COURSE MAP-

FINANCIAL STATEMENT RATIO

Concept, objectives, interpretaions, Users of Financial statement are interested on the results of the operation kwowing it status and its performance in the
and analytics market. Internal and external users have priorities in dealing with the report other than the effectiveness and efficiency the
management deal with the day to day affairs of the organization. Need for the financial report requires better understanding
by presenting the financial statement free from Bias as an aid for decision making by ascertaining the weakness and strenght
of the company; thus:

Balance sheet- the statement of financial position must show the worth of the investment equally managed to settle obligation
and show the efficciency and effectiveness by producing a continues growth to attract investors for a better pay back of the
dividends.

Income statement- the statemen of financial performance must show proper control on the revenues and the operating
expenses by continuous monitoring of the budget requirements per plan to give management a clear understanding of the
possible adjustment needed.

Cash flow- the statement of cash flow shows the inflow and outflow of the funds to study the effect of fund contibutor ie:
operation, investment, and financing. Proper monitoring of fund is necessary to manage cash for possible investment to
augment working capital requiements

The user of the financial statements (internal and external) are interested to the FEEDBACK of the Company operation
by considering financial ratios that would speak on the weaknesses and strenght of the company.

The objectives are:

-improvement from last years performance
-Competitive status with other business alike industry
-Knowing industry peculiarity
-Future endevours using past ratio performance

Ratios and techniques-

Protitability ratio A sample forecasted financial statement is presented to be use as a baseline in explaning the different ratios helpful to meet
Turnover or asset utilization ratios the objectives Management need for analysis in decision making.
Liquidity ratio
Leverage or long term solvency ratio KAYLURANG BATA DYA
Statement of financial position
As at December 31, 2021 and 2020
(In Million Pesos)
2021 2020
ASSETS

Current assets
Cash and cash equivalents 33.00 28.00
Accounts receivable (net of allowance or impaired receivables) 45.00 60.00
inventories 82.00 75.00
Prepaid expenses and other assets 20.00 9.00
Total current assets 180.00 172.00

Other assets/Non-Current Assets

Investment in subsidiary company 27.00 26.00
Property plant and equpment (net of accumulated depreciation) 296.00 282.00
Construction in progress 680.00 -
Total other assets 1,003.00 308.00

TOTAL ASSETS 1,183.00 480.00

LIABILITIES

Current liabilities
Accounts payable 47.00 33.00
 Short term loans 75.00 68.00
Income tax payable 7.00 7.00
Current portion of long tern debts 20.00 32.00
Total currenl liabilities 149.00 140.00

Other liabilities
Long term loans 800.00 194.00

TOTAL LIABILITIES 949.00 334.00

SHAREHOLDERS' EQUITY

Ordinary stock (P100 par value) 66.00 42.00

Additional paid in capital in excess ordinary par value stock 78.00 28.00
Accumulated surplus 90.00 76.00
Total shareholders' equity 234.00 146.00

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,183.00 480.00

KAYLURANG BATA DYA

Statement of financial condition
For the year ended December 31, 2021 and 2020
(In Million Pesos)

2021 2020
REVENUES
Sales 530.00 461.00
Cost of goods sold 420.00 360.00
Gross profit 110.00 101.00

OPERATING EXPENSES
 Selling and general expenses 32.00 35.00

OPERATING PROFIT before financing charges 78.00 66.00

FINANCING CHARGES
Interest expenses 57.00 35.00

OPERATING PROFIT after financing charges and before tax 21.00 31.00

PROVISION FOR INCOM TAX 7 9

NET INCOME 14.00 22.00

KAYLURANG BATA DYA

Statement of Cash Flow
For the year December 31, 2021 and 2020
(In Million Pesos)

2021 2020

FUNDS FROM OPERATING ACTIVITIES

Net income 14 22
Add (deduct) non cash transaction
Depreciation 115 127

129 149
Decrease in accounts receivable 15 -60
Increase in inventory -7 -75
Increase in prepaid expenses and other assets -11 -9
Increase in accounts payable 14 33
 Income tax payable 7

FUNDS FROM INVESTMENT ACTIVITIES

Purchase of property plant and equipment -129 -409
Construction in progress -680 0
Investment in subsidiary -1 -26
Increase in ordinary shares 24 42
increase in additional paid in capital in excess of par orinary shares 50 28
Accumulated surplus 54

