Department of Education

Bureau of Learning Delivery

Teaching and Learning Division

Grade Level: Grade 11

Specialized Subject: Accountancy, Business and Mgt. 2
Semester: 1st
Week: 6
Module: 6
 About the Module

This module was designed and written with you in mind. It is here to help you
master about Statement of Cash Flow. The scope of this module permits it to
be used in many different learning situations. The language used recognizes
the diverse vocabulary levels of students. The lessons are arranged based on
the standard sequence of the course. But the order in which you read them
can be changed to correspond with the textbook you are now using.

After going through this module, you are expected to:

• Perform vertical and horizontal analyses of financial statements of a
single proprietorship.

What I Know (Pre -test)

The table below is the Statement of Financial Position of XYZ Company
for the year ended 2019. You are task to do vertical analysis for the
following.
XYZ COMPANY
STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED 2019
ITEMS AMOUNT Percent of Change
Cash 200,000.00
Accounts Receivables 400,000.00
Inventory 250,000.00
Equipment 550,000.00
Total Assets 1,400,000.00

Accounts Payable 300,000.00

Notes Payable 400,000.00
Owner's Capital 700,000.00
Total Liabilities and Equity 1,400,000.00
 ANALYSIS OF FINANCIAL
STATEMENTS

FINANCIAL STATEMENT ANALYSIS

Different methods and techniques are used in analyzing financial statements.

There are two phases involved, namely, the computation phase and the
interpretation phase. In the first phase, we compute for differences,
percentages, or ratios. In the second stage, we interpret the results of the
figures we get from the first phase. The second phase, although more difficult
than the first phase, makes the analysis of financial statements more
meaningful because it communicates to the users the significance of the
results.

Using the statement of financial position and the income statement, financial
statements can be analyzed using the following techniques. These are
considered the tools in analyzing the financial data provided by the financial
statements.

Horizontal Analysis compares the same account in the financial statements

of two periods (current and past year) determining the amount of changes and
computing its percentage change using a base year as comparison. It should
be noted that for accounts in the base year with zero or negative balances, the
computation of percentage of change will not apply.

Vertical Analysis shows the relationship of each part to the whole in a single
financial statement. In the statement of financial position or balance sheet,
each item is expressed as a percentage of total assets or total liabilities and
owner's equity. In the income statement, each item is presented as a
percentage of net sales.

Trend Analysis compares not only two years but covers three, four years'
financial statements. This is to determine the trends in the industry.

Financial Ratio Analysis describes the significant relationship between the

numbers presented in the financial statements. Ratios can be expressed
either as a rate, percentage, or a proportion.
 What’s New

HORIZONTAL ANALYSIS IN FINANCIAL STATEMENTS

Horizontal analysis, otherwise known as comparative analysis, helps

management analyze increases and decreases in balance sheet and income
statement accounts. For example, in the balance sheet, a significant increase
in property, plant, and equipment will indicate purchases of land, equipment,
machinery or other plant assets necessary for use in the business. On the
other hand, a significant decrease will reveal disposal of such assets as
management may have deemed necessary. Comparing two consecutive years
and noting magnanimous increases or decreases in other balance sheet items
may also be used by management for decision making purposes.

For income statement accounts, horizontal analysis also helps management

analyze significant increases or decreases in sales, cost of sales and expenses.
For example, an alarming decrease in net income may call management's
attention as the generation of net income is the company's main goal in doing
business. This may lead management to evaluate other income statement
items such as sales, cost of sales, and expenses which are crucial components
in arriving at a company's net income.

In conclusion, getting the amount of increases and decreases and their

percentages, is just the first step of the analysis. The difficult part is the
interpretation of the results. In the real world, this is subjective as there are
no strict and fast rules to follow. Experience and industry trends are
considered in the picture.

VERTICAL ANALYSIS IN THE STATEMENT OF FINANCIAL POSITION

In the statement of financial position, vertical analysis, otherwise known as

common-size analysis, helps management analyze the components of the total
assets as well as the components of the total liabilities and owner's equity. It
helps management answer certain questions as follows:

Of the total assets, what percent is classified as current? Non-current?

