure, all add up to the fall of a business. With sufficient finance and significant financial
management, it becomes easier for the organization to walk down the business cycle. No matter
how bad the situation is, they are always ready to face the problem and bear the consequences
without being under the threat of shutting down. Failure-proof financial management plans help
the organization thrive even know adverse economic conditions.

Final Word
Having said all of the above, it is clear that as much as finance is important for your
business, so is the management. Right from collecting funds to allocating and spending them,
organizational leaders must have a transparent view of all financial undertakings within their
organization and likewise, indulge in planning for efficient utilization of available resources.

Lesson
Financial statements are summarized data that provide information about the financial position
(balance sheet), result of operation (income statement) and cash flow (statement of cash flow) of
a firm. This would help decision makers to assess profitability and stability of an enterprise and
what are the next steps in order to further maximize its profit.
Users of Financial Statement

1. Creditors/suppliers
2. Managers
3. Investors
4. Government agencies
5. Employees’ unions

Components of Financial statements

Balance Sheet
1. Current assets are presented first. These items can be converted into cash within a year.
2. Non-current assets these items can be converted into cash over a year.
3. Current liabilities are obligations of the firm which are due within a year.
4. Non-current liabilities are obligations which are due beyond a year.
5. Stockholder’s equity is the net worth or the residual value of the company.
a. Par Value of stock – face value of stock
b. Additional paid-in capital – (issued price – par value of stock) x number of shared
acquired
c. Retained earnings – represent the buildup of equity from profits that are plowed
back to firm.

Normal balance
1. Assets: Debit
2. Liabilities: Credit
3. Equity: Credit

FMA Company
Balance Sheet
December 31, 2013
Current Assets Liabilities
Cash P 65,000 Current liabilities P 110,800
Accounts Receivable 40,000 Non-current liabilities P 270,800
160,000
Marketable Securities 40,000
Inventory 100,000 P 245,000 Stockholder’s Equity
Non-current Assets Common stock (P P 100,000
5.00 par value, 20,000
shares)
Plants assets 200,000 Retained earnings 74,200 P 174,200
Total Assets P 445,000 Total Liabilities and P 445,000
Stockholder’s
Equity

Income Statement
1. Sales
2. Sales Returns and Allowances
3. Sales Discount
4. Cost of Goods Sold (COGS) is direct cost attributed to the producing the product sold
5. Gross Profit
6. Operating Expenses – Selling and General expenses
7. Interest – on firms debt
8. Taxes – earning owed to the government

Normal balance
1. Income accounts: credit
2. Expense accounts: debit

FMA Company
Income Statement
For the Year Ended December 31, 2013
Sales P 200,000
Less: Sales returns and
allowances 40,000
Net Sales P 160,000
Less: Cost of Goods Sold 100,000
Gross Profit 60,000
Less: Operating Expenses
Selling Expenses P 22,000
General Expenses 8,000 30,000
Income from operations P 30,000
Add: Non-operating income 6,000
Income before interest and
taxes P 36,000
Less: Interest expense 4,000
Income before tax
expenses P 32,000
Less: Income taxes (30%) 9,600
Net Income P 22,400
Statement of stockholders’ equity
Shows movements in the elements of components of the stockholders’ equity. Major elements of
the statement of stockholders’ equity include the following:

a. Issuance of stock
b. Retained earnings
c. Declaration of cash dividends
d. Distribution of stock dividends
e. Purchase and sale of treasury stocks
f. Accumulated other comprehensive income
g. Correction of errors

Statement of Cash flow

Shows firms cash receipts and cash payments during a specific period of time. The
transactions recognized is only cash already paid or received.

Accounting policies and notes to financial statements

Guidelines and detailed information used in the preparation of financial statements that are
not seen in financial statement.

