05 Handout 1 (7) PDF - Financial Statement Analysis

BMSH2003 ANALYSIS AND INTEPRETATION OF FINANCIAL STATEMENTS Introduction to Financial Statement Analysis Financial statement (FS) analysis involves careful selection of data from financial statements in order to assess and evaluate the firm’s past performance, present condition...

BMSH2003 ANALYSIS AND INTEPRETATION OF FINANCIAL STATEMENTS Introduction to Financial Statement Analysis Financial statement (FS) analysis involves careful selection of data from financial statements in order to assess and evaluate the firm’s past performance, present condition, and future business potentials. Objectives of Financial Statement Analysis (Garrison, Noreen, & Brewer, 2018) The primary purpose of FS analysis is to evaluate and forecast the company’s financial condition. Interested parties, such as managers, investors, and creditors, can identify the company’s financial strengths and weaknesses and know about the following: Profitability of the firm; Solvency of the firm; Safety of the investment in the business; and Effectiveness of management in running the firm. Limitations of Financial Statement Analysis (Garrison, Noreen, & Brewer, 2018) The following are the limitations of financial statement analysis. 1. Comparison of financial data across companies Comparisons of one company with another can provide information about the financial health of an organization. However, the following factors make it difficult to compare their financial data: Differences in accounting methods and estimates Valuation problem – Financial statements are based on historical costs and, therefore, do not reflect the current market value of the firm’s assets. Moreover, the effects of price level changes must be considered. The timing of transactions and the use of averages in applying the various techniques in FS analysis affect the results obtained. 2. The need to look beyond ratios These refer to the financial ratios. The ratios are designed to show relationships between financial statement accounts. For example, Company A might have a debt of P2 million and interest charges of P150,000, while Company B might have a debt of P20 million and interest charges of P1.5 million. Which company is stronger? It depends. The burden of these debts and the company’s ability to repay them can be ascertained by comparing each firm’s debt to its assets or by comparing the interest to the income available for the payment of interest. However, financial ratios should not be viewed as an end, but rather as a starting point. Ratios are not sufficient in themselves as a basis for judgment about the future. Other factors must be considered, such as the following: Internal factors Employee learning and growth Business process performance Customer satisfaction External factors Industry trends Technological changes Changes in consumer tastes Changes in broad economic indicators 05 Handout 1 *Property of STI  [email protected] Page 1 of 10  BMSH2003 Horizontal analysis An item on a balance sheet or income statement has little meaning by itself. Suppose a company’s sales for a year were P2,500,000. In isolation, that is not particularly useful information. How is that item compared to last year’s sales? How do the sales relate to the cost of goods sold? In making these comparisons, three (3) analytical techniques are widely used: 1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis. Also known as trend analysis, horizontal analysis involves analyzing data over time, such as computing year- to-year peso and percentage changes within a set of financial statements. Each item on the most recent statement is compared with the same item on one (1) or more earlier statements, in which the earlier statement is normally used as the base year for computing increases and decreases (Garrison, Noreen, & Brewer, 2018). Most recent value - Base period value Percentage change = Most recent value Peso change = Most recent value - Base period value A comprehensive illustration of the horizontal analysis in the comparative financial statements of Mighty Warrior Corporation is shown below. Note that the amounts are in pesos. Mighty Warrior Corporation Comparative Statement of Financial Position December 31, 201B and 201A Increase (Decrease) 201B 201A Peso change % change Assets Current Assets Cash 100,000 127,000 (27,000) (21.3%) Marketable Securities 40,000 40,000 0 0.0% Accounts Receivable, Net 80,000 100,000 (20,000) (20.0%) Inventory 200,000 140,000 60,000 42.9% Prepaid Expenses 30,000 20,000 10,000 50.0% Total Current Assets 450,000 427,000 23,000 5.4% Long-Term Investments 180,000 162,500 17,500 10.8% Property, Plant, and Equipment 510,400 603,000 (92,600) (15.4%) Intangible Assets 90,000 120,000 (30,000) (25.0%) Total Assets 1,230,400 1,312,500 (82,100) (6.3%) Liabilities Current Liabilities 140,000 162,000 (22,000) (13.6%) Long-Term Liabilities 130,000 220,000 (90,000) (40.9%) Total