FUND FROM FINANCING ACTIVITIES

Bank loans 7 68
Long term loans 594 226

NET CHANGE IN CASH 5 28

ADD: CASH BEGINNING 28 0

CASH BALANCE END 33 28

Note: The depreciation is reported as part of the cost of goods sold at P115 and P127 for year 2021 and 2020 respectively
Credit sales amounted to P380 and P323 for year 2021 and 2020 respectively
Purchases amounted to P350 and P270 for year 2021 and 2020 respectively

PROFITABILITY RATIO- relationship between income and sales or investment. Determine ability of the company to be
efficient by generating income, and to reward shareholders of profits and dividend

Gross profit margin- recovery of product cost Sales - Cost of Sales / Sales

Net profit margin- net productivity of sales Net income / Sales

Return on Equity- efficiency in use of shareholders

 money in deriving revenue Net income / Shareholders' equity
Flaws: Not effective it the company is experiencing loss, or the equity is deficit. It simply shows that the
creditors money are use for the operation instead.

Return on Total assets- efficiency in use of assets in Net income / Total assets
deriving revenue

Return on Total operating assets- efficiency in use of Operating income / Operating assets
of operating assets in derving revenue

Effect- Need to be explained/ reviewed, and evaluated

ASSET TURNOVER UTILIZATION RATIO/ ACTIVITY RATIO- Indicates efficiency in the use of assets to generate revenue
reflecting mainly on sales

Purpose:
-To minimize investment in idle assets
-To maximize sales potential of assets

Total Asset turnover Net Sales / Total Assets

Operating assets turnover Sales / Operating assets

Operating assets and leased asset turnover Sales / Operating assets and leased assets

Fixed asset turnover Sales / Fixed assets

Fixed asset turnover (Pre-expansion) Sales / Pre fixed asset expansion

Accounts receivable turnover- sales productivity of Net credit sales / Accounts receivable
customer credit or Average Accounts receivable
 -Days receivable turnover- represent how many 360 days / Receivable turnover
days Accounts receivable are collected 360 days or 365 days is acceptable
if records is available through aging of receivables
uncollectible and delinquent accounts must be
deducted to provide a better ratio and evaluation

Inventory turnover- rate of sales generation from Cost of sale (cost of goods sold) / inventory or
inventory average inventory

-Days inventory turnover- the cycle of inventory 360 days / inventory turnover
replenishment

Day's Accounts payable- shows policy on paying Accountns payable / Average credit purchase per
suppliers given the credit term, or average supplier day (Annual purchase on credit/360)
credit period

Operating cycle- average term of a company's operation

or an average time for cash to be converted into various
form of inventories, finished goods to be sold, and Days inventory + Day's accounts receivable
receivables to be collected. The theory of current
operation or normal operating cycle to qualify as current
assets/liability

Since the inventory to be converted into cash is partly

finance by suppliers on account more favorable Days inventory + Day's accounts receivable - day's payable
approach is calculate the NET OPERATING CYCLE

The theory of TRADE GAP is essential in ratio analysis

to determine the sufficiency of time suppliers money Day'a accounts receivable Less Day's payable
is used in the operation. The higher the gap favor the
owner (Day's payable is greater than Day's accounts
receivable) the decision to source by financing is not
 necessary. Should the day's receivable is greater than
the day's payable the possibility of financing is needed
at the option of the business owners.

Depending on the economic situation, the trade gap

must be property studied to elminate mismatch between
the favor given to customer sales on account and the
suppliers for purchases on account.

LIQUIDITY RATIO- speak of the quality of the current asset and

current liability. Quality of current assets simply means that the
current assets can be converted immediately to cash to meet its
current obligation. Of the current assets however the more its
liquid the more it is quicker to convert it into cash, example:
Cash, Marketable securities, and Accounts receivable. Thus Quick
assets is known for by considering only the 3 mentioned accounts
without the inventory, prepayments, and other current assets.

Decision makers shall look upon the importance of studying the

benefits for working capital to effectively serve its purpose paying
its current obligation

Working Capital= Total Current assets

Net Working Capital= Total Current assets - Current
liabilities

Current ratio- safety margin of current assets vs curent Curretn assets / Current liabilities
liabilities, or ability of current assets to sustain losses
to a certain degree current liabilites and can still pay
current obligation.

High rate means low risk of default

 Low rate means hign risk of default

Quick ratio Current assets - inventory - prepapaid expenses

and - other current assets/ Current liabilities

LEVERAGE RATIOS- Showing dependence on external creditors

requiring payment of interest and principal regardless of situation
when the obligation becomes due.