Limitations of Financial Statements

1. The application of accounting principles vary
2. Financial statements are interim in nature
3. Financial statements do not reflect changes in the purchasing power of the peso
4. Financial statements do not contain all the significant facts about the business

Financial Analysis
Entails the use of historical financial statements to evaluate the past and current
performances of the firm and to make financial forecast in the future (Keown et al., 2006)

Horizontal analysis
Evaluation of the trend of account balances through the years. Comparative Statements
are used to evaluate the changes or the behavior patterns of the different accounts in financial
statements for two or more years.
𝑌𝑒𝑎𝑟 2 − 𝑌𝑒𝑎𝑟 1
=( ) × 100
𝑌𝑒𝑎𝑟 1
= 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑜𝑟 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑜𝑓 𝑎𝑛 𝑎𝑐𝑐𝑜𝑢𝑛𝑡
Example:
 Increase or Percentage of increase
(Decrease) or (decrease)
2012- 2011- 2012-
2013 2012 2011 2011-2012
2013 2012 2013
ASSETS
Current Assets
Cash 65,000 70,000 75,000 (5,000) (5,000) (7.14%) (6.67%)
Accounts receivable 40,000 35,000 20,000 5,000 15,000 14.29% 75.00%
Marketable securities 40,000 35,000 10,000 5,000 25,000 14.29% 250.00%
Inventory 100,000 80,000 100,000 20,000 (20,000) 25.00% (20.00%)
Total current assets 245,000 220,000 205,000 25,000 15,000 11.36% 7.32%
Plant assets 200,000 160,000 170,000 40,000 (10,000) 25.00% (5.88%)
TOTAL ASSETS 445,000 380,000 375,000 65,000 5,000 17.11% 1.33%
LIABILITIES
Current liabilities 110,800 105,000 104,000 5,800 1,000 5.52% 0.96%
Long-term liabilities 160,000 145,000 140,000 15,000 5,000 10.34% 3.57%
Total liabilities 270,800 250,000 244,000 20,800 6,000 8.32% 2.46%
STOCKHOLDER’S
EQUITY
Common stock (P 5.00 par
100,000 100,000 100,000
value, 20,000 shares)
Retained Earnings 74,200 30,000 31,000 44,200 (1,000) 147.33% (3.23%)
Total stockholder’s equity 174,200 130,000 131,000 44,200 (1,000) 34.00% (0.76%)
Total Liabilities and
445,000 380,000 375,000 65,000 5,0000 17.11% 1.33%
stockholder’s equity

Percentage of
Increase or
increase or
(Decrease)
(decrease)
2012- 2011- 2012- 2011-
2013 2012 2011
2013 2012 2013 2012
Sales 200,000 210,000 100,000 (10,000) 110,000 (4.76%) 110.00%
Sales returns and allowances 40,000 25,000 6,000 15,000 19,000 60.00% 316.37%
Net sales 160,000 185,000 94,000 (25,000) 91,000 (13.51%) 96.81%
Cost of Goods Sold 100,000 115,625 50,000 (15,625) 65,625 (13.51%) 131.25%
Gross Profit 60,000 69,375 44,000 (9,375) 25,375 (13.51%) 57.67%
Operating Expenses
Selling Expense 22,000 25,000 16,000 (3,000) 9,000 (12.00%) 56.25%
General Expense 8,000 12,000 8,000 (4,000) 4,000 (33.33%) 50.00%
Total Operating Expenses 30,000 37,000 24,000 (7,000) 13,000 (18.92%) 54.17%
Income from operations 30,000 32,375 20,000 (2,375) 12,375 (7.34%) 61.88%
Non-operating income (28.57%
6,000 2,500 3,500 3,500 (1,000) 140.00%
)
Income before interest
36,000 34,875 23,500 1,125 11,375 3.23% 48.40%
expense and taxes
Interest expense 4,000 3,500 3,000 500 500 14.29% 16.67%
Income before taxes 32,000 31,375 20,500 625 10,875 1.99% 53.05%
Income taxes (30% rate) 11,200 10,981 7,175 219 3,806 1.99% 53.05%
Net Income 20,800 20,394 13,325 406 7,069 1.99% 53.05%

Trend Ratio
A firm has to choose a base year which will be assigned and index of 100.
𝑌𝑒𝑎𝑟 𝑁𝑜.
= ( ) × 100
𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟
Example:

