AE 24 Module 4 FS Analysis
AE 24 Module 4 FS Analysis
AE 24 Module 4 FS Analysis
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:
*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:
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.
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.
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.
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.
Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the
firm’s performance
1. Cross-sectional analysis – involves the comparison of different firm’s financial ratios at the same
point in time.
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.
2. Activity Ratio – measure the speed with which various accounts are converted into sales
or cash, or inflows or outflows
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.
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.
Below is the common-size income statement of Bartlett Company for 2015 and 2014
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.
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.
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