BUSINESS APPLICATIONS

Lesson Objectives

At the end of this lesson, the students should be able to:

1. solve partnership problems;
2. solve tax problems;
3. perform vertical analysis of financial statements;
4. perform horizontal analysis of financial statements;
and
5. perform ratio analysis.
 Partnership Problems
Partners A, B, and C share profits and losses: 20% to A,
30% to B, and 50% to C. Compute the share of each if
the partnership earned a net income of ₱15,000.
Given: A = 20% B = 30% C = 50% Net = ₱15,000
P = BR
A = ₱15,000 × 20% = ₱3,000
B = ₱15,000 × 30% = ₱4,500
C = ₱15,000 × 50% = ₱7,500
 Tax Problems
A corporation earned ₱36,800 in net income before
tax. If the corporation’s income tax is 35%, compute
for the net income after tax.

Given: Net income before tax (NIBT) = ₱36,800

Income tax rate (ITR) = 35%
Net income after tax (NIAT) = NIBT – Income Tax
 Tax Problems

NIAT = NIBT – Income Tax

= NIBT – (NIBT × Income tax rate)
= ₱36,800 – (₱36,800 × 35%)
= ₱36,800 – ₱12,880
= ₱23,920
 Vertical Analysis of Financial Statements

1. Convert the following Income Statements to a

common-size statement:
Excelsior Enterprises
Income Statement
For the Month Ended June 30, 2010
Net Sales ₱150 000.00
Less: Cost of Sales ₱ 90 000.00
Gross Profit ₱ 60 000.00
Less: Operating Expenses ₱ 35 000.00
Net Income ₱ 25 000.00
 Net Sales ₱150 000.00
Less: Cost of Sales ₱ 90 000.00
Gross Profit ₱ 60 000.00
Less: Operating Expenses ₱ 35 000.00
Net Income ₱ 25 000.00

Net Sales 100%

90,000
Less: Cost of Sales = 60%
150,000
60,000
Gross Profit = 40%
150,000
35,000
Less: Operating Expenses = 23.33%
150,000
25,000
Net Income = 16.67%
150,000
 Ratio Analysis – Profitability Ratios

1. Return on Owner’s Investment (ROI)

If a company earns a net profit of ₱100,000 and the
capital of the owner is ₱1,000,000, the ROI would be:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
ROI =
𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
₱100,000
=
₱1,000,000
= 10%
 Ratio Analysis – Profitability Ratios

2. Profit Margin or Return of Sales (ROS)

If a company earned a net profit of ₱100,000 from
the generated sales of ₱900,000, the return on sales
or profit margin would be:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
ROI =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
₱100,000
=
₱900,000
= 11.11%
 Liquidity/Solvency Ratios
1. Current Ratio
If a company has ₱300,000 current assets and
₱100,000 current liabilities, its current ratio would be:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
₱300,000 3
= =
₱100,000 1
= 3:1
For every ₱1 of liability or debt, the company has ₱3 to pay it.
 Liquidity/Solvency Ratios
2. Debt Ratio
Assuming a firm with total liabilities of ₱450,000 and
total assets of ₱900,000, the debt ratio would be:
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Debt ratio =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
₱450,000 1
= =
₱900,000 2
= 1:2
The firm has ₱1 liability for ₱2 total assets.
 Horizontal Analysis
Let us study the following trend analysis of the
comparative income statements of a certain firm:
201B 201A Amount %
(P000) (P000) (P000) R
Q2 Q1

Sales 150 125 25 20.00

Cost of Sales 90 70 20 28.57
Gross Profit 60 55 15 27.27
Operating Expenses 35 45 (10) (22.22)
Net Income 25 10 15 150.00
 Horizontal Analysis
Getting the percent of increase/(decrease):
Q 2 − Q1
R=
Q1
150,000 − 125,000 25,000
= = = 𝟐𝟎%
125,000 125,000

For the operating expenses:

35,000 − 45,000 (10,000)
R= = = (𝟐𝟐. 𝟐𝟐%)
45,000 45,000
Exercises:
1. What is the tax rate of a product if Martin paid ₱2,354
with included ₱87 as sales tax?
2. Bea and Camille agreed to share profits and losses
according to their capital ratio. Using Bea’s capital of
₱16,000 and Camille’s ₱25,000, find the share of each in a
net loss of ₱5,500.
3. If a company has a return of investment of 15% and a
capital of ₱1,700,000, what is the company’s net profit?
4. A company has a current ratio of 4:1. If the company has
₱100,000 current assets, what is their current liabilities?