Trend Ratio
2011-
2013 2012 2011 2012-2013 2011
2012
ASSETS
Current Assets
Cash 65,000 70,000 75,000 86.67% 93.33% 100%
Accounts receivable 40,000 35,000 20,000 200.00% 175.00% 100%
Marketable securities 40,000 35,000 10,000 400.00% 350.00% 100%
Inventory 100,000 80,000 100,000 100.00% 80.00% 100%
Total current assets 245,000 220,000 205,000 119.51% 107.32% 100%
Plant assets 200,000 160,000 170,000 117.65% 94.12% 100%
TOTAL ASSETS 445,000 380,000 375,000 118.67% 101.33% 100%
LIABILITIES 100%
Current liabilities 110,800 105,000 104,000 106.54% 100.96% 100%
Long-term liabilities 160,000 145,000 140,000 114.29% 103.57% 100%
Total liabilities 270,800 250,000 244,000 110.98% 102.46% 100%
STOCKHOLDER’S EQUITY
Common stock (P 5.00 par value,
100,000 100,000 100,000 100.00% 100.00% 100%
20,000 shares)
Retained Earnings 74,200 30,000 31,000 239.35% 96.77% 100%
Total stockholder’s equity 174,200 130,000 131,000 132.98% 99.24% 100%
 Total Liabilities and
445,000 380,000 375,000 118.67% 101.33% 100%
stockholder’s equity

Trend Ratio
2013 2012 2011 2012-2013 2011-2012 2011
Sales 200,000 210,000 100,000 200.00% 210.00% 100%
Sales returns and allowances 40,000 25,000 6,000 666.67% 416.67% 100%
Net sales 160,000 185,000 94,000 170.21% 196.81% 100%
Cost of Goods Sold 100,000 115,625 50,000 200.00% 231.25% 100%
Gross Profit 60,000 69,375 44,000 136.36% 157.67% 100%
Operating Expenses
Selling Expense 22,000 25,000 16,000 137.50% 156.25% 100%
General Expense 8,000 12,000 8,000 100.00% 150.00% 100%
Total Operating Expenses 30,000 37,000 24,000 125.00% 154.17% 100%
Income from operations 30,000 32,375 20,000 150.00% 161.88% 100%
Non-operating income 6,000 2,500 3,500 171.43% 71.43% 100%
Income before interest
36,000 34,875 23,500 153.19% 148.40%
expense and taxes
Interest expense 4,000 3,500 3,000 133.33% 116.67% 100%
Income before taxes 32,000 31,375 20,500 156.10% 153.05% 100%
Income taxes (30% rate) 11,200 10,981 7,175 156.10% 153.05% 100%
Net Income 20,800 20,394 13,325 156.10% 153.05% 100%

Vertical Analysis
Evaluating the account balances in both balance sheet and income statement in proportion
of the total account statement. Common Size Statement is the base account with a percentage of
100. In the case of balance sheet, total asset account is used while in the income statement net sales
is used to evaluate the accounts in comparison with it. Common Size Analysis will then be
beneficial to the decision making of the company wherein they will see the internal structure of
the enterprise that would help them determine what are the accounts to look out for, the
improvements in distribution of resources and alternatives that would help to maximize their
profits.

Example:

Common Size Analysis

2013 2012 2011 2013 2012 2011
ASSETS
Current Assets
 Cash 65,000 70,000 75,000 14.61% 18.42% 20.00%
Accounts receivable 40,000 35,000 20,000 8.99% 9.21% 5.33%
Marketable securities 40,000 35,000 10,000 8.99% 9.21% 2.67%
Inventory 100,000 80,000 100,000 22.47% 21.05% 26.67%
Total current assets 245,000 220,000 205,000 55.06% 57.89% 54.67%
Plant assets 200,000 160,000 170,000 44.94% 42.11% 45.33%
TOTAL ASSETS 445,000 380,000 375,000 100% 100% 100%
LIABILITIES
Current liabilities 110,800 105,000 104,000 24.90% 27.63% 27.73%
Long-term liabilities 160,000 145,000 140,000 35.96% 38.16% 37.33%
Total liabilities 270,800 250,000 244,000 60.85% 65.79% 65.07%
STOCKHOLDER’S
EQUITY
Common stock (P 5.00 par
100,000 100,000 100,000 22.47% 27.63% 26.67%
value, 20,000 shares)
Retained Earnings 74,200 30,000 31,000 16.67% 7.89% 8.27%
Total stockholder’s equity 174,200 130,000 131,000 39.15% 34.21% 34.93%
Total Liabilities and
445,000 380,000 375,000 100% 100% 100%
stockholder’s equity