Liabilities 270,000 382,000 (112,000) (29.3%) Stockholders' Equity Common Stock, P30 par 630,000 630,000 0 0.00% Retained Earnings 330,400 300,500 29,900 10.0% Total Stockholders' Equity 960,400 930,500 52,900 5.7% Total Liabilities and Stockholders' Equity 1,253,400 1,312,500 (82,100) (6.3%) Table 1. Horizontal analysis – Comparative statement of financial position 05 Handout 1 *Property of STI  [email protected] Page 2 of 10  BMSH2003 Mighty Warrior Corporation Comparative Income Statement December 31, 201B and 201A Increase (Decrease) 201B 201A Peso change % change Sales 455,000 390,000 65,000 16.7% Less: Sales Returns and Allowances 5,000 3,000 2,000 66.7% Net Sales 450,000 387,000 63,000 16.3% Less: Cost of goods sold 297,000 288,750 8,250 2.9% Gross Profit 153,000 98,250 54,750 55.7% Less: Operating Expenses 52,000 22,000 30,000 136.4% Income from operations 101,000 76,250 24,750 32.5% Less: Interest expense 18,250 21,000 (2,750) (13.1%) Income before income tax 82,750 55,250 27,500 49.8% Less: Income Tax (30%) 24,825 16,575 8,250 49.8% Net Income 57,925 38,675 19,250 49.8% Table 2. Horizontal analysis – Comparative income statement An extended horizontal analysis can be developed, and it is called trend analysis. For example, assume the sales and net income items for the past seven (7) years are as follows: 201A 201B 201C 201D 201E 201F 201G Sales 313,425 341,805 352,830 341,175 361,125 421,590 411,615 100% 109% 113% 109% 115% 135% 131% Net Income 53,160 35,925 64,695 68,265 74,190 83,790 71,370 100% 68% 122% 128% 140% 158% 134% Table 3. Trend analysis The data above shows that sales increased every year except for years 201D and 201G and the net income increased every year except 201B and 201G. In the table, both the sales and net income have been restated as percentages of the 201A sales and net income. Note that the earliest year should be the base period unless otherwise stated. For example, the sales during 201E of P361,125 is 115% of the sales during 201A of P313,425. This trend analysis is plotted in Figure 1. TREND ANALYSIS Sales Net income 200% 158% 140% 134% 150% 122% 128% 100% 109% 100% 135% 131% 113% 109% 115% 50% 68% 0% 201A 201B 201C 201D 201E 201F 201G Figure 1. Trend analysis Vertical Analysis Vertical analysis focuses on the relations among financial statements at a given point in time (Garrison, Noreen, & Brewer, 2018). A common-size financial statement is a vertical analysis in which each account is expressed as a percentage. In the statement of financial position, all items are expressed as a percentage of total assets and total liabilities and equity, while in income statements, all items are expressed as a percentage of net sales. A common size balance sheet and income statement are shown below. 05 Handout 1 *Property of STI  [email protected] Page 3 of 10  BMSH2003 Mighty Warrior Corporation Common-Size Statement of Financial Position December 31, 201B and 201A 201B 201A Assets Current Assets Cash 100,000 8.13% 127,000 9.68% Marketable Securities 40,000 3.25% 40,000 3.05% Accounts Receivable, net 80,000 6.50% 100,000 7.62% Inventory 200,000 16.25% 140,000 10.67% Prepaid Expenses 30,000 2.44% 20,000 1.52% Total Current Assets 450,000 36.57% 427,000 32.53% Long-Term Investments 180,000 14.63% 162,500 12.38% Property, Plant, and Equipment 510,400 41.48% 603,000 45.94% Intangible Assets 90,000 7.31% 120,000 9.14% Total Assets 1,230,400 100% 1,312,500 100% Liabilities Current Liabilities 140,000 11.38% 162,000 12.34% Long-Term Liabilities 130,000 10.57% 220,000 16.76% Total Liabilities 270,000 21.94% 382,000 29.10% Stockholders' Equity Common Stock, P30 par 630,000 51.20% 630,000 48.00% Retained Earnings 330,400 26.85% 300,500 22.90% Total Stockholders' Equity 960,400 78.06% 930,500 70.90% Total Liabilities and Stockholders' Equity 1,230,400 100% 1,312,500 100% Table 4. Vertical analysis – Common-size statement of financial position Mighty Warrior Corporation Common-Size Income Statement December 31, 201B and 201A (in pesos) 201B 201A Sales 455,000 101.11% 390,000 100.8% Less: Sales Returns and Allowances 5,000 1.11% 3,000 0.8% Net Sales 450,000 100.00% 387,000 100.0% Less: Cost of goods sold 297,000 66.00% 288,750 74.6% Gross Profit 153,000 34.00% 98,250 25.4% Less: Operating Expenses 52,000 11.56% 22,000 5.7% Income from operations 101,000 22.44% 76,250 19.7% Less: Interest expense 18,250 4.06% 21,000 5.4% Income before income tax 82,750 18.39% 55,250 14.3% Less: Income Tax (30%) 24,825 5.52% 16,575 4.3% Net Income 57,925 12.87% 38,675 10.0% Table 5. Vertical analysis – Common-size income statement Ratio Analysis Financial statements are fundamentally related. Data contained in one statement is also related to that information found in another. In the financial ratio analysis, the account used from the financial statements shall be as follows: Financial Statements Basis Examples Income Statement Net amount Net sales, net income, net