How to use this module?

Before starting this 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.

3. Perform all the provided activities in this module.

4. Let your subject teacher assess your answers.

5. Analyze conceptually the post-test 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 learning and skills did

you understand from the previous lesson.

 Brief Introduction – This section will give you an overview of the lesson.

 Lecture – This section will help you understand the facts, topics, concepts, principles and

procedure.

 Activities – This is a set of activities that you need to perform.

 Post-test – This will measure how much have you learned from the entire module.

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 1 | P a g e

BUSINESS FINANCE

Module 2: Lesson 1 - Financial Statement

Analysis and Interpretation: Liquidity Ratio
Expectation
Specifically, this module will help you to:
1. define liquidity;
2. solve liquidity ratios; and
3. analyze, interpret and compare the liquidity ratios of sample companies.

Pre-test
Part I. Multiple Choice: Direction: Please read and analyze the questions carefully. Write the
letter of the correct answer in space provided.

_____1. It is relative magnitude of two selected numerical values taken from an enterprise’s
financial statements.

A. Financial Ratios B. Numerical Ratios C. Monetary Ratios

_____2. This refers to the company’s ability to satisfy its short-term obligations as they come
due.

A. Efficiency B. Effective C. Liquidity

_____3. If the current ratio is exactly equal to 1, it means that the current assets is also
_________ to the current liabilities.

A. more B. less C. equal

_____4. If the current ratio is greater than 1, it means that the company has _________ current
asset compare to its current liabilities.

A. more B. less C. equal

_____5. If the current ratio is lesser than 1, it means that the company has _________ current
assets compare to its current liabilities.

A. more B. less C. equal

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 2 | P a g e

 Looking Back to your Lesson
Part I. Identification: Direction: Please read and analyze the questions carefully. Write the
correct answer in space provided.

Finance Financial Manager

Budgeting Board of Directors
Wealth Maximization Financial Institutions
Profit Financial Instruments
Financial Management Financial Market

__________________1. It is defined as the science and art of managing money.

__________________2. This deals with decisions that are supposed to maximize the value of
shareholders’ wealth.
__________________ 3. It is a real or a virtual document representing a legal agreement
involving some sort-of monetary value.
__________________4. It is part of a management team whose ultimate goal is to maximize
shareholders wealth.
__________________5. It is a measure of the financial performance of a company for a period
of time.
__________________6. This position refers to the highest policy making body in a corporation.
__________________7. It is the act of estimating revenue and expenses over a period of time.
__________________8. These are organized forums in which the suppliers and users of various
types of funds can make transactions directly
__________________9. The overall objective of a shareholder should be ________________.
__________________10. The intermediaries that channel the savings of individuals, businesses,
and governments into loans or investments.

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 3 | P a g e

 Brief Introduction

Can you tell if a company is healthy or unhealthy? Before the end of this module, you
should be able to answer this questions.
Below are excerpts of a news article from the business section of The Philippine Star
about Universal Robina Corporation (URC), one of the biggest food conglomerates in the
country and the company behind popular brands such as Chippy, C2, Nova, and Blend 45,
among others.
“…URC said its net income from October 2013 to September 2014 jumped 15.1 percent
to ₱11.56 billion from ₱ 10.05 billion during the same period the previous year.”
“ Net sales also rose 14.1 percent year-on –year to ₱ 92.38 billion on the back of robust
sales in its branded consumer food group (BCFG).”
These excerpts seem to indicate that URC did well in 2014. But financial health is not
limited to profitability An analyst of a company should not just look at how much profits a
company generates, but should also pay attention to its capital structure, that is , how much of the
total assets are financed by debt. The drivers of the revenues and net income must also be looked
into. In the case of URC, the increase in revenue in 2014 must have come from its core business
as the robust sales in its branded consumers food group was cited as the reason for its improved
revenues in 2014.
In determining the financial health of a company, the different financials statements have
to be analyzed. These are the statement of financial position or balance sheet, income statement
or statement of profit or loss, and the statement of cash flows. There is a fourth financial
statement, the statement of changes in stockholders’ equity. For purpose of this module, focus
will be on the statement of financial position, statement of profit or loss and the statement of the
cash flows.

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 4 | P a g e

 Lecture
Have you ever tried buying from sari-sari stores on credit?

What are the implications if you or your household don’t pay your obligations to your
neighbor’s sari-sari store?