Common Size Analysis

2013 2012 2011 2013 2012 2011
Sales 200,000 210,000 100,000 125.00% 113.51% 106.38%
Sales returns and allowances 40,000 25,000 6,000 25.00% 13.51% 6.38%
Net sales 160,000 185,000 94,000 100% 100% 100%
Cost of Goods Sold 100,000 115,625 50,000 62.50% 62.50% 53.19%
Gross Profit 60,000 69,375 44,000 37.50% 37.50% 46.81%
Operating Expenses
Selling Expense 22,000 25,000 16,000 13.75 13.51% 17.02%
General Expense 8,000 12,000 8,000 5.00% 6.94% 8.51%
Total Operating Expenses 30,000 37,000 24,000 18.75% 20.00% 25.53%
Income from operations 30,000 32,375 20,000 18.75% 17.50% 21.28%
Non-operating income 6,000 2,500 3,500 3.75% 1.35% 3.72%
Income before interest expense and
36,000 34,875 23,500 22.50% 18.85% 25.00%
taxes
Interest expense 4,000 3,500 3,000 2.50% 1.89% 3.19%
Income before taxes 32,000 31,375 20,500 20.00% 16.96% 21.81%
Income taxes (30% rate) 11,200 10,981 7,175 7.00% 5.94% 7.63%
Net Income 20,800 20,394 13,325 13.00% 11.02% 14.18%
Financial Ratios
According to Igben (1999:423), “Accounting {or financial} ratio is a proportion or fraction
or percentage expressing the relationship between one item in a set financial statements and
another item in the financial statements. Accounting ratios are the most powerful of all tools used
in analyzed and interpreting financial statements”. Therefore, ratio analysis involves taking stats
of number (or items) out of financial statements and forming ratios with them, to enhance informed
judgments and decisions (Lasher, 1997:66). (Nuhu, 2014)

Financial
Ratio
Industry Trend Analysis
Comparison
Comparison to own
Comparison of own progress through the
performance against years past.
competitors.

Liquidity Ratio
 Describes the degree to which an asset or security can be quickly bought or sold in the
market at a price reflecting its intrinsic value. In other words: the ease of converting it to
cash.
 Cash is universally considered the most liquid asset.
 Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid.

IS THE FIRM ABLE TO MEET ITS CURRENT OBLIGATIONS?

1. Working Capital

= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑊𝐶
= 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑖𝑠 𝑎𝑏𝑙𝑒 𝑡𝑜 𝑚𝑒𝑒𝑡 𝑖𝑡𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛 𝑤𝑖𝑡ℎ 𝑎 𝑠𝑎𝑓𝑒𝑡𝑦 𝑐𝑢𝑠ℎ𝑖𝑜𝑛

𝑍𝑒𝑟𝑜 𝑊𝐶
= 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑖𝑠 𝑎𝑏𝑙𝑒 𝑡𝑜 𝑚𝑒𝑒𝑡 𝑖𝑡𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛 𝑤𝑖𝑡ℎ 𝑖𝑡𝑠 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡

𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑊𝐶 = 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 𝑐𝑜𝑢𝑙𝑑𝑛′ 𝑡 𝑝𝑎𝑦 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

 2. Current Ratio
Most frequently used to measure liquidity. This determines the ability of the firm to pay for its
current liabilities with the use of their current assets.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
> 1 ∶ 𝑓𝑖𝑟𝑚 𝑖𝑠 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑛𝑑 𝑖𝑡 𝑖𝑠 𝑖𝑛 𝑎 𝑔𝑜𝑜𝑑 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 𝑡𝑜 𝑚𝑒𝑒𝑡 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛

= 1 ∶ 𝑓𝑖𝑟𝑚 𝑖𝑠 𝑙𝑖𝑞𝑢𝑖𝑑, 𝑡ℎ𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑖𝑠 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

< 1 ∶ 𝑓𝑖𝑟𝑚 𝑖𝑠 𝑖𝑙𝑙𝑖𝑞𝑢𝑖𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑢𝑙𝑑 𝑛𝑜𝑡 𝑝𝑎𝑦 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑛𝑔 𝑙𝑜𝑎𝑛

3. Quick Ratio
Is slightly stricter. It excludes inventories and other current assets, which are not as liquid as cash
and cash equivalents, accounts receivable, and short-term investments.
𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Activity Ratio
 Asset management
 Are the key to analyzing how effectively and efficiently your small business is managing
its assets to produce sales.
 Also called turnover ratios or efficiency ratios.