purchases Statement of Financial (Beginning balance + Ending Balance) Average Position 2 05 Handout 1 *Property of STI  [email protected] Page 4 of 10  BMSH2003 The following are the most common ratios used by financial analysts: I. STATEMENT OF FINANCIAL POSITION Liquidity Ratios Liquidity refers to how quickly an asset can be converted into cash. Companies need to continuously monitor the amount of liquid assets (current assets) relative to the amount they owe to short-term creditors (current liabilities), such as suppliers. If a company’s liquid assets are not enough to support timely payments to creditors, this presents an important management problem that, if not remedied, can lead to bankruptcy. RATIO FORMULA SIGNIFICANCE 1 Net working 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 If a company has enough working capital capital, it assures that the company can pay its creditors in full and on time. However, it must be financed with long-term debt and equity—both of which are expensive. Furthermore, a large and growing working capital may indicate troubles, such as excessive growth in inventories. 2 Current ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 It is the basic test of liquidity of the 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 firm. This will determine the adequacy of working capital to meet current obligations. It measures a rough estimate of the ability of the business to meet its currently maturing obligations; this ratio varies in great disparity from one industry to another. The higher the current ratio, the better, as it would mean more current assets are available for paying its current obligations. A ratio of 1.0 means current assets can fully cover its current liabilities. However, some creditors require a current ratio of 2.0 as a margin of safety. 3 Quick ratio 𝑄𝑢𝑖𝑐𝑘 𝑎𝑠𝑠𝑒𝑡𝑠 It is a more severe test of immediate (Acid-test ratio) liquidity to meet currently maturing 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 obligations. OR Quick assets include cash, marketable 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑃𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 securities, and receivables. Current 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 assets such as inventory takes a longer time to liquidate and prepaid expenses are not convertible to cash, thus, they are not included. The higher the quick ratio, the better the liquidity position of the firm. A quick ratio of 1.0 is acceptable. 05 Handout 1 *Property of STI  [email protected] Page 5 of 10  BMSH2003 Creditors give greater importance to net working capital and current ratio as indicators of the company’s ability to pay if the company’s sources of cash inflows are uncertain and unstable, for example, creditors may allow current ratios lower than 2.0 for those companies with constant and stable cash flows (Salazar, 2017). Asset Management Ratios It measures how the firm uses its assets to generate revenue and income. It is a set of ratios that measures how effectively a firm is managing its assets. These ratios are called utilization ratios, and these measure how effectively the firm utilized its assets to earn profits. Normally, companies borrow or obtain capital from other sources to acquire assets. If a company has too many assets acquired through borrowings, the interest expenses will be too high, hence a lower profit. On the other hand, if assets are too low, profitable sales may be lost. Managing assets, most especially current assets, will help the firm avoid borrowing funds to finance operations. RATIO FORMULA SIGNIFICANCE 1 Accounts 𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 It measures the efficiency of collections. The receivable turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 higher the turnover, the better, as it would mean a greater number of times receivable is reinvested for more profit. 2 Number of days in 365 𝑑𝑎𝑦𝑠 It measures the average number of days to accounts 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 collect a receivable. The shorter, the better. receivable 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 Average collection 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑠𝑎𝑙𝑒𝑠 period 3 Inventory turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 It determines how fast the inventories are 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 converted to sales. It indicates if a firm holds excessive inventories that are unproductive, which lessens the company’s productivity. Note that it is measured based on cost of sales or cost of goods sold, and not sales, because upon sale, the cost of inventory is transferred to the cost of goods sold. For a manufacturing company, the number of days and turnover is determined for each item in the inventory. Raw materials turnover Work in process turnover Finished goods turnover 4 Number of days in 365 𝑑𝑎𝑦𝑠 It measures the average number of days inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 that inventory is held before sale. