Republic of the Philippines

Department of Education
National Capital Region
DIVISION OF CITY SCHOOLS – MANILA
Manila Education Center Arroceros Forest Park
Antonio J. Villegas St. Ermita, Manila

FABM2

htps://keydifferences.com/difference-between-fundamentals-and-technical-analysis.htm

Vertical and Horizontal Analysis

Quarter 1 Week 6 Module 6
Learning Competencies:
Define the measurement
levels namely liquidity,
stability and profitability
and perform the vertical and
analysis of a Single
Proprietorship
(ABM_FABM12-If-9, 10)
 Learning Module for Accountancy, Business and Management

HOW TO USE THIS MODULE?

Before starting the module, I want you to set aside other task/s that may
disturb you while enjoying the lessons. Read the simple instructions below
to successfully enjoy the objectives of this kit. Have fun!

1. Follow carefully all the contents and instructions indicated in

every page of this module.
2. Write on your notebook the concepts about the lessons. Writing
enhances learning that is important to develop and keep in mind.
3. Perform all the provided activities in the module.
4. Let your facilitator/guardian assess your answers using the
answer key card.
5. Analyze conceptually the posttest and apply what you have
learned.
6. Enjoy studying!

PARTS OF THE MODULE

• Expectations - These are what you will be able to know after

completing the lessons in the module.
• Pre-test - This will measure your prior knowledge and the concepts to
be mastered throughout the lesson.
• Looking Back to your Lesson - This section will measure what
learnings and skills did you understand from the previous lesson.
• Brief Introduction- This section will give you an overview of the
lesson.
• Activities - This is a set of activities you will perform with a partner.
• Remember - This section summarizes the concepts and applications
of the lessons.
• Check your Understanding - It will verify how you learned from the
lesson.
• Post-test - This will measure how much you have learned from the
entire module.

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 Learning Module for Accountancy, Business and Management

Methods of Analysis of Financial

LESSON
6 Statements

EXPECTATIONS

You will represent real-life situations using horizontal and vertical analysis

Specifically, this module will help you:

❖ define the measurement levels, namely liquidity, solvency, stability and

profitability.
❖ perform vertical and horizontal analysis of single proprietorship.

PRETEST

Let us start your journey in

learning more on Financial Analysis. I am
sure you are ready and excited to answer
the Pretest. Enjoy answering!

Directions: Fill in the blanks with the correct answer

____________1. also known as horizontal analysis

____________2. evaluate how efficiently a company uses its assets and liabilities
to generate sales and maximize profits.

___________3. a technique that expresses each financial statement item of

a percentage of a base amount
___________4. analysis is a technique for evaluating a series of financial
statement data over a period of time with the purpose of determining the
increase or decrease that has taken place.

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 Learning Module for Accountancy, Business and Management
___________5. measure a company's ability to pay off its short-term debts
as they become due, using the company's current assets
____________6. these ratios convey how well a company can generate profits from
its operations.
____________7. compare a company's debt levels with its assets, equity, and
earnings
____________8. size is another term for Vertical Analyses
____________9. another term for solvency ratio is financial ______
___________10. the process of evaluating risks, performance, financial health,
and future prospects of a business by subjecting statement data

Great, you finished answering the

questions. You may request your
facilitator to check your work.
Congratulations and keep on
learning!

LOOKING BACK TO YOUR LESSON

Directions: Using the choices provided, indicate the presence of each of the
transactions below in a statement of cash flows prepared under the direct method)

Choices: (Choices may be used more than once.)