IS THE FIRM EFFECTIVELY MANAGING ITS ASSETS?

1. Accounts Receivable Turnover

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐴𝑅 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐴𝑅
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 =
2

↑ 𝐴𝑅𝑇 = 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑖𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑛𝑔 𝑡ℎ𝑒𝑖𝑟 𝑐𝑟𝑒𝑑𝑖𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑜𝑛 𝑎 𝑡𝑖𝑚𝑒𝑙𝑦 𝑏𝑎𝑠𝑖𝑠

↓ 𝐴𝑅𝑇
= 𝑙𝑜𝑜𝑘 𝑎𝑡 𝑡ℎ𝑒𝑖𝑟 𝑐𝑟𝑒𝑑𝑖𝑡 𝑎𝑛𝑑 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛𝑠 𝑝𝑜𝑙𝑖𝑐𝑦 𝑎𝑛𝑑 𝑏𝑒 𝑠𝑢𝑟𝑒 𝑡ℎ𝑒𝑦 𝑎𝑟𝑒 𝑜𝑛 𝑡𝑎𝑟𝑔𝑒𝑡

2. Average Collection Period

 It is used to determine the effectiveness of a company's credit and collection efforts
in allowing credit to customers, as well as its ability to collect from them.
360 𝑑𝑎𝑦𝑠
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

3. Inventory Turnover
Is one of the most important asset management or turnover ratios. If your firm sells
physical products, it is the most important ratio. The number of days signifies the number
of times inventory is sold and restocked each year.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
2
↑ 𝐼𝑇 = 𝑦𝑜𝑢 𝑚𝑎𝑦 𝑏𝑒 𝑖𝑛 𝑑𝑎𝑛𝑔𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠
↓ 𝐼𝑇 = 𝑤𝑎𝑡𝑐ℎ 𝑜𝑢𝑡 𝑓𝑜𝑟 𝑜𝑏𝑠𝑜𝑙𝑒𝑡𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

4. Average Age of Inventory

It tells the business owner how many days, on average, it takes to sell inventory.
360
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

5. Operating Cycle
Is the time required for a company's cash to be put into its operations and then return
to the company's cash account. A manufacturer's operating cycle is amount of time required
for the manufacturer's cash to be used to:
a. pay for the raw materials needed in its products
b. pay for the labor and overhead costs needed to convert the raw materials
into products
c. hold the finished products in inventory until they are sold
d. wait for the customers' cash payments to be collected

= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

6. Total Asset Turnover

It shows how efficiently your assets, in total, generate sales. The higher the total
asset turnover ratio, the better and the more efficiently you use your asset base to generate
your sales.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =
2

Leverage Ratio
 Debt Management Ratios
 Measures how much of a company's operations comes from debt instead of other forms of
financing, such as stock or personal savings. Is one measure among many of a company's
risk and likelihood of default.

DOES THE FIRM HAVE THE RIGHT MIX OF DEBT AND EQUITY?

1. Debt Ratio
It measures the extent of a company’s leverage.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =
2

> 1 ∶ 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑏𝑙𝑒 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑑𝑒𝑏𝑡 𝑖𝑠 𝑓𝑢𝑛𝑑𝑒𝑑 𝑏𝑦 𝑎𝑠𝑠𝑒𝑡𝑠

= 1 ∶ 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑖𝑠 𝑒𝑞𝑢𝑎𝑙 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
< 1 ∶ 𝑔𝑟𝑒𝑎𝑡𝑒𝑟 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑎 𝑐𝑜𝑚𝑝𝑎𝑛𝑦′𝑠 𝑎𝑠𝑠𝑒𝑡𝑠 𝑖𝑠 𝑓𝑢𝑛𝑑𝑒𝑑 𝑏𝑦 𝑒𝑞𝑢𝑖𝑡𝑦

