FINANCIAL STATEMENTS - An INCOME STATEMENT is a summary of the REVENUES AND EXPENSES of a business over a

According to the Financial Accounting Standard Board (FASB), the financial statements of the firm period of time, usually either one month, three months, or one year.
should provide sufficient information that is useful to investors and creditors in making their - Summarizes the result of the firms’ operating and financing decisions during that time.
investment and credit decisions in an informed way.
- Operating decisions of the company apply to production and market such as sales/ revenues, cost
 Informed decisions that can be found in FS
of good sold, administrative, and general expenses (advertising, office, salaries).
 Investors and creditors are ex. of External Users
STATEMENT OF CASH FLOWS
The financial statements are expected to be prepared in accordance with asset of standards known  The statement of cash flow is designed to show how the firm’s operations have affected its
as Generally Accepted Accounting Principles (GAAP) cash position and to help answer questions such as these:
The financial statements of publicly traded firms must be AUDITED at least ANNUALLY by an  Is the firm generating the cash needed to purchase additional fixed assets for growth?
independent PUBLIC ACCOUNTANTS.  Is the growth so rapid that the external financing is required both to maintain operations
 Must Audited because the FS must be fairly stated, free from bias and prepared and for investment in new fixed assets?
accordance with GAAP by independent public accountant.  Does the firm have excess cash flows that can be used to repay debt or to invest in new
products?
The auditors are expected to attest to the fact that these FS od the firms have been prepared with
accordance with GAAP. IMPORTANCE OF FINANCIAL STATEMENTS
 Financial statements report both on firm’s position at a point in time and on its operations
TYPES OF FINANCIAL STATEMENTS over some past period.
1. Statement of Financial Position or Balance Sheet  From management’s viewpoint, financial statement analysis is useful both as a way
2. Statement of Performance or Income Statement to anticipate future conditions and more important, as a starting point for planning
3. The Statement of Cash Flow actions that will influence the future course of events or to show whether a firm’s position
4. Statement of Changes in Equity has been improving or deteriorating over time.
5. Notes to Financial Statements – discloses the necessary info. that users needs to know. FS ANALYSIS TECHNIQUES
– performing analysis assessment on FS
STATEMENT OF FINANCIAL POSITION – shows the current condition  Evaluates the company’s performance through Balance Sheet, Income Statement and try
 A summary of asset, liabilities, and equity of a business at a particular point time, usually to assess the weaknesses, the weak point of the entity.
the end of the firm’s fiscal year. 1. Horizontal or Comparative Analysis
ASSETS = LIABILITY + EQUITY 2. Vertical or Ordinary- Size Analysis
Resources of the business Obligation of the Ownership left over 3. Financial Ratio Analysis
business residual
Current Assets Current Liabilities Common stock
Horizontal or Comparative Analysis (pahalang)
 Cash, Receivable,  Payables, outstanding, additional
1. Horizontal analysis presents the differences in absolute amount and convert to percentage
Inventories, Prepaid Short- term paid-in capital, retained
earnings between two compared variables.
Expenses loans, Deferred
Non- Assets Income 2. Such comparisons may be made between two time period such as in years, quarters,
 Plant, Machinery, Noncurrent Liabilities months, or between two companies, between actual or budgeted data, and other bases of
Equipment, Buildings  Notes, bonds, analyses. The difference could either be an increase or decrease both in amounts or in
capital lease percentage.
and obligations 3. Percentage change is computed as follows:
 Percentage of change = amount of change / base
4. The base may be the last year’s data, budgeted data, average industry data, or chief
STATEMENT OF INCOME – shows the result of operation/performance. competitor’s data.
 5. The percentage of change is not computed if the denominator (or base) is zero or negative. COST VOLUME PROFIT ANALYSIS – a systematic examination of the relationships among cost,
6. Getting the change in amount and percentage is not the end-in-view of the financial cost driver and profit.
statement analysis. The interpretation about those changes is of more relevance.
ELEMENTS OF CVP ANALYSIS
1. Sales
COMPUTATION:  Selling price
Changes in Amount = Current year – Previous Year  Units or volume
Changes in Percentage = Total Changes in Amount / Previous year 2. Total Fixed Cost
3. Variable Cost per unit
Vertical or Ordinary- Size Analysis (pababa)
APPLICATIONS OF CVP ANALYSIS
1. It gets the proportional component of each of the variables in the financial  statements in Planning and decision-making, which may involve choosing the:
relation to a chosen base (i.e 100%). As in horizontal analysis, the financial statements are 1. Type of product to produce and sell
treated individually, and each is analyzed independent of the others. 2. Pricing policy to follow
2. The base in the statement of comprehensive income is the net sales; the base in the 3. Marketing strategy to use, and
statement of financial position is the total assets. In the statement of cash flows, the base 4. Type of productive facilities to acquire
may be the total cash available for use. Total Assets = Total Liabilities + Equity
3. By expressing the financial data in percentage using a particular base, the size of different CONTRIBUTION MARGIN INCOME STATEMENT – prepared for management own use
companies is brought to an ordinary expression. The cost and expenses in the CM-IS are classifies as to behavior (variable and fixed). The
4. Size alone does not reflect the true merits of managerial performance. To compare the amount of CM, which is the difference between sales and variable cost is shown:
financial data, they should be put in equal standing by expressing financial figures into
percentage and defining ordinary base (100%) Sales( units x selling price) xx
Less: Variable Cost (units x variable cost per unit) xx
COMPUTATION: Contribution Margin xx
Less: Total fixed cost xx
Based amount/ based Amount = 100 %
INCOME BEFORE TAX xx
Next Amount / Based Amount = …%
INHERENT SIMPLIFYING ASSUMPTIONS OF CVP ANALYSIS
1. All cost is classified as either variable or fixed
2. Cost and revenue relationships are predictable and linear over a relevant range of activity
and a specified period of time
3. Total variable costs change directly with the cost driver, but variable costs per unit are
constant over the relevant range.
4. Total fixed costs are constant over the relevant range, but fixed costs per unit vary
inversely with the cost driver.
5. Selling prices per unit and market conditions remain unchanged.
6. Production equals sales, i.e., there is no change in inventory.
7. If the company sells multiple products, sales mix is constant.
8. Technology, as well as productive efficiency, is constant.
9. The time value of money is ignored.
BREAK- EVEN ANALYSIS CVP Analysis for Multi-Products ( More than 1 product)
 BREAK -EVEN POINT – the sales volume level (pesos or units) where the total revenues
equals total costs, that is, there is neither profit nor loss.