A. Cash inflow from operating

B. Cash outflow from operating
C. Cash inflow from investing
D. Cash outflow from investing
E. Cash inflow from financing
F. Cash outflow from financing

_______1. purchase of fixed asset

_______2. additional investment made by the business

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 Learning Module for Accountancy, Business and Management
________3. payment of rent
________4. sold an old furniture
________5. withdrawals by the owner
________6. cash received by the company from Bank loan
________7. cash receipts from services rendered
________8. payment of wages
________9. payment of repairs and maintenance
_______10. interest income received by the company

BRIEF INTRODUCTION

Financial Statement (FS) Analysis is the process of evaluating risks,

performance, financial health, and future prospects of business by subjecting

financial statement data to computational and analytical techniques with the

objective of making economic decisions (White et.al 1998). There are three kinds

of FS analysis techniques:

a. Horizontal analysis

b. Vertical Analysis

c. Financial Ratios

Horizontal Analysis is also called trend analysis involves a comparison of

financial statement figures comparing two or more consecutive accounting

periods.

Vertical Analysis is also called common-size statements, compares figures

in the financial statement of a single period. This is accomplished by expressing

figures in the statements as a percentage of a certain base, such as total assets

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 Learning Module for Accountancy, Business and Management
(in the SFP) and net sales (in the SCI). As a result, all figures in the statement

are expressed in percentages rather than in pesos.

The financial ratio can be well defined as a comparative magnitude of two

selected statistical values taken from the financial statements of business

enterprises. The measurement levels and its definition are as follows:

a. Liquidity Ratios measure a company's ability to pay off its short-term debts

as they become due, using the company's current or quick assets. Liquidity

ratios include the current ratio, quick ratio, and working capital ratio.

b. Solvency Ratios - also called financial leverage ratios, compare a company's

debt levels with its assets, equity, and earnings, to evaluate the likelihood of

a company staying afloat over the long haul, by paying off its long-term debt

as well as the interest on its debt. Examples of solvency ratios include debt-

equity ratios, debt-assets ratios, and interest coverage ratios

c. Profitability Ratios These ratios convey how well a company can generate

profits from its operations. Profit margin, return on assets, return on equity,

return on capital employed, and gross margin ratios are all examples of

profitability ratio.

d. Efficiency Ratios also called activity ratio to evaluate how efficiently the

company uses its assets and liabilities to generate sales and maximize profits.

Key efficiency ratios include turnover ratio, inventory turnover, and days'

sales in inventory.

The formula in the computation of a Horizontal and Vertical Analysis

Horizontal Analysis Formula

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 Learning Module for Accountancy, Business and Management
Peso change=Balance of Current Year-Balance of Prior Year

Percentage change= (Balance of Current Year-Balance of Prior Year)/(Balance of

Prior Year)

Horizontal Analysis Example:

✓Peso change = P250,000 - P175,000 = P75,000

✓Percentage change = (P250,000 - P175,000) / P175,000 = 42.86%

Vertical Analysis Formula

The base for the common size analysis is the percentage of total Assets for the

SFP and the percentage of gross Sales for SCI.

Example computation for Vertical Analysis

Cash P 200,000 200,000/1,400,000 = 14.3%

Accounts Receivable 400,000 400,000/1,400,000 = 28.6%

Inventory 250,000 250,000/1,400,000 = 17.9%

Equipment 550,000 550,000/1,400,000 = 39.3%

Total Assets P 1,400,000 Sum of the components is 100%

Accounts Payable P 300,000 300,000/1,400,000 = 21.4%

Notes Payable 400,000 400,000/1,400,000 = 28.6%

Owner, Capital 700,000 700,000/1,400,000 = 50.0%

Total Liabilities and equity P 1,400,000 Sum of the components is 100%

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 Learning Module for Accountancy, Business and Management

ACTIVITIES

Activity 1.

Directions: Unscramble the scrambled words to reveal the correct answer.

1. measure a company's ability to pay off its short-term

debts as they become due, using the company's current
or quick assets DIQLITUIL

2. evaluate how efficiently a company uses its assets

and liabilities to generate sales and maximize profits. FYECINIE

3. a technique that expresses each financial statement item

as a percentage of a base amount ALVECITR

4. _______size is another term for vertical Analyses MMOONC

5. compare a company's debt levels with its assets, equity, LEVSOCYN

and earnings

6. also known as horizontal analysis DRENT

7. another term for solvency ratio is financial ______ RLEEVGAE

8. these ratios convey how well a company can generate FABITPRYBLOTI

profits from its operations.