2. Debt to Equity Ratio

Proportion of the total liabilities to the invested capital. It reflects the ability of shareholder
equity to cover all outstanding debts in the event of a business downturn.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
↑ 𝐷𝐸𝑅 = 𝑓𝑖𝑟𝑚 𝑓𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 𝑚𝑜𝑠𝑡𝑙𝑦 𝑜𝑛 𝑑𝑒𝑏𝑡𝑠
↓ 𝐷𝐸𝑅
= 𝑓𝑖𝑟𝑚 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 𝑏𝑦 𝑚𝑒𝑎𝑛𝑠 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑓𝑢𝑠𝑖𝑜𝑛 𝑏𝑦 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠

3. Times Interest Earned Ratio

Measures the capability of a firm to pay for its interest obligations. The larger the times
interest earned ratio, the more likely that the corporation can make its interest payments.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (𝐸𝐵𝐼𝑇)
=
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

Profitability Ratio
 Indicates how financially stable and how effective a firm is in managing to earn satisfactory
profit and return on investment.

THE COMBINED EFFECTS OF LIQUIDITY, ASSET AND DEBT MANAGEMENT

1. Gross Profit Margin

Measures a firm’s manufacturing and distributing efficiency during the production process
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
=
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

2. Profit Margin (Return on Sales)

Compares the quality of a firm’s operations against its competitors
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑓𝑡𝑒𝑟 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 (𝑁𝐼𝐴𝑇)
=
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

3. Return on Investment
Measures the efficiency of the investment of a firm.
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
=( ) × 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

4. Return on Assets
Measure the income generated for every peso invested for assets.
𝑁𝐼𝐴𝑇
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =
2

5. Return on Equity
Measure of how effectively management is using a company’s assets to create profits.
𝑁𝐼𝐴𝑇 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘

Market Value Ratios

Evaluates the current publicly held price of shares. These ratio may determine if a stock is
over or under priced.
RELATES THE FIRM’S STOCK PRICE TO ITS EARNINGS AND THE BOOK VALUE
PER SHARE

1. Earnings Per Share

Measures income generated per common stock held.
𝑁𝐼𝐴𝑇 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠
=
𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

2. Price/ Earnings Ratio (P/E)

Indicates what the investors perceive about firm’s future prospects.
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
=
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

3. Book value per share

Book value is the value of a firm on the perspective of accounting. It is the total of common
stock, premium on paid-in capital and retained earnings less treasury stock. This will then
be divided to common shares outstanding.
𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘
=
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

4. Market to Book value Ratio

Finds a company's value by comparing its book value to its market value. A company's
book value is calculated by looking at the company's historical cost, or accounting value.
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
=
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Dividend Ratio
Percentage of dividends (cash, stocks, scrip or property dividends) declared by the board of
directors to their stockholders.

1. Dividend Yield
Relationship between earned dividends per share and market price of the stock.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
=
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
2. Dividend payout Ratio
Measures how many of the earnings per share was declared as dividends.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
=
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Cash Flow Statement

 It is a summary of changes in the balance sheet in a specific period of time (mostly yearly)
as a result of day to day operations of a firm. These changes are grouped in three, namely, cash
flows from operating activities, investing activities and financing activities.

Purchase of Inventories
Sale of Inventories Operating Activities

Cash Acquisition of Asset

Sale of Asset Investing Activities
Reserves

Payment of Loans Financing Activities

Borrowing of Money

Cash reserves pertain to the total amount of cash on hand that the company has (shown in
the beginning cash balance in balance sheet). All transition of a firm will have an effect on how
much the cash reserves will be. It will increase due to cash inflows and decrease due to cash
outflows. At the end of the period being covered, the amount of cash balance will be shown at the
ending balance sheet of the firm. Change in cash balance between beginning and ending cash must
be equal to the changes in each of accounts in the balance sheet and income statement.

Purpose of Cash Flow Statement

1. Gives the data of cash inflows and outflows.
2. Gives information about changes in balance sheet.
3. Gives information about the firm’s liquidity, profitability and overall health.
4. Gives insight on different activities of the firm.
5. Gives information about the capability of firm to produce cash and equivalents.

