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THE FINANCIAL REPORTS and The Stories Behind Numbers!

The document provides an overview of financial statement analysis. It lists the key learning objectives as understanding the meaning of accounts in financial statements, relating financing, investing, and operating strategies, and computing various ratios. The document then discusses the major financial statements - balance sheet, income statement, and statement of cash flows - and explains how they reflect the basic functions of financing, investing, and operating activities.

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Nicole
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34 views3 pages

THE FINANCIAL REPORTS and The Stories Behind Numbers!

The document provides an overview of financial statement analysis. It lists the key learning objectives as understanding the meaning of accounts in financial statements, relating financing, investing, and operating strategies, and computing various ratios. The document then discusses the major financial statements - balance sheet, income statement, and statement of cash flows - and explains how they reflect the basic functions of financing, investing, and operating activities.

Uploaded by

Nicole
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL STATEMENT ANALYSIS

LEARNING OBJECTIVES:
At the end of this topic, the student should be able to:
1. Understand and appreciate the meaning of the accounts and amount in the financial statements
2. Interrelate the financing, investing and operating strategies of a firm
3. Explain the financing and investing contents in the balance sheet
4. Explain the operating cycle of a business
5. Compute the horizontal, trend, vertical and financial mix ratios
6. Relate the financing activities with the investing and operating activities
7. Compute the profitability ratios, growth ratios, liquidity ratios, leverage ratios and stability ratios
8. Describe financial leverage and its relations to return on equity

THE FINANCIAL REPORTS… and the stories behind numbers!

Basic financial statements include the balance sheet, income statement, statement of cash flows, statement of
changes in owner’s equity and the related notes to financial statements. These are the wealth of financial information
sources that are intended to inform all interested parties about a business organization. These financial reports are
contained in an annual report prepared and made available by the management group of publicly traded companies,
government agencies, cooperatives and other busıness organizations. Government regulatory agencies such as the
Securities and Exchange Commission, Bureau of Internal Revenue, and Bangko Sentral ng Pilipinas require companies
under their regulations to submit audited financial statements for monitoring and policy use. Aside from the statement of
cash flows, the balance sheet and income statement are major sources of financial information. These financial statements
reflect the basic business functions with respect to financing, investing and operating activities.

FINANCING ACTIVITIES: FINANCING ACTIVITIES:


CURRENT ASSETS AND CURRENT AND NONCURRENT
NONCURRENT ASSETS LIABILITIES AND EQUITY

\\\\\

OPERATING ACTIVITIES

THE BASIC FINANCIAL STATEMENT ANALYSIS

What is the purpose of financial statement analysis?

The objective of financial statements analysis is to determine the extent of a firm’s success in attaining its
financial goals, namely:
(1) to earn maximum goals; (2) to maintain solvency and (3) to attain stability.

The three major financial statement user groups and what they hope to learn from financial statement analysis:
1) Creditors
a) Short-term creditors
b) Long-term creditors
2) Equity Investors
3) Management

There are at least four traditional techniques of interpreting financial statements, namely:
 HORIZONTAL (COMPARATIVE ANALYSIS)
 TREND ANALYSIS
 VERTICAL (COMMON SIZE) ANALYSIS
 FINANCIAL MIX RATIO

HORIZONTAL (COMPARATIVE ANALYSIS) – presents the difference in absolute amount and in percentage between two
periods (i.e., years, quarters etc..), two companies, actual budgeted date, and other bases of analyses. The difference
could either be an increase or a decrease both in amount and in percentage. The percentage change is computed as
follows:

PERCENTAGE CHANGE = AMOUNT OF CHANGE / BASE

SAMPLE EXERCISE (HORIXONTAL ANALYSIS):

Increase (decrease)
2020 2019 Amount Percentage
ASSETS
Cash P 600 P 400
Accounts receivable 2,900 2,600
Inventories 1,000 1,200
Long-term investments 2,200 2,000
Property and equipment 4,400 4,000
Other assets 400 0
Total Assets P 11,500 P 10,200

TREND ANALYSIS – the purpose of trend analysis is to track down what happened in the past and provide on what may
happen in the coming years. It uses indexes and ratios to simplify the visible complications and annoying presentation of
numbers contained in the financial reports. Financial data expressed in indexes and ratios are easily readable than those
presented in terms of millions.

Indexes are expressed in hundreds while ratios are expressed in normal decimal places

SAMPLE EXERCISE (TREND ANALYSIS):

2011 2012 2013 2014 2015 2016 2017


Net sales P22,980,000 P23,600,890 P28,998,879 P22,766,550 P29,765,876 P34,675,239 P38,512,235
Net sales
index
 Solution:
Net sales
ratio
 Solution:
VERTICAL ANALYSIS (common size analysis) – gets the proportional component of each of the variables in the financial
statements in relation to a chosen base. As in horizontal analysis, the financial statements are treated individually and
each is analyzed independent of the others.
FINANCIAL STATEMENT BASES (100%)
 Income statement Net sales
 Balance sheet Total assets
 Statement of cash flows May be the total cash available for use

SAMPLE EXERCISE (VERTICAL ANALYSIS)

CHARITY CORP INTEGRITY CORP


% AGE % AGE
GROSS SALES P 203,600 P 3,400
Less: SALES RETURN AND 3,600 400
ALLOWANCES
NET SALES P 200,000 P 3,000
Less: COST OF GOODS SOLD 160,000 1,000
GROSS PROFIT P 40,000 P 2,000
Less: OPERATING EXPENSES 10,000 500
OPERATING INCOME P 30,000 P 1,500
Less: INTEREST EXPENSE 3,000 200
INCOME BEFORE TAX P 27,000 P 1,300
Less: INCOME TAX 10,800 520
NET INCOME P 16,200 P 780

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