9. financial _________ is the process of evaluating risks, LYASNSAI

financial health, and prospects of business by subjecting
statement data

10. __________analysis is a technique for evaluating a RIHTALHOZO

series of financial statement data over a period of

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 Learning Module for Accountancy, Business and Management
Activity 2.

Directions: Perform the vertical analysis of the following company

TMAM TRANSPORTATION
STATEMENT OF PERFORMANCE
For the period ended December 31, 2019

Sales Php104,705

Cost of Sales (35,275)

Gross Profit Php69,430

Selling Expenses (35,325)

Administrative Expenses (12,815)

Operating Income (21,290)

Interest Expense (1,050)

Net Income Php20,240

Activity 3.

Directions: Shown below is the net income taken from Tintin Beauty Shop.
Compute for the horizontal analysis for the net income of Tintin Beauty Shop.

2016 2017 2018 2019 2020

P50,000.00 P75,000.00 P85,000.00 P120,000.00 P100,000

HORIZONTAL ANALYSIS

2016 2017 2018 2019 2020

Peso
Change
%change

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REMEMBER

What will be the essence of financial statements if you do not know how to
evaluate and assess the financial position of your business? In this module you
have learned the (1) horizontal analysis, also called trend analysis, the
comparison of financial information extends beyond two periods; (2) vertical
analysis involves only one reporting period, that is each amount in the financial
statement is shown as a percentage of another item; (3) financial ratio analysis,
involves the computation of percentages fractions using certain formulas.

CHECK YOUR UNDERSTANDING

UNDERSTANDING

Multiple Choice: Choose the letter corresponding in the statement of cash flows

1. Measure a company's ability to pay off its short-term debts as they become
due, using the company's current or quick assets.
a. Liquidity c. Solvency
b. Profitability d. Efficiency
2. These ratios convey how well a company can generate profits from its
operations.
a. Liquidity c. Profitability
b. Solvency d. Efficiency
3. Compare a company's debt levels with its assets, equity, and earnings, to
evaluate the likelihood of a company staying afloat over the long haul, by
paying off its long-term debt as well as the interest on its debt.
a. Liquidity c. Solvency
b. Profitability d. Efficiency
4. Also called activity ratio evaluate how efficiently a company uses its assets
and liabilities to generate sales and maximize profits.
a. Liquidity c. Solvency

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 Learning Module for Accountancy, Business and Management
b. Profitability d. Efficiency
5. Involves a comparison of financial statement figures comparing two or
more consecutive accounting period.
a. Vertical c. Financial Analysis
b. Horizontal d. Financial Ratio
6. Compares figures in the financial statement of a single period.
a. Horizontal c. Financial Ratio
b. Vertical d. Financial Analysis
7. Also known as trend analysis
a. Horizontal c. Financial Ratio
b. Vertical d. Financial Analysis
8. Also known as common-size analysis
a. Horizontal c. Financial Ratio
b. Vertical d. Financial Analysis
9. is the process of evaluating risks, performance, financial health, and
future prospects of a business
a. Trend c. Financial Ratio
b. Vertical d. Financial Analysis
10. Defined as a comparative magnitude of two selected statistical values
taken from the financial statements of a business enterprise.
a. Common c. Financial Ratio
b. Vertical d. Financial Analysis

POSTTEST

Directions: Prepare the Vertical Analysis for the statement of financial position
of TMAM Company for the current year.