Cash flow from Operating Activities

These transactions are related to the day-to-day operations of the firm. These activities include
revenues (inflows) and expenses (outflows) which is seen in the income statement and changes in
the current assets and liabilities in the balance sheet excluding short-term debt and notes payable.

Cash flow from Investing Activities

These transactions are related to generally the sale and acquisition of fixed asset (accounts seen in
non-current assets), investments and divestments.

Cash flow from Financing Activities

These transactions includes borrowings made to the bank, payment of obligations, capital changes
and withdrawals.

Basic Format of Cash Flow Statement

 Alpha Corporation
Statement of Cash Flows
For the Year Ended December 31,2020
Cash Flow From Operating Activities
Net Income After Tax XX
Add: Depreciation Expense XX
Change in Accounts Receivable XX
Change in Inventory XX
Change in Other Current Assets XX
Change in Accounts Payable XX
Change in Accruals XX
Change in Other Current Liabilities XX
Total Cash Flow From Operating Activities XX

Cash Flow From Investing Activities

Change in Gross Fixed Assets XX
Change in Investments XX
Total Cash Flow From Investing Activities XX

Cash Flow From Financing Activities

Change in Short Term Debt (Notes XX
Payable)
Change in Long Term Debt XX
Change in Capital Stock XX
Dividends Paid (Withdrawals) XX
Total Cash Flow From Financing Activities XX
Change in Cash XX
Add: Beginning Cash (January) XX
Ending Cash Balance (December) XX

Note:
1. Change in accounts can be computed by subtracting the ending balances to beginning
balances in the balance sheet.
2. Assets Accounts: if the difference is a negative amount (excluding cash) it is considered a
source of cash. If the difference is a positive amount (excluding cash) it is considered a
use of cash.
3. Liabilities Accounts: if the difference is negative amount, it is considered as a use of cash
while if the difference is positive amount it is considered source of cash.
 4. Net Income After Tax and increase in capital stock (if corporation) are considered as a
source of cash. Net Loss After Tax and decrease in capital stock (if corporation) are
considered as a use of cash.
5. Depreciation Expense: even if it is referred as expense, is a non-cash expense meaning the
firm does not pay actual cash to pay depreciation. This account simply reduces the taxable
income by being claimed as an expense.
6. Withdrawals is a use of cash.
7. Retained Earnings are excluded since NIAT is already considered in the presentation of
cash flows from the operating activities.

Activity 1
Perform the horizontal and vertical analysis for the Balance Sheet and Income Statement of PER
Corporation

2013 2012
ASSETS
Current Assets
Cash 600 800
Accounts receivable 300 400
Inventory 400 200
Total current assets 1,300 1,400
Non-Current Assets
Land 1,000 1,000
Building, Net Book Value 4,800 4,500
Transportation, Net Book Value 90 110
Total non-current assets 5,890 5,610
TOTAL ASSETS 7,190 7,010
LIABILITIES
Current Liabilities
Accounts Payable 100 130
Taxes Payable 290 -
Short Term Debt 200 280
Total current liabilities 590 410
Non-Current Liabilities
Long Term Debt 200 200
Total liabilities 200 200
TOTAL LIABILITIES 790 610
STOCKHOLDER’S EQUITY
Common stock 6,000 6,000
Retained Earnings 400 400
 Total stockholder’s equity 6,400 6,400
Total Liabilities and stockholder’s equity 7,190 7,010

2013 2012
Sales 2,000 3,000
Cost of Goods Sold 1,450 2,000
Gross Profit 550 1,000
Operating Expenses
Selling Expense 80 100
General Expense 80 200
Depreciation Expense 300 330
Income from operations 460 630
Income before interest expense and taxes 90 370
Interest expense 10 30
Income before taxes 80 340
Income taxes (40% rate) 32 136
Net Income 48 204

Activity 2
Perform liquidity, asset, leverage, and profitability ratio for PER Corporation.

Check your Understanding

If a company is experiencing a negative profit margin, what may be the possible reasons?

Post Test
Create a financial analysis on each type of ratio for PER Corporation

1. Liquidity
2. Asset
3. Leverage
4. Profitability