Assessment Task 1

I. Questions
1. What is the objective of financial statement analysis?
- To understand and evaluate financial statement information in
order to assess the firm's profitability and financial stability, as
well as to forecast the firm's future prospects.
2. What are some of the indications of satisfactory short-term solvency or
working capital position of a business firm?
- Favorable credit position
- Satisfactory proportion of cash to the requirements of the current
volume.
- Ability to pay currents in the regular course of business.
- Ability to extend more credit to customers.
- Ability to replenish inventory promptly.
3. What are some of the tests of a sound or healthy long-term financial
position?
- A variety of financial variables must be examined when evaluating
a company's financial health and long-term viability. Liquidity,
solvency, profitability, and operational efficiency are the four key
aspects of financial health that should be assessed.
4. Give some indications of managerial efficiency in the use of company
resources.
- Management efficiency
- Allocative efficiency
- Return on capital
- Productivity
- Resource efficiency
- Process efficiency
- Cost efficiency
5. What are the most commonly used techniques in the analysis and
interpretation of financial statements?
 - Financial statement analysis often employs a number of
approaches. Horizontal analysis, vertical analysis, and ratio
analysis are three of the most significant approaches. Horizontal
analysis analyzes data over two or more years by evaluating the
values of line items.
6. What are the steps involved in using trend percentages in financial
analysis?
- Step 1: Choose a year as your starting point and set it to 100%.
- Step 2: Compute the index number by dividing the yearly amount
and base year amount.
7. Distinguish between horizontal and vertical analysis of financial statement
data.
- Horizontal analysis is a method of comparing and analyzing
financial result of different accounting periods in each financial
statement account and element while Vertical analysis is the
method of analyzing financial results expressing each financial
statement account and element as a component of a base.
8. What is the basic objective in looking at trends in financial ratios and other
data?
- The main purpose of examining trends in a company's financial
ratios and other data is to be able to spot anomalies and predict
the future.
9. Define trend percentages.
- Trend percentage is index numbers displaying relative changes in
financial data as a result of the passage of time. Trend
percentages present financial data from many years in terms of
the base year. It also help you to compare financial information
over time to a base year or period.
10. Discuss the steps in analyzing financial statements using trend
percentages.
- You can calculate trend percentages by: Selecting a base year or
period. Assigning a weight of 100% to the amounts appearing on
the base-year financial statements. To compute the percentages
by Analysis year amount / base year amount and then multiplying
the result by 100 to get a percentage.
11. In financial statement analysis, what is the basic objective of observing
trends in data and ratios? Suggest some other standards of comparison.
 - Observation of trends is useful primarily in determining whether a
situation is improving, deteriorating, or remaining constant.
12. Distinguish between trend percentages and component percentages.
Which would be better suited for analyzing the change in sales over a
term of several years?
- Trend percentages are used to show the increase or decrease in
an amount over a period of years by comparing the amount in
each year with the base-year amount.
13. Nets sales of the Premiere General Store have been increasing at a
reasonable rate, but net income has been declining steadily as a
percentage of these sales. What appears to be the problem?
- Expenses, such as the cost of goods sold, have been increasing
faster than net revenues. As a result, Premiere appears to be
having difficulty keeping track of its costs.
14. Under what circumstances would you consider a corporate net income of
P1 million for the year as being unreasonably low? Under what
circumstances would you consider a corporate profit of P1 million as being
unreasonably high?
- A corporate income of P1 million for the year would be
unreasonably low when the assets, sales, and equity has two to
three-digit millions. It suggests that the owner of the corporate
can do much better by investing in insured bank savings
accounts or in government bonds which would be virtually risk-
free and would pay a higher return. On the other hand, a profit of
P1 million would be unreasonably high for a corporation that had
sales, assets, and equity has only one digit million. The net
income of a corporation must be judged in relation to the scale of
operations and the amount invested.