Relevance of leverage ratio:

- shows the relative of creditors compared to owners in
a company
- shows the risk of bankruptcy due to possible action
of the creditors against the company
- shows the debt capacity of the company

Total debt to Asset ratio- shows the percentage ot Total debt / Total assets
assets financed by creditors
- if ratio is low the owners is at financial risk than the
creditor
- if ratio is high the creditor is at financial risk than the
owner

Whatever the situation is, the creditor face risk in worry

that the interest and principal can not be settled by the
owner. Creditor relies upon the quality of the assets the
owner sell to settle obligation with incurred expenses

Debt (Long term debt) to equity ratio- show the long Long term debt / Stockholders equity
term debt financing the company's requirement.
a ratio of less than 1 assures that the the business
long term fund is run majority by the shareholder, while
 a ratio of greater than 1, the long term funds is exposed
through the loan financing from creditors.

OWNERSHIP RATIO- the role of the management rest upon the

performance of the company it represent. Shareholders look upon
the benefits it shall received through the dividend declared or
dividen per share, concerned on the earnings per share, & book value
per share.

Earnings per share- average net income per share of Net income on common less (accrued dividend on preferred
ordinary shares. Net income per share of ordinary shares shares) / outstanding number of ordinary shares
means Net income less dividend accruing on preferred
shares all over the outstanding number of ordinary shares

Cash Dividend per share- cash dividend paid for each Cash dividend paid on ordinary shares / Outstanding
of the ordinary shares held. Cash dividend is declared by number of ordianary shares
the Board of Directors, while dividend on preferred
shares are spefically paid based on the rate assigned
at the date of issuance.

Cash dividend declaration is one of the content the

stock market players help decide to invest on stock.

Issues for investment in preferred shares it's advantage

and disadvantage:

ADVANTAGES:
1. Investors with preferred stock receive the first dividends.
2. Some preferred stock provides cumulative shares.
3. It gives investors a higher claim on any company assets.
4. You might have the option to trade in your preferred shares for common stock.
5. The cost of raising capital for share issuance is lower
6. Companies can issue callable preferred shares.
7. You know what your bottom line will be.
8. Preferred stock receives gradings from rating agencies.

DISADVANTAGES
1. You don’t receive voting rights.
2. The time to maturity can be problematic for some investors.
3. Some companies don’t put their profits into dividend payments.
4. Guaranteed dividends might not ever get paid.
5. Preferred stock creates a limited upside potential
6. There isn’t much industry diversification for preferred stock today.
7. There is rarely equity growth in preferred stock.

Book value per share-stockholders' equity per share of ordinary

shares. If there is preferred stocks the value stipulated to be paid Total stockholders equity (Net of preferred shares
to preferred shareholders at liquidation date is deducted from the to be paid) / Ordinary shares outstanding
stockholders' equity to determine the book value of ordinary share

Price earning ratio- willingness of investors to pay for each Market price per share / Earning per share
peso of earnings

-The greater the price earning ratio is. Investors would be willing
to purchase shares at high multiple of earnings. The market
gives a mirror on a companys earnings if investors perceived
growth and stability in future earnings

-The lower the price earning ratio is. Investors would not be
willing to pay a high premium for the company's earning.
meaning the market price is unstable and performing poor

Du Pont Analysis of ROE- shows the work of 3 major ROE= Net income / Sales x Net sales / total assets x
components of organization hierarchy that Sales Total assets / Equity
 managers should increase the sales, production
managers should reduce the cost, while finance manager
should use the debt effectively Profit
margin Asset turnover

Leverage ratio

STANDARDS AND GUIDELINES Ratio analysis is helpful in decision making provided certain
IN RATIO ANALYSIS standards and guidelines be followed to provide a better picture
of the event, considering the economic factor, business trends,
seasonal events, birth of competitors in the market, availability
of data, etc to use for evaluation.

The trends must be properly analyzed and explain to get a clear

picture of the variances noted, relate and raise competitive isues,
that include, as previously said, the seasonal factor, trend by
considering 2 to five year financial statement data, and of course
the inclusion of window dressing in the ratio analysis presented

Window dressing is am improper practice of misrepresentaion

of finacial status and performance to be able to gain advantage
of presenting the data to increase current ratio. Audited financial
statement must be read carefully and detect possible misrepresen
taion of transaction at cut off date by leaving the financial data
open at year end to accommodate certain transaction purposely
to misrepresent financial statement. Say Sales for succeding year
recorded at current year, expediture for current year taken up
succeeding year, etc
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