Republic of the Philippines

DEPARTMENT OF EDUCATION
Region IX, Zamboanga Peninsula
MOLAVE VOCATIONAL TECHNICAL SCHOOL
Burgos St., Molave, Zamboanga del Sur 7023
Tel No. (062) 2251 507/ School ID No. 303797

SENIOR HIGH SCHOOL

LEARNING ACTIVITY SHEETS # 6
Fundamentals of Accountancy, Business and Management 2

Name of Learner: _____________________Grade and Section: _________

Date : __________ Score: ____
ANALYSIS & INTERPRETATION
OF FINANCIAL STATEMENTS

In the earlier chapters of the book, Fundamentals of Accountancy, Business and

Management 2, you were able to learn of the different financial statements which a company
needs to prepare to summarize the overall performance and condition of its business. However,
your learning does not end from just knowing how to prepare the financial statements correctly. It
is also of high importance for you to have the ability to make use of the financial data to come up
with sound decisions and judgment for the business.

LIQUIDITY

-refers to the capacity of a company to pay its currently maturing obligations

-it is how a business can quickly convert its assets into cash
-liquidity requires a good amount of Cash and other liquid assets: Accounts Receivables,
Inventories, Trading Securities, and Prepaid Assets.
-it is said that a company which has good liquidity is likely to be granted a loan from a financial
institution

SOLVENCY

-refers to the ability of a company to meet its long-term obligations/debts and other financial
obligations as they fall due

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-it is one of the measurement levels of a company’s health because it demonstrates a company’s
ability to manage operations into the foreseeable future

PROFITABILITY

-is the primary goal of all business ventures

-it is measured with income against expenses
-it is the metric used to determine the scope of a company’s profit in relation to the size of the
business
-it is a business’ ability to produce a return on an investment based on its resources in comparison
with an alternative investments
-remember that although a company can realize a profit, it does not necessarily mean that the
company is profitable

STABILITY

-is the ability to withstand a temporary problem, such as decrease in sales, lack of capital or loss of
a key employee or customer
-it is essentially about being able to cover all of the necessary expenses without the worry of
where the money to do such will come from
-it relates to security in financial situation of the entity

HORIZONTAL ANALYSIS VS. VERTICAL ANALYSIS

Horizontal and Vertical analyses are the two most basic tools used by entities in analyzing its own
financial statements.

Horizontal Analysis

-the company compares their own financial statements for the current period (2020) with the
financial statements from prior period (2019)

-the prior (previous/past) period serves as the basis or the starting point of the computation
-increases and decreases are taken and measured in percentages (%)

Examples:

ABC Company
Statement of Financial Position
As of December 31, 2020
ASSETS
Cash ₱500,000
Accounts Receivable 80,000
Inventory 60,000
Land 700,000
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Patent 90,000
Total Assets ₱1,430,000
LIABILITIES
Accounts Payable ₱400,000
Notes Payable 250,000
Total Liabilities ₱650,000
OWNER’S EQUITY
ABC, Capital ₱780,000

Total Liabilities and Owner’s Equity ₱1,430,000

ABC Company
Statement of Financial Position
As of December 31, 2019
ASSETS
Cash ₱420,000
Accounts Receivable 100,000
Inventory 35,000
Land 625,000
Patent 50,000
Total Assets ₱1,230,000
LIABILITIES
Accounts Payable ₱330,000
Notes Payable 200,000
Total Liabilities ₱530,000
OWNER’S EQUITY
ABC, Capital ₱700,000

Total Liabilities and Owner’s Equity ₱1,230,000

The financial statement of 2020 (current) will be compared with year 2019 (previous/prior).

ASSETS 2019 2020 Increase/ % of Increase/Decrease

Decrease
Cash ₱420,000 ₱500,000 ₱80,000 inc 19.04% inc
A/R 100,000 80,000 20,000 dec 20% dec
Inventory 35,000 60,000 25,000 inc 71.42% inc
Land 625,000 700,000 75,000 inc 12% inc
Patent 50,000 90,000 40,000 inc 80% inc
₱1,230,000 ₱1,430,000 ₱200,000 inc 16.26% inc

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Liabilities 2019 2020 Increase/ % of Increase/Decrease
Decrease
A/P ₱330,000 ₱400,000 ₱70,000 inc 21.21% inc
N/P 200,000 250,000 50,000 inc 25% inc
530,000 650,000 120,000 inc 22.64%
OE
ABC, Capital 700,000 780,000 80,000 inc 11.42% inc
₱1,230,000 ₱1,430,000 ₱200,000 inc 16.26% inc

% of increase / decrease sample computation:

Cash % of increase or decrease:

= Increase or decrease in cash / Prior year cash amount = _____ x 100 = ____%
= 80,000 / 420,000
= .1904 x 100
= 19.04%

Note: Aside from SFP, companies can also make use of horizontal analysis in analyzing SCI.