If a business does not pay its obligations on time, will it also have the same experiences
like the household not paying its obligations? What could possibly happen to the business?
Short-run? Long-run?

FINANCIAL RATIOS
Financial Ratios or Accounting Ratios is a relative magnitude of two selected
numerical values taken from an enterprise’s financial statements. Often used in accounting, there
are many standard ratios used to try to evaluate the overall financial condition of a corporation or
other organization. There are four major categories of financial ratios, but in this module, we will
just focus on liquidity ratios.
1. Liquidity
2. Profitability
3. Efficiency
4. Leverage

LIQUIDITY RATIOS

Liquidity refers to the company’s ability to satisfy its short-term obligations as they
come due. There are two ways to compute liquidity ratios: the current ratio and quick ratio.

Current Assets
Current Ratio =
Current Liabilities

Cash + Marketable Securities + Accounts Receivable

Quick Ratio =
Current Liabilities

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 5 | P a g e

Let’s Compute
Below is a sample financial statement of a corporation. Let’s try to compute its current
ratio and quick ratio using the formula above.

Sample Company Statement of Financial Position as of December 31, 2019

Assets Liabilities and Stockholders’

Equity
Cash P 120,000.00 Accounts Payable P 70,000.00
Marketable Securities 35,000.00 Short-term notes 55,000.00
Accounts receivable 45,000.00 Current liabilities P 125,000.00
Inventories 130,000.00 Long-term debt P 2,700,000.00
Current assets P 330,000.00 Total liabilities P 2,825,000.00

Equipment P 2,970,000.00 Common stock P 500,000.00

Buildings 1,600,000.00 Retained earnings 1,575,000.00
Fixed Assets P 4,570,000.00 Stockholders’ equity P 2,075,000.00
Total liabilities and
Total Assets P 4,900,000.00 equity P 4,900,000.00

Solution
Current Assets ₱ 330,000
Current Ratio = = = 2.64
Current Liabilities ₱ 125,000

Cash + Marketable Securities

+ Accounts Receivable ₱ 120,000 + ₱ 35,000 + ₱ 45,000 ₱ 200,000
Quick Ratio = = = = 1.60
Current Liabilities ₱ 125,000 ₱ 125,000

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 6 | P a g e

 What do you think are the ratios mean and their applications may be? Here are some of
the reflection questions:

What is a good current ratio? 1? 2? 0.5? Is a high current ratio always good? Is a low
current ratio always bad?

If the current ratio is exactly equal to 1, it means that the current assets is also
equal to the current liabilities.

If the current ratio is greater than 1, it means that the company has more current
asset compare to its current liabilities.

If the current ratio is lesser than 1, it means that the company has less current
assets compare to its current liabilities.

A high current ratio is not necessarily good. Although a high current ratio would
mean that there is a higher probability that the company can meet its short-term
obligations, its assets may not be earning as much and the company may have given up
long-term investment opportunities.

What factors affect company’s decisions in managing current ratio?

High receivable balances increase liquidity ratios however, the collectability of

these receivables might not be assured. Quality of receivables should also be considered
in analyzing liquidity. This can be explained in the discussion of efficiency ratios where
the average collection period is computed.

Activities
Activity 1. Directions: Answer the following questions. Write your answer in the space
provided.

1. In your opinion, if company A has current ratio of 1.6 while company B has a current ratio of
2.2, which is a better company?
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____

Activity 2. Computation. Directions: Here are the condensed financial statements of the three
companies (Jollibee, Petron and Globe) as of December 31, 2014 (see next page). Compute the

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 7 | P a g e

ratios of the sample companies and compare the three companies using the ratios computed.
Note: no need to write the solution for the computation. Round to the nearest hundredths (two
decimal places). All values are presented in millions.
JFC Petron Globe
ASSETS
Current assets
Cash 7,619 90.602 16,757
Receivables 7,621 17,927 23,543
Inventories 5,972 53,180 3,186
Other current assets 2,810 57,320 3,256

Total Current Assets 24,022 219,029 46,742

Non-current Assets
Property, plant and equipment 13,364 153,650 117,299
Financial Investments 3,410 1,613 451
Other non-current assets 13,323 17,032 15,015

Total Non-Current Assets 30,097 172,295 132,765

TOTAL ASSETS 54,119 391,324 179,507

LIABILITIES
Current Liabilities
Accounts Payable 2,455 29,496 12,458
Income Tax Payable 182 73 1,587
Short-term debt 1,865 133,388 0
Other current liabilities 14,589 39,630 46,305