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 5 Fixed assets 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 It measures the level of use of fixed assets turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 such as property, plant, and equipment to generate sales. 6 Total assets 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 It measures the effectiveness of asset turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 utilization and determines the number of times investments in assets are used to generate sales. The more the number of times it turns over, the higher profit the company utilized its assets. 05 Handout 1 *Property of STI  [email protected] Page 6 of 10  BMSH2003 Solvency Ratios or Financial Leverage It measures the ability of the business to use debt in maximizing the shareholder’s value. These measure the extent to which the firm uses its debt financing or financial leverage. Some important implications can be raised: 1. By raising funds through debt, owners can maintain control of the firm with limited investment. 2. Creditors look to the equity, or owner-supplied funds, to provide a margin of safety, that is, if the owners have provided only a small proportion of the total financing, the risks of the enterprise are borne mainly by its creditors. However, financial leverage raises the expected rate of return to stockholders for two (2) reasons: 1. Since interest is deductible, the use of debt financing lowers the tax and leaves more of the firm’s operating income available to its shareholders. 2. If the rate of return on assets (net income/total assets) exceeds the interest rate on debt, as it generally does, then the company can use debts to finance assets, pay the interest on the debt, and have something left over for its stockholders. Normally, firms with high debt ratios are exposed to more risks of losses and have higher expected returns. Conversely, firms with low debt ratios are less risky, but they also forego the opportunity to leverage up on their return on equity. Ratio Formula Significance 1 Debt-to-equity 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 It measures the use of debt to ratio finance operations and provides a 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 measure of relative amount of resources contributed by the creditors and owners. 2 Debt ratio or 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 It measures the relative share of Debt-to-assets 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 creditors over the total resources of ratio the firm. 1 − 𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 3 Equity ratio 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 It measures the amount of resources 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 provided by the owners of the firm. 1 − 𝐷𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 4 Times-interest- Earnings before income and taxes earned (TIE) or 𝐸𝐵𝐼𝑇 (EBIT) is the income from operations interest coverage before deducting interest and taxes. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 ratio This is the ability of the firm to meet its annual interest payments with its operating income before interest and taxes. A ratio greater than 1.0 means that the company’s EBIT can meet its interest expense. However, creditors prefer a higher TIE ratio to ensure that the company will be able to meet interest payments as they become due. II. INCOME STATEMENT Profitability Ratios Profitability is a measure of operating effectiveness. It measures the ability of the business to recover long-term investments from money generated by its normal operating activities. It also measures earnings in relation to some base such as assets, sales, or capital. 05 Handout 1 *Property of STI  [email protected] Page 7 of 10  BMSH2003 Ratio Formula Significance 1 Profit margin on sales It measures net profit percentage / Return on sales 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 per peso sales.it is the peso value (ROS) 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 of the net income earned for every pesos of sales. 2 Gross Profit ratio 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 It measures the gross profit percentage on sales to recover 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 operating expenses. 3 Cost ratio It measures the proportion of the cost of goods sold to sales. 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 For example, if the cost ratio is 60%, the gross profit margin is 40%. 4 Return on investment It measures the overall asset (ROI) / Return on profitability and indicates how the assets (ROA) management has employed effective assets to produce income. 