II. True or False

 1. Financial analysis is primarily a matter of making relevant mechanical
computations. True
2. Percentage changes usually are computed by use of the amounts for the
latest accounting period as a base. False
3. The peso amount of change during an accounting period for an item
appearing in financial statements is less significant than the change
measured as a percentage. True
4. A business enterprise's earnings performance and its financial condition
are the two primary concerns of the financial analysis. True
5. An increase in sales volume generally is accompanied by a proportionate
increase in net income. False
6. On a common-size income statement, net income is given an equivalent
of 100%. False
7. The peso amount of a change during a period in a certain item appearing
in financial statements is probably less significant than the change
measured as a percentage. True
8. Percentage changes are usually computed by using the latest figure as a
base. False
9. It is possible that a decrease in gross profit rate may be offset by a
decrease in expenses, thus resulting in an increase in net income. True
10. Industry standards tend to place the performance of a company in a more
meaningful perspective. True

III. Problems
Problem 1 (Percentage Changes)
 Percentage
2020 2019
  Change
 
a. Account Receivable P126,000 P150,000 16%
b. Marketable securities 0 250,000 100%
c. Retained earnings 80,000 (80,000) 200%
d. Notes receivable 120,000 0 0%
e. Notes payables 860,000 800,000 7.50%
f. Cash 82,400 80,000 3%
g. Sales 990,000 900,000 10%

a. Accounts receivable decreased 16% (P24, 000 decrease P150, 000

=16% decrease).
b. Marketable securities decreased 100% (P250, 000 decrease P250, 000
=100% decrease).
c. A percentage change cannot be calculated because retained
earnings showed a negative amount (a deficit) in the base year and
a positive amount in the following year.
d. A percentage change cannot be calculated because of the zero amount of
notes receivable in 2019, the base year.
e. Notes payable increased 7.50% (P60, 000 increase P800, 000 =
7.50% increase).
f. Cash increased 3% (P2, 400 increase P80, 000 = 3% increase).
g. Sales increased 10% (P90, 000 increase P900, 000 = 10% increase).

Problem 2 (Computing and Interpreting Rates of Change)

a. Compute the percentage change in 2020 for the amounts of (1) net sales
and (2) total expense.
 2020 2019 Percentage
  Change
Net sales P2,200,000 P2,000,000 10%
Total Expense 1,998,000 1,800,000 11%
a. Net sal es in creased 10% (P2 00, 000 increa se P2, 000, 000
= 10%increase).
b. Total expenses increased 11% (P198, 000 increase P1, 800, 000 =
11%increase).
b. Using the information developed in a part, express your opinion as to
whether the company’s net income for 2020:
1. Increased at a greater or lower percentage rate that did net sales.
- Total expenses grew faster than net sales. Net income cannot also
have grown faster than net sales, or the sum of the parts would
exceed the size of the whole.
2. Represented a larger or smaller percentage of net sales revenue than
in 2019. For each answer, explain your reasoning without making any
computations references to peso amounts.
- Net income must represent a smaller percentage of net sales in 2020
than it did in 2019. Again, the reason is that the expenses have
grown at a f a s t e r r a t e t h a n n e t sa l e s . Thus, total expenses
represent a larger percentage of total sales in 2020 than in
2019, and net income must represent a smaller percentage.

Problem 3 (Financial Statement Analysis using Comparative Statements or

Increase-Decrease Method)
XYZ Corporation
Statement of Financial Position
As of December 31
  2019 2020 Peso %
Assets
Cash and equivalents P14,000 P16,000 2,000 14.29%
Receivables 28,800 55,600 26,800 93.06%
Inventories 54,000 85,600 31,600 58.52%
Prepayments and others 4,800 7,400 2,600 54.17%
Total Current Assets P101,600 P164,600 63,000 62.01%
Property, Plant &
Equipment- net of 30,200 73,400 43,200 143.05%
depreciation
Total Assets P131,800 P238,000 106,200 80.58%
Liabilities and Equity
Notes payable to banks P10,000 P54,000 44,000 440.00%
Account payable 31,600 55,400 23,800 75.32%
Accrued liabilities 4,200 6,800 2,600 61.90%
Income taxes payable 5,800 7,000 1,200 20.69%
Total Current Liabilities P51,600 P123,200 71,600 138.76%
Share capital 44,600 44,600 0 0.00%
Retained earnings 35,600 70,200 34,600 97.19%
Total Equity P80,200 P114,800 34,600 43.14%
Total Liabilities and Equity P131,800 P238,000 106,200 80.58%

1. Compute the missing changes in peso amounts and percentages in the

above.