Of the total assets, what percent is accounts receivable? Merchandise
Inventory?
Of the total liabilities, what percent is classified as current? Non-current?
Of the total liabilities and owner' equity, what percent is liabilities? What
percent owner's equity?
 The answer to the above questions may lead to other questions such as when
account receivable occupies a big percentage of current assets, are these
receivables collectible? This may reflect on the company's credit and collection
policy. This indicates the leniency of a company in extending credit to its
customers and the terms and policies for collection. If a big percentage of the
total assets is allotted to merchandise inventory, this raises a question as to
the whether the inventory is saleable or obsolete. For the percentage of total
liabilities versus owner's equity, this indicates the part of the company
financed by creditors and the part of the company financed by the owner. In
short, what part of total assets is financed by the creditors and what part of
the total assets is financed by the owner.

What Is It
The following are the steps in performing a HORIZONTAL ANALYSIS:
1. Use at least 2 consecutive years of comparative financial statements.
We will use BRENDA MAGE Company’s Financial statements for year
2015 and 2016.
BRENDA MAGE COMPANY
COMPARATIVE STATEMENT OF FINANCIAL POSITION
FOR THE YEAR 2015 AND 2016

Assets 2016 2015

Current Assets
Cash 400,000.00 290,000.00
Accounts Receivables 100,000.00 120,000.00
Trading Securities 20,000.00 40,000.00
Inventories 80,000.00 60,000.00
Prepaid Expenses 20,000.00 10,000.00
Total Current Assets 620,000.00 520,000.00
Non-Current Assets
Total Non-current Assets 300,000.00 200,000.00

Total Assets 920,000.00 720,000.00

Liabilities
Current Liabilities
Total Current liability 50,000.00 100,000.00
Non-Current Liability
Total Non-current liabilities 450,000.00 350,000.00
Total Liabilities 500,000.00 450,000.00
Owner's Equity
Total Owner's equity 420,000.00 300,000.00

Total Liabilities and OE 920,000.00 750,000.00

 BRENDA MAGE COMPANY
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR 2015 AND 2016
2016 2015
Net Sales 700,000.00 900,000.00
Less: Cost of Goods Sold -100,000.00 -80,000.00
Gross Profit 600,000.00 820,000.00
Less: Operating Expenses -50,000.00 -120,000.00
Income before taxes and interest 550,000.00 700,000.00
Less: Interest Expense -10,000.00 -50,000.00
Net Income before Tax 540,000.00 650,000.00
Less: Income Tax -162,000.00 -195,000.00
Net Income 378,000.00 455,000.00

2. Add a third column for the increase/decrease in amount and a fourth

column for the percentage of the increase and decrease.
3. Get the percent of increase or decrease for each account.
i. Choose a base year which is usually the initial of analysis.
ii. Deduct the amount of the current year from the base year.
iii. Divide the difference above by the amount of the base year.
iv. Multiply the quotient by 100 to get the percentage of change.
This is represented by the following formula:

% of change = Current year amount – Base year x 100

Base year amount

% of change = 920,000 – 720,000 x 100

720,000

= 27.78 %

BRENDA MAGE COMPANY

COMPARATIVE STATEMENT OF FINANCIAL POSITION
FOR THE YEAR 2015 AND 2016
Increase /
Assets 2016 2015 Percent
(Decrease ( - )
Current Assets
Cash 400,000.00 290,000.00 110,000.00 38%
Accounts Receivables 100,000.00 120,000.00 -20,000.00 -17%
Trading Securities 20,000.00 40,000.00 -20,000.00 -50%
Inventories 80,000.00 60,000.00 20,000.00 33%
Prepaid Expenses 20,000.00 10,000.00 10,000.00 100%
Total Current Assets 620,000.00 520,000.00 100,000.00 19%
Non-Current Assets
 Total Non-current
300,000.00 200,000.00 100,000.00
Assets 50%

