AE 24 Module 4 FS Analysis

You are on page 1of 20

COLLEGE OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

MODULE 1 PACKET
AE 24 – STRATEGIC BUSINESS ANALYSIS
MODULE 4 FINANCIAL STATEMENT ANALYSIS
Welcome to Module 4!
In this module, we will discuss what finance entails and analysis of financial statements.
Consultation hours
Phone / messenger:

Virtual time: Class schedule

Module I: Learning Objectives


By the end of the module, students will be able to:

1. discuss basic financial statement analytical methods.


2. use financial ratios to assess the liquidity, activity, debt management, and profitability of a
business

2020-2021 Module Packets for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 1 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
Module 1: Course Content:
Below is the schedule for Module 1:

Activity Description Time to


Complete

Lecture Discussion Financial Report and Ratio Analysis 1 hour

Activity Financial ratio analysis as applied to feasibility 2 ours


study
QUIZ Summative Quiz 30 minutes

*Suggested Readings:
Besley, Scott and Brigham, Eugene, Corporate Finance, Philippines Edition. Cengage Learning
Chapter 2 Analysis of Financial Statements
Any book or related reading materials on the topic.

LECTURE DISCUSSION

I. FINANCIAL REPORTS

The four key financial statements required by the SEC for reporting to shareholders are:

1. The income statement


2. The balance sheet/ statement of financial position

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 2 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
3. The statement of stockholder’s equity
4. The statement of cash flows

Income Statement

The income statement provides a financial summary of the firm’s operating results during a specified
period. Most common are income statements covering a 1-year period ending at a specified date,
ordinarily December 31 of the year.

Below is the income statement of Barlett Company for the year ended December 31, 2015 and 2014.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 3 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
Balance Sheet

The balance sheet presents a summary statement of the firm’s financial position at a given time. The
statement balances the firm’s assets (what it owns) against its financing, which can either be debt (what it
owes) or equity (what was provided by owners).

Below is the balance sheet of Barlett Company as of December 31, 2015 and 2014.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 4 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
Statement of Retained Earnings

The statement of retained earnings is an abbreviated form of the statements of stockholders’ equity.
Unlike the statement of stockholders’ equity, which shows all equity account transactions that occurred
during a given year, the statement of retained earnings reconciles the net income earned during a given
year, and any cash dividend paid, with the change in retained earnings between the start and the end of
the year.

Below is the statement of retained earnings of Barlett Company for the year ended December 31, 2015
and 2014.

Statement of Cash Flows

The statement of cash flows is a summary of the cash flows over the period of concern. The statement
provides insight into the firm’s operating, investment, and financing, cash flows and reconciles them with
the changes in its cash and marketable securities during the period.

The statement of cash flows of Barlett Company for the year ended December 31, 2015 and 2014 is
shown on the next page.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 5 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

II. RATIO ANALYSIS

Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the
firm’s performance

Types of Ratio Comparison

1. Cross-sectional analysis – involves the comparison of different firm’s financial ratios at the same
point in time.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 6 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
Benchmarking – comparing a firm’s ratio values with those of a key competitor or with a group of
competitors that it wishes to emulate.

2. Time-Series Analysis – evaluates performance over time.


3. Combined analysis – the most informative approach of ratio analysis; combines cross sectional
and time-series analysis

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 7 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

Categories of Financial Ratios

Financial ratios can be divided for convenience into five general categories: liquidity, activity, debt,
profitability and market ratios.

1. Liquidity Ratio – is the firm’s ability to satisfy its short-term obligations as they come due.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 8 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2. Activity Ratio – measure the speed with which various accounts are converted into sales
or cash, or inflows or outflows

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 9 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 10 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 11 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

3. Debt Ratios – The debt position of a firm indicates the amount of other people’s money being
used to generate profits. In general, the more debt a firm uses in relation to its total assets,
the greater its financial leverage. Financial leverage is the magnification of risk and return
through the use of fixed-cost financing, such as debt and preferred stock.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 12 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 13 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 14 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

4. Profitability ratios – as a group, these measures enable analysts to evaluate the firm’s profits
with respect to a given level of sales, a certain level of assets, or other owner’s investment.

Common-Size Income Statements – each item on this statement is expressed as a


percentage of sales. It is especially useful when comparing performance across the years
because it is easy to see if certain categories of expenses are trending up or down as a
percentage of the total volume of business that the company transacts.

Below is the common-size income statement of Bartlett Company for 2015 and 2014

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 15 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 16 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 17 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

5. Market Ratios – relate to the firm’s market values, as measure by its current share price, to
a certain accounting values. These ratios give insight on how investors in the market place
believe that the firm is doing in term of risk and return.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 18 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 19 of 23
COLLEGE OF COMMERCE
DEPARTMENT OF ACCOUNTANCY
REFERENCES:

Besley, Scott and Brigham , Eugene.(2019). Corporate finance. Cengage Learning Asia Ple Ltd.

Brigham, Houston, Chiang and Ariffin.(2016). Core concepts of financial management . Cengage
Learning Asia Ple Ltd.

Cabrera, Elenita.(2017). Financial management. Manila, Philippines: GIC Enterprises Inc.

Gitman, L. J. and Zutter, C. J., (2016) Principles of managerial finance, Global Edition. Pearson
Education Limited”

Graham, John and Smart, Scott. (2017). Introduction to Financial Management, Third Edition.
Cengage Learning

Kretlow, William J., et.al. (2017). Financial management. Singapore: Cengage Learning Asia Pte Ltd.

Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) issued
by FRSC.

International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)
issued by IASB

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce |


University of San Agustin, Iloilo City, 5000, Philippines Page 20 of 23

You might also like