6 - Business - Applications of Rate Ratio and Proportions

BUSINESS APPLICATIONS ON
RATES, RATIO AND PROPORTION

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
A invested 125% as much money as B, C
invested 80% as much money as B. The
total of all the three is $61,000. How
much did C invest ?
Given : A invested 125% as much money as B.
Investment of A = 125% of x = 1.25x
Given : C invested 80% as much money as B.

Investment of C = 180% of x = 0.8x
Given : The total of all the three is $61,000

So, we have
1.25x + x + 0.8x = 61000
3.05x = 61000
Divide both sides by 3.05
x = 61000/3.05
x = 20000
Investment of C is
= 0.8x
= 0.8 ⋅ 20000
= 16000
Hence, C invested $16000.
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
= ₱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%

Less: Cost of Sales = 60%
Gross Profit = 40%
Less: Operating Expenses = 23.33%
Net Income = 16.67%
Ratio Analysis – Profitability Ratios
Return on Owner’s Investment (ROI) -is a performance

measure used to evaluate the efficiency of an investment or
compare the efficiency of a number of different investments.
ROI tries to directly measure the amount of return on a
particular investment, relative to the investment’s cost.
If a company earns a net profit of ₱100,000 and the capital of

the owner is ₱1,000,000, the ROI would be:
ROI =
=
= 10%
Ratio Analysis – Profitability Ratios
2. Profit Margin or Return of Sales (ROS) - often

called the operating profit margin, is a financial ratio
that calculates how efficiently a company is at
generating profits from its revenue.
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:
ROS =
=
= 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 ratio =
= =
= 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:
Debt ratio =
= =
= 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):
For the operating expenses:

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?

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BUSINESS APPLICATIONS ON

RATES, RATIO AND PROPORTION

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

Given : C invested 80% as much money as B.

Given : The total of all the three is $61,000

Given: Net income before tax (NIBT) =

NIAT = NIBT – Income Tax

Net Sales 100%

Return on Owner’s Investment (ROI) -is a performance

If a company earns a net profit of ₱100,000 and the capital of

2. Profit Margin or Return of Sales (ROS) - often

Sales 150 125 25 20.00

For the operating expenses:

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