Total Assets 920,000.00 720,000.00 200,000.00 28%

Liabilities
Current Liabilities
Total Current liability 50,000.00 100,000.00 -50,000.00 -50%
Non-Current Liability
Total Non-current
450,000.00 350,000.00
liabilities 100,000.00 29%
Total Liabilities 500,000.00 450,000.00 50,000.00 11%
Owner's Equity
Total Owner's equity 420,000.00 300,000.00 120,000.00 40%

Total Liabilities and

920,000.00 750,000.00 170,000.00
OE 23%

BRENDA MAGE COMPANY

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR 2015 AND 2016
2016 2015 Increase/Decrease(-) Percent
Net Sales 700,000.00 900,000.00 -200,000.00 -22%
-
Less: Cost of Goods Sold -80,000.00
100,000.00 20,000.00 25%
Gross Profit 600,000.00 820,000.00 -220,000.00 -27%
-
Less: Operating Expenses -50,000.00
120,000.00 -70,000.00 -58%
Income before taxes and interest 550,000.00 700,000.00 -150,000.00 -21%
Less: Interest Expense -10,000.00 -50,000.00 -40,000.00 -80%
Net Income before Tax 540,000.00 650,000.00 -110,000.00 -17%
- -
Less: Income Tax
162,000.00 195,000.00 -33,000.00 -17%
Net Income 378,000.00 455,000.00 -77,000.00 -17%

What More
The following are the steps in performing a vertical analysis:

1. Prepare comparative financial statements of two consecutive years.

2. Add one column on the right side of each year.
3. For the comparative statement of financial position, express each
amount as percentage of the total assets. The total asset is
automatically 100%. Likewise, total liabilities and owner’s equity is also
automatically 100%.
4. For the comparative income statement, express each account as a
percentage of Net Sales. Net Sales is automatically 100%.
 Take a look for the following examples:

BRENDA MAGE COMPANY

COMPARATIVE STATEMENT OF FINANCIAL POSITION
FOR THE YEAR 2015 AND 2016
Assets 2016 Percent 2015 Percent
Current Assets
Cash 400,000.00 43% 290,000.00 40%
Accounts Receivables 100,000.00 11% 120,000.00 17%
Trading Securities 20,000.00 2% 40,000.00 6%
Inventories 80,000.00 9% 60,000.00 8%
Prepaid Expenses 20,000.00 2% 10,000.00 1%
Total Current Assets 620,000.00 67% 520,000.00 72%
Non-Current Assets
Total Non-current Assets 300,000.00 33% 200,000.00 28%

Total Assets 920,000.00 100% 720,000.00 100%

Liabilities
Current Liabilities
Total Current liability 50,000.00 5% 100,000.00 13%
Non-Current Liability
Total Non-current liabilities 450,000.00 49% 350,000.00 47%
Total Liabilities 500,000.00 54% 450,000.00 60%
Owner's Equity
Total Owner's equity 420,000.00 46% 300,000.00 40%

Total Liabilities and OE 920,000.00 100% 750,000.00 100%

BRENDA MAGE COMPANY

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR 2015 AND 2016
2016 Percent 2015 Percent
Net Sales 700,000.00 100% 900,000.00 100%
Less: Cost of Goods Sold 100,000.00 14% 80,000.00 9%
Gross Profit 600,000.00 86% 820,000.00 91%
Less: Operating Expenses 50,000.00 7% 120,000.00 13%
Income before taxes and interest 550,000.00 79% 700,000.00 78%
Less: Interest Expense 10,000.00 1% 50,000.00 6%
Net Income before Tax 540,000.00 77% 650,000.00 72%
Less: Income Tax 162,000.00 23% 195,000.00 22%
Net Income 378,000.00 54% 455,000.00 51%

What can I do?