Total Current Liabilities 19,091 202,587 60,350

Non-current Liabilities
Long-term Debt 4,428 66,269 59,146
Other Liabilities 2,522 8,776 5,473
Total Non-Current Liabilities 6,950 75,045 64,619

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 8 | P a g e

TOTAL LIABILITIES 26,041 277,634 124,969

JFC Petron Globe

EQUITY
Capital Stock 1,064 9,485 8,429
Additional Paid-in Capital 4,452 19,653 36,049
Retained Earnings 22,646 40,815 10,852
Other Equity Accounts (84) 43,739 (792)

Total Equity 28,078 113,692 54,538

TOTAL LIABILITIES AND EQUITY 54,119 391,324 179,507

Sales Revenue 90,671 482,535 103,235

Cost of Sales/Service (73,728) (463,100) (10,661)

Gross Margin 16,943 19,435 92,574

Operating Expenses (10,806) (11,830) (59,506)

Operating Profit 6,137 7,605 33,068

Other Income 748 1,736 1,255
Other Expenses (126) (5,528) (14,940)

Net Income Before Tax 6,759 3,813 19,383

Income Tax (1,271) (804) (6,011)

Net Income After Tax 5,488 3,009 13,372

JFC Petron Globe Write your analysis here:

____________________________________________
Current Ratio ____________________________________________
____________________________________________
____________________________________________
____________________________________________
Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 9 | P a g e
Quick Ratio

Jollibee Foods Corporation (JFC) – JFC has a relatively high current and quick ratio.
This is driven by its high cash and receivable balances. With its mass market operations and
expansion plans, high liquidity ratios make sense. It can also be attributed to relatively low levels
of current liabilities. This can be explained later on when efficiency ratios are computed and
when operating cycle and cash conversion cycles are computed. These cycles will also show
later on why JFC’s operating cash flows are high and which allows the company to pay its
maturing obligations on time.

Petron Corporation - As an established company operating in a stable oil industry,

Petron’s liquidity ratios can be acceptable. What made Petron’s liquidity ratios low is the
PHP133 billion short-term debt. If this is taken out, Petron’s liquidity ratios will be much higher.
But this is a decision made by the management of the company. Later in the course when
working capital financing policies are discussed, this is an indicator that the company has
adopted a more aggressive working capital financing policy.

Globe Corporation – Globe’s liquidity ratios are relatively low compared to the other
two companies. This means that Globe might need to get more financing to meet its short-term
obligations. However, since Globe is an established company, it won’t be difficult for it to get
more credit from the bank or funding from investors. Emphasize that there are other financial
ratios that need to be considered in determining the credit worthiness of Globe, not just liquidity
ratios.

Activity 3. Directions: Answer the following questions. Write your answer in the space
provided.

1. Which ratio is more accurate in liquidity - quick ratio or current ratio?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 10 | P a g e

 Post-Test
Part 1. Computation. Directions: By this time, you have learned the computation of liquidity
ratios. Let us now try some other examples, but this time, you will be the one to answer it. Note:
no need to rewrite the formula for the computation. Round to the nearest hundredths (two
decimal places).

1. Current assets is ₱ 4,000, current liabilities is ₱ 7,000. What is current ratio?

Solution

Answer: Current Ratio = __________

2. Current assets is ₱ 26,000, current liabilities is ₱ 16,000. What is current ratio?

Solution:

Answer: Current Ratio = __________

3. Inventory is ₱ 450. Accounts payable is ₱ 1350. Cash and accounts receivable total
₱ 2,400. What is the current ratio? Quick ratio?

Solution:

Answer: Current Ratio = __________ Quick Ratio = __________

4. Inventory is ₱ 4,600. Accounts payable is ₱ 6,800. Cash and accounts receivable total ₱
11,600. What is the current ratio? Quick ratio?

Solution:

Answer: Current Ratio = __________ Quick Ratio = __________

5. If current ratio is 1.7, what is the total accounts receivable if cash is ₱ 20,000, inventory
is ₱ 7,500, and accounts payable is ₱ 30,000.

Solution:

Module 2: Lesson 1 Financial Statement Analysis and Interpretation – Liquidity Ratio 11 | P a g e

 Answer: Accounts Receivable = __________

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