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 A high ratio is indicative of a high 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 operating efficiency of the business, and a low ratio indicates low operating efficiency. A company with high ROA is judged to be more profitable. 5 Return on equity It measures the percentage of (ROE) 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 income derived for every peso of the owner’s equity. A company with 𝐴𝑣𝑒𝑟𝑔𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 high ROE is judged to be more profitable. Note: All ratios could be more meaningful if they are compared to the industry standards so that the financial analyst could assess the performance of the company in relation to its competitors. ILLUSTRATIVE PROBLEM: Financial statement analysis of Mighty Warrior Corporation Year 1 Year 2 1. Net working capital Current assets P427,000 P450,000 Current liabilities 162,000 140,000 P265,000 P310,000 2. Current ratio Current assets P427,000 P450,000 Current liabilities 162,000 140,000 2.64 3.21 3. Quick Ratio Quick assets P267,000 P220,000 Current liabilities 162,000 140,000 1.65 1.57 4. Accounts receivable (A/R) turnover (assuming all sales are on credit) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃450,000 = = 𝟓. 𝟎 𝒕𝒊𝒎𝒆𝒔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐴/𝑅 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐴/𝑅 𝑃100,000 + 𝑃80,000 ( ) ( 2 ) 2 05 Handout 1 *Property of STI  [email protected] Page 8 of 10  BMSH2003 5. Number of days in accounts receivable / Average collection period 365 𝑑𝑎𝑦𝑠 365 𝑑𝑎𝑦𝑠 = = 𝟕𝟑 𝒅𝒂𝒚𝒔 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 5 OR 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴/𝑅 𝑃90,000 = = 𝟕𝟑 𝒅𝒂𝒚𝒔 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑠𝑎𝑙𝑒𝑠 (𝑃450,000) 365 𝑑𝑎𝑦𝑠 6. Inventory turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝑃297,000 = = 𝟏. 𝟕𝟓 𝒕𝒊𝒎𝒆𝒔 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑃140,000 + 𝑃200,000 ( ) ( 2 ) 2 7. Number of days in inventory 365 𝑑𝑎𝑦𝑠 365 𝑑𝑎𝑦𝑠 = = 𝟐𝟎𝟖. 𝟓𝟕 𝒅𝒂𝒚𝒔 𝒐𝒓 𝟐𝟎𝟗 𝒅𝒂𝒚𝒔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 1.75 OR 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑃170,000 = = 𝟐𝟎𝟖. 𝟗𝟐 𝒅𝒂𝒚𝒔 𝒐𝒓 𝟐𝟎𝟗 𝒅𝒂𝒚𝒔 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 (𝑃297,000) 365 𝑑𝑎𝑦𝑠 8. Fixed assets turnover 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 450,000 = = 𝟎. 𝟖𝟏 𝒕𝒊𝒎𝒆𝒔 (𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐸𝑛𝑑𝑖𝑛𝑔) (𝑃603,000 + 𝑃510,400) 2 2 9. Total assets turnover 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃450,000 = = 𝟎. 𝟑𝟓 𝒕𝒊𝒎𝒆𝒔 (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠) (𝑃1,312,500 + 𝑃1,230,400) 2 2 10. Debt-to-equity ratio Year 201A Year 201B 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑃382,000 𝑃270,000 = = 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝑃930,500 𝑃960,400 = 𝟎. 𝟒𝟏 = 𝟎. 𝟐𝟖 11. Debt ratio / Debt-to-assets ratio Year 201A Year 201B 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑃382,000 𝑃270,000 = = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑃1,312,500 𝑃1,230,400 = 𝟎. 𝟐𝟗 = 𝟎. 𝟐𝟐 12. Equity ratio Year 201A Year 201B 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝑃930,500 𝑃960,400 = = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑃1,312,500 𝑃1,230,400 = 𝟎. 𝟕𝟏 = 𝟎. 𝟕𝟖 05 Handout 1 *Property of STI  [email protected] Page 9 of 10  BMSH2003 13. Times-interest-earned Year 201A Year 201B 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠 𝑃76,250 𝑃101,000 = = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑃21,000 𝑃18,250 = 𝟑. 𝟔𝟑 𝒕𝒊𝒎𝒆𝒔 = 𝟓. 𝟓𝟑 𝒕𝒊𝒎𝒆𝒔 14. Profit margin on sales / Return on sales (ROS) 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑃57,925 = = 𝟏𝟐. 𝟖𝟕% 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃450,000 15. Gross profit ratio 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑃153,000 = = 𝟑𝟒% 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃450,000 16. Cost ratio 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝑃450,000 = = 𝟔𝟔% 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 𝑃297,000 17. Return on investment (ROI) / Return on assets (ROA) 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑃57,925 = = 𝟒. 𝟓𝟔% (𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝐸𝑛𝑑𝑖𝑛𝑔) (𝑃1,312,500 + 𝑃1,230,400) 2 2 18. Return on equity 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑃57,925 = = 𝟔. 𝟏𝟑% 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 (𝑃930,500 + 960,400) ′ 2 References: Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting, Sixteenth Edition. McGraw-Hill Education. International Accounting Standards Board. (n.d.). IAS 1 — Presentation of Financial Statements. Retrieved from IASPlus: https://www.iasplus.com/en/standards/ias/ias1 Payongayong, L. S. (2016). Management Services. Polytechnic University of the Philippines. Salazar, D. (2017). Fundamentals of Accountancy, Business and Management 2. Rex Book Store, Inc. 05 Handout 1 *Property of STI  [email protected] Page 10 of 10