The following below are the comparative financial statements of BRENDA

MAGE Company for year ended 2019 and 2020. You are task to do vertical
analysis of the following financial statements.
 BRENDA MAGE COMPANY
COMPARATIVE STATEMENT OF FINANCIAL POSITION
FOR THE YEAR 2019 AND 2020
Assets 2020 Percent 2019 Percent
Current Assets
Cash 1,400,000.00 36% 1,290,000.00 47%
Accounts Receivables 1,100,000.00 28% 1,120,000.00 41%
Trading Securities 20,000.00 1% 40,000.00 1%
Inventories 80,000.00 2% 60,000.00 2%
Prepaid Expenses 20,000.00 1% 10,000.00 0%
Total Current Assets 2,620,000.00 67% 2,520,000.00 93%
Non-Current Assets
Total Non-current Assets 1,300,000.00 33% 200,000.00 7%

Total Assets 3,920,000.00 100% 2,720,000.00 100%

Liabilities
Current Liabilities
Total Current liability 1,050,000.00 27% 100,000.00 4%
Non-Current Liability
Total Non-current liabilities 1,450,000.00 37% 1,320,000.00 49%
Total Liabilities 2,500,000.00 64% 1,420,000.00 52%
Owner's Equity
Total Owner's equity 1,420,000.00 36% 1,300,000.00 48%

Total Liabilities and OE 3,920,000.00 100% 2,720,000.00 100%

BRENDA MAGE COMPANY

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR 2019 AND 2020
2020 Percent 2019 Percent
Net Sales 1,700,000.00 100% 1,900,000.00 100%
Less: Cost of Goods Sold 1,100,000.00 65% 1,200,000.00 63%
Gross Profit 600,000.00 35% 700,000.00 37%
Less: Operating Expenses 50,000.00 3% 120,000.00 6%
Income before taxes and interest 550,000.00 32% 580,000.00 31%
Less: Interest Expense 110,000.00 6% 150,000.00 8%
Net Income before Tax 440,000.00 26% 430,000.00 23%
Less: Income Tax 162,000.00 10% 195,000.00 10%
Net Income 278,000.00 16% 235,000.00 12%
 Assessment (Post -test)
Below are the comparative financial statements of BRENDA MAGE
Company for the year 2018 and 2019. You are required to do HORIZONTAL
and VERTICAL ANALYSIS of the following.
BRENDA MAGE COMPANY
COMPARATIVE FINANCIAL STATEMENT
FOR THE YEAR 2018 AND 2019

Assets 2019 2018

Current Assets
Cash 450,000.00 400,000.00
Accounts Receivables 280,000.00 250,000.00
Trading Securities 30,000.00 120,000.00
Inventories 420,000.00 370,000.00

Prepaid Expenses 80,000.00 20,000.00

Total Current Assets 1,260,000.00 1,160,000.00
Non-Current Assets
Delivery Equipment 1,140,000.00 840,000.00
Total Non-current Assets 1,140,000.00 840,000.00

Total Assets 2,400,000.00 2,000,000.00

Liabilities
Current Liabilities
Accounts Payable 450,000.00 400,000.00
Total Current liability 450,000.00 400,000.00
Non-Current Liability
Notes Payable 1,300,000.00 1,100,000.00
Total Non-current liabilities 1,300,000.00 1,100,000.00
Owner's Equity
Total Owner's equity 650,000.00 500,000.00

Total Liabilities and OE 2,400,000.00 2,000,000.00

BRENDA MAGE COMPANY

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR 2018 AND 2019
2019 2018
Net Sales 6,000,000.00 5,200,000.00
Less: Cost of Goods Sold (1,500,000.00) (1,200,000.00)
Gross Profit 4,500,000.00 4,000,000.00
Less: Operating Expenses (500,000.00) (1,000,000.00)
Income before taxes and interest 4,000,000.00 3,000,000.00
Less: Interest Expense (2,000,000.00) (500,000.00)
Net Income before Tax 2,000,000.00 2,500,000.00
Less: Income Tax (600,000.00) (750,000.00)
Net Income 1,400,000.00 1,750,000.00
References

Textbook
Beticon, J., et al. Accountancy, Business and Management 2

Congratulations!
You are now ready for the next module. Always remember the
following:

1. Make sure every answer sheet has your

o Name
o Grade and Section
o Title of the Activity or Activity No.
2. Follow the date of submission as agreed with your teacher.
3. Keep the modules with you.
Return them at the end of the quarter.