Vertical Analysis

-in vertical analysis, entities express items of a certain financial statement as a percentage of a
given base amount
-for instance, individual items in the Statement of Financial Position (Cash, Inventories, Land,
etc. ) are compared to the total assets of the company in a given accounting period
-items in the Statement of Comprehensive Income are compared to its Net Sales for a given
accounting period
- In preparing Vertical Analysis, the Total assets and the Net Sales will serve as the Base Amount
or the 100%. All of the items in the SFP and SCI will be divided using the base amount

Examples of SFP and SCI Vertical Analysis for DEF Company:

DEF Company
Statement of Financial Position
As of December 31, 2020
ASSETS
Cash ₱500,000 34.96%
Accounts Receivable 80,000 5.59%

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Inventory 60,000 4.19%
Land 700,000 48.95%
Patent 90,000 6.29%
Total Assets ₱1,430,000 100%
LIABILITIES
Accounts Payable ₱400,000 27.97%
Notes Payable 250,000 17.48%
Total Liabilities ₱650,000 45.45%
OWNER’S EQUITY
DEF, Capital ₱780,000 54.54%

Total Liabilities and Owner’s Equity ₱1,430,000 100%

DEF Company
Statement of Comprehensive Income
For the period ended December 31, 2020

Net Sales ₱950,000 100%

Less: Cost of Sales (180,000) 18.94%
Gross Profit ₱770,000 81.05%
Less: Operating expenses (180,000) 18.94%
Operating income ₱590,000 62.10%
Less: Interest expense 25,000 2.63%
Net income before tax ₱565,000 59.47%
Less: Income tax (180,000) 18.94%
Net Income ₱385,000 40.52%

LEARNING COMPETENCIES:

Define the measurement levels, namely; liquidity, solvency, stability and profitability;
ABM_FABM12-Ig-h-12
Perform vertical and horizontal analyses of financial statements of a single
proprietorship; ABM_FABM12-Ig-h-13

ACTIVITY 1:

Directions: Answer the following questions briefly and concisely. Use a separate sheet of paper.

1. How does liquidity differ from solvency?

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 2. Enumerate the items which are set at 100% in preparing Vertical Analysis of financial
statements.

ACTIVITY 2:
JKL Company
Comparative Statement of Financial Position
For the year 2020 & 2019

ASSETS 2020 2019

Cash P 400,000 P 290,000
Accts. Receivable 100,000 120,000
Trading Securities 20,000 40,000
Inventories 80,000 60,000
Prepaid Assets 20,000 10,000
Total Current Assets 620,000 520,000

Total Non-current Assets 300,000 200,000

Total Assets P 920,000 P 720,000

LIABILITIES
Total Current Liabilities 50,000 100,000
Total Non-current Liabilities 450,000 320,000

OWNER’S
EQUITY
Total Owner’s Equity 420,000 300,000

Total Liabilities & OE P 920,000 P 720,000

REQUIRED:
Perform Horizontal Analysis on the given Statement of Financial Position of JKL
Company. Answers must be in two decimal places

ACTIVITY 3:

JKL Company
Comparative Statement of Comprehensive Income
For the year 2020 & 2019
2020 2019
Net Sales P 700,000 P 900,000
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Less: Cost of Sales (100,000) (80,000)
Gross Profit 600,000 820,000
Less: Operating Expenses (50,000) (120,000)
Earnings before interest and taxes 550,000 700,000
Less: Interest expense (10,000) (50,000)
Net Income before tax 540,000 650,000
Less: Income tax (162,000) (195,000)
Net Income P 378,000 P 455,000

REQUIRED:
Perform Vertical Analysis on the given Statement of Comprehensive Income of JKL
Company for year 2019. Answers must in two decimal places.

REFERENCE FOR LEARNERS:

Beticon,J.L., Domingo,J.D., Yabut, F. D., (2016). Fundamentals of Accountancy, Business

& Management 2. Quezon City; Vibal Group , Inc.

Prepared by:

DANNA MAE E. PABALAN

Subject Teacher