Republic of The Philippines Department of Education: Gen. Pantaleon Garcia Senior High School

Republic of the Philippines
Department of Education
REGION IV-A CALABARZON
SCHOOLS DIVISION OF IMUS CITY
Gen. Pantaleon Garcia Senior High School
Pedro Reyes St. Malagasang 1-G, City of Imus, Cavite
LEARNING ACTIVITY SHEET 1 Week 6 to 7

Analysis and Interpretation of Financial Statements
FUNDAMENTALS OF ACCOUNTANCY BUSINESS AND MANAGEMENT II
Name: ________________________________________ Level: ________

Section: ____________________ Date: _________
MELC:
1. Identify and define measurement levels.
2. Differentiate the various financial ratios.
3. Solve exercises and problems that require computation and interpretation using various financial ratios
The most common ratios for the following measurement levels are as follows:
1. Liquidity - the company’s ability to pay debts that are coming due /short term debt.
a. Current ratio- the ratio of current assets to current liabilities, meaning the firm’s ability to pay its current debt.
Current Assets
Current Ratio=
Current Liabilities
b. Quick ratio – also called Acid Test Ratio, is a stricter measure of liquidity. It does not consider all the current assets, only
those that are easier to liquidate such as cash, cash equivalents, short-term investments or marketable securities and accounts
receivable are referred to as quick assets. Quick assets are current assets that can be converted to cash within90 days or shorter
period.
Cash+ Cash Equivalents +Short−term investments+Current Accounts Receivable
Quick Ratio:
Current Liabilities
c. Working Capital Ratio – pertains to the business’ ability to pay its current liabilities with the use of its current assets.
There are four examples of changes that can affect the working capital:
Current Assets increase = increase in working capital Current Assets decrease = decrease in working capital
Current Liabilities increase = decrease in working capital Current Liabilities decrease = increase in working capital
WorkingCapital Ratio=Current Assets−Current Liabilities
Example:
Amor’s Water Station has made loans from banks to purchase its water and sanitation equipment five years ago. This made its
working capital decreases because these loans are becoming due. At the end of the year, Amor’s
statement of financial statement showed a balance of P350,000.00 for its Current Assets and P180,000.00 for its Current Liabilities.
Compute for its Working Capital.
2. Solvency- pertains to the company’s capacity to pay long term debts or liabilities.
a. Debt to asset ratio- it pertains to the ratio of total debt to total assets. It shows a company’s ability to pay off its liabilities
with its assets.
Total Liabilities
Debt ¿ Asset Ratio=
Total Assets
b. Debt to equity ratio- it pertains to the ratio of total debt to owner’s equity/ shareholder’s equity (Asset – liabilities =
Equity).
Total Liabilities
Debt ¿ Equity Ratio=
Total Equity
c. Equity ratio- it pertains to the ratio of the business assets that are financed by capital. A high ratio shows a high level of capital.
Total Equity
Debt ¿ Asset Ratio=
Total Assets
3. Stability – It is the long- term counter part of liquidity or the company’s ability to be structurally firm and can support its long-
term debts by its equity.
a. Debt to equity ratio- it pertains to the ratio of total debt to owner’s equity/ shareholder’s equity (Asset – liabilities =
Equity).
Total Liabilites
Debt ¿ Equity Ratio=
Total Equity
b. Interest Cover Ratio- it shows how many times a business’s interest expense on its loans/ credits are covered by its
operating profit. The higher multiple the better.
Operating Profit
Interest Cover Ratio=
Interest Expense
4. Profitability - the company’s ability to convert its sales into cash flow and profit.
a. Gross margin ratio- it is the ratio of gross profit to sales (Gross profit= Sales- Cost of goods sold).
Gross Margin
Gross Margin Ratio=
Net Sales
b. Operating margin ratio - it is the ratio of operating profits to sales (Operating profit = Gross profit- Operating
expenses).
Operating Profit
Operating Margin Ratio=
Net Sales
c. Net income margin ratio - it is the ratio of net income margin to sales (Net income = Operating profit – interest and taxes). Also
referred to as Profit Margin Ratio. It measures how much net profit is produced at a certain level of sales .
Net Income
Profit Margin Ratio=
Net Sales
Interpretation: It shows that Josefina’s

converted 35 percent of her sales into profits.
d. Return on asset (ROA) - it is the ratio that measures the peso value of income generated by using the business assets.
Note: Average assets are computed by adding the beginning
Net Income balance and ending balance and then divide it by 2. It may be only
Return on Asset Ratio=
Average Total Assets ending of total assets if beginning balance is not given.
Interpretation: The ROA of 502.38 percent means that for every peso that
Kiko invested in assets during the year produced PhP 5.02 of net income.
e. Return on equity (ROE) measures the return (net income) generated by the owner’s capital invested in the business. Similar to
ROA, the denominator of ROE may also be total equity or average equity.
Note: Average equity is computed by adding the beginning

Net Income balance and ending balance and then divide it by 2. It may be only
Return on Equity Ratio=
Average Equity ending of total equity if beginning balance is not given.
Activity 1: Gerlie’s Bread and Pastries

Activity 2: Asid Wash and Wear Supplies- Part 1
Activity 3: Asid Wash and Wear Supplies- Part 2
Activity 4: TJ’s Bakes

Activity 5: “LET PROBLEM SOLVE IT”
Prepared by:
Mr. Paulo Miguel A. Carpio

Teacher I
General Pantaleon Garcia Senior High School

Republic of The Philippines Department of Education: Gen. Pantaleon Garcia Senior High School

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Republic of the Philippines

LEARNING ACTIVITY SHEET 1 Week 6 to 7

Name: ________________________________ Level:

WorkingCapital Ratio=Current Assets−Current Liabilities

Interpretation: It shows that Josefina’s

Note: Average equity is computed by adding the beginning

Activity 1: Gerlie’s Bread and Pastries

Activity 3: Asid Wash and Wear Supplies- Part 2

Activity 4: TJ’s Bakes

Mr. Paulo Miguel A. Carpio

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