XYZ Corporation
Income Statement
Year Ended December 31
  2019 2020 Peso %
Net sales P266,400 P424,000 157,600 59.16%
Cost of goods sold 191,400 314,000 122,600 64.05%
Gross profit 75,000 109,400 34,400 45.87%
Selling, general and 35,500 58,400 22,900 64.51%
administrative expense
Income before income
taxes 39,500 51,000 11,500 29.11%
Income taxes 12,300 16,400 4,100 33.33%
Net income P27,200 P34,600 7,400 27.21%

2. Evaluate the company’s short-term financial position, leverages, managerial

efficiency and profitability using the increase-decrease method of analysis.

Short – term Financial Position

1. Current Assets increased by 62.01% while the Current Liabilities
increased by 138. 76%.
- Unfavorable

2. Quick Assets increased by 62.40% while Current Liabilities

increased by 138.76%.
- Unfavorable

3. Net Sales increased by 59.16% while Accounts Receivable

increased by 93.06%
- Unfavorable

4. Cost of Goods Sold increased by 64.37% while Inventories

increased by 58.52%.
-Favorable

Leverage
1. Total Assets increased by 80.58% while Total Liabilities increased
by 138.76%.
- Unfavorable

2. Total Liabilities increased by 138.76% while Total Equity increased

by 43.14%.
- Unfavorable
 Profitability
1. Net Sales increased by 59.16% while Cost of Goods Sold
increased by 64.37%.
- Unfavorable

2. Net Sales increased by 59.16% while Selling, General and

Administrative Expense increased by 64.51%
- Unfavorable

3. Net Sales increased by 59.16% while Net Income increased by

27.21%.
- Unfavorable

4. Net Income increased by 27.17% while Total Assets increased by

80.58%.
- Unfavorable

IV. Multiple Choice

1. The data from comparative financial statements are useful
- D. In accomplishing all of the above
2. Index numbers are used in
- A. Trend analysis
3. “Trading on the equity”(financial leverage) is likely to be a good financial
strategy for shareholders of corporation with:
- A. Rapidly growing amounts of net income
4. Select one with the CORRECT statement
- B. An increase in the rate of operating earnings as a percentage
of sale may accompany a decrease in operating earnings
measured in absolute pesos
5. Comparing performance with industry norms is complicated by
- D. all of the above
6. Which of the following would probably not be found in a company’s annual
report?
- C. Interim financial statements
7. What is the first step in an analysis of financial statements?
- C. Specify the objectives of the analysis
8. What is a creditor's objective in performing an analysis of financial
statements?
- A. To decide whether the borrower has the ability to repay interest
and principal on borrowed funds
9. What is an investor's objective in financial statement analysis?
- D. To determine whether an investment is warranted by
estimating a company’s future earnings
10. Which of the following is not a tool or technique used by a financial
statement analyst?
- B. Trend analysis

11. In each of the past five years, the net sales of Beta Co. have increased at
about half the rate of inflation, but net income has increased at
approximately twice the rate of inflation. During this period, the company's
total assets, liabilities and equity have 12 remained almost unchanged;
dividends are approximately equal to net income. These relationships
suggest (indicate all correct answers):
- A. Management is successfully controlling costs and expenses
- C. the annual return on assets has been increasing
 - D. Financing activities are likely to result in a net use of cash
12. Holly Corporation's net income was P400.000 in 2018 and P160, 000 in
2019.What percentage increase in net income must Holly achieve in 2020
to offset the decline in profits in2019?
- B. 150%
13. In financial statement analysis, the most difficult of the following items to
predict is whether:
- A. The company’s market share is increasing or declining