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 Learning Module for Accountancy, Business and Management

TMAM COMPANY
STATEMENT OF FINANCIAL POSITION
Comparative Report as of June 30, 2020
ASSETS 2019 2020
Cash Php20,000.00 Php35,000.00
Accounts Receivables 15,000.00 50,000.00
Supplies 5,000.00 2,500.00
Equipment 30,000.00 27,000.00
Total Assets Php70,000.00 Php114,500.00

OWNER EQUITY
Accounts Payable Php10,000.00 Php5,000.00
Owners Equity 60,000.00 109,500.00
Total Liability & Owner's
Equity Php70,000.00 Php114,500.00

REFLECTIVE LEARNING
SHEET
Consider this case study:
TMAM Company has negative _____________________
horizontal and vertical analysis _____________________
for his financial report due to _____________________
COVID 19. From a well-known _____________________
TVNS operator, he shifted to _____________________
another TNVS. For three _____________________
months, he didn’t earn from grab
because of ECQ and GCQ. What
can you advise, Mr. Martinez to
recover from his losses?

E-SITES

To be able to practice the skills you have learned in this module about cash
flows, you can visit the following sites:

www.accountingcoach.com

https://www.investopedia.com/investing/what-is-a-cash-flow-statement/

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 Learning Module for Accountancy, Business and Management

REFERENCES

Ferrer, R. and Millan, Z. V. ( 2017). Fundamentals of Accountancy, Business &

Management Part 2. 1st Edition

Valencia, E. G., & Roxas, G. F. (2010). Basic Accounting (3rd ed.). Mandaluyong
City, Philippines: Valencia Educational Supply.

Anastacio, V. (2011). Accounting Essentials 1, Centro Escolar University

Publisher
https://www.readyratios.com/reference/analysis/financial_ratio.html

Acknowledgment
Writer : Ma. Cristina A. Labay, MM

Editor : Isabel A. Gumaru, DBA

Evaluator : Ellaine I. Dela Cruz, DBA

Validators &
Reviewers: Remylinda T. Soriano, EPS
Angelita Z. Modesto, PSDS
George B. Borromeo,PSDS
LayoutArtist &
Illustrator: Ma. Cristina A. Labay, MM

Management Team :

Maria Magdalena M. Lim, Schools Division

Superintendent, Manila
Aida H. Rondilla, Chief Education Supervisor
Lucky S. Carpio, EPS in charge of LRMDS
Lady Hannah C. Gillo, Librarian II, LRMDS

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 Learning Module for Accountancy, Business and Management

ANSWER KEY

PRETEST

1. Trend 6. Profitability
2. Efficiency 7. Solvency
3. Vertical 8. Common
4. Horizontal 9. Leverage
5. Liquidity 10. Financial Analysis

LOOKING BACK TO YOUR LESSON:

1. D 6. E
2. E 7. A
3. B 8. B
4. C 9. B
5. F 10. A

ACTIVITIES:

Activity 1

1. Liquidity 6. Trend
2. Efficiency 7. Leverage
3. Vertical 8. Profitability
4. Common 9. Analysis
5. Solvency 10. Horizontal

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 Learning Module for Accountancy, Business and Management
Activity 2:

1. Sales 100% 5. Administrative Expense -12%

2. Cost of Sales -34% 6. Operating Income 20%
3. Gross profit 66% 7. Interest Expense -1%
4. Selling Expenses -34% 8. Net Income 19%

Activity 3

1. 2017 50% 2. 2018 13% 3. 2019 41% 4. 2020 -17%

CHECK YOUR UNDERSTANDING:

1. A 6. B
2. C 7. A
3. C 8. B
4. D 9. D
5. B 10. C

POSTTEST

%age
ASSETS 2020 change

Cash Php20,000.00 29%

Accounts Receivables 15,000.00 21%
Supplies 5,000.00 7%
Equipment 30,000.00 43%
Total Assets Php70,000.00 100%

OWNERs EQUITY
Accounts Payable 10,000.00 14%
Owners Equity 60,000.00 86%
Total Liability & Owner's Equity 70,000.00 100%

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