METHODS OF DETERMINING THE BREAK-EVEN POINT

 Graphical Method
 Contribution Margin Method (Formula Method)

BREAK-EVEN GRAPH
Under the graphical approach, sales revenue, variable costs and fixed cost are plotted in
the vertical axis while volume is plotted on the horizontal axis. The break-even point is the point
where the total sales revenue line intersects the total cost line.

Contribution Margin per Unit or Marginal Income per unit

• This is the excess of unit selling price over unit variable costs and the amount each unit SENSITIVITY ANALYSIS OF CVP RESULTS
sold contributes toward:
1. Covering fixed costs; and Margin of Safety
2. Providing operating profit • Measures the potential effects of the risk that sales will fall short of planned levels.
• This is the excess of actual or budgeted sales over break-even sales an indicates the
Formula: CM Unit = Unit Selling Price - Unit Variable Costs amount by which sales could decrease before losses are incurred.
• Can be express as percentage of Sale
Contribution Margin Ratio
• This is the percentage of contribution margin to total sales. This ratio is computed as
follows: CM Ratio = Contribution Margin / Sales
* CM Ratio shows how the contribution margin will be affected by a given peso change in
total sales.

CVP Analysis for Break-even Planning

• Break-even point is the level of sales volume where total revenues and total expenses
are equal, that is, there is neither profit or loss.
Operating Leverage
• Measures the potential effect of the risk that sales will fall short of planned levels as
influenced by the relative proportion of fixed to variable manufacturing cost.
• The ratio of the contribution margin to profit

CVP Analysis for Revenue and Cost Planning

• It can be use to determine the level of sales needed to achieve a desired level of profit.