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    Understanding The FS

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    Divina Gammoot
    The document provides an overview of financial statements and financial statement analysis. It defines the three primary financial statements as the balance sheet, income statement, and cash flow statement. It explains that a balance sheet shows a company's assets, liabilities, and owners' equity at a point in time. The income statement shows revenues and expenses over a period of time. The cash flow statement reports cash inflows and outflows. The document also discusses the importance of financial statements and provides examples of each type. It describes methods for analyzing financial statements through horizontal and vertical analysis and calculating financial ratios.

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    Understanding The FS

    Uploaded by

    Divina Gammoot
    61 views21 pages
    The document provides an overview of financial statements and financial statement analysis. It defines the three primary financial statements as the balance sheet, income statement, and cash flow statement. It explains that a balance sheet shows a company's assets, liabilities, and owners' equity at a point in time. The income statement shows revenues and expenses over a period of time. The cash flow statement reports cash inflows and outflows. The document also discusses the importance of financial statements and provides examples of each type. It describes methods for analyzing financial statements through horizontal and vertical analysis and calculating financial ratios.

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    UNDERSTANDING THE FS.ppt

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    The document provides an overview of financial statements and financial statement analysis. It defines the three primary financial statements as the balance sheet, income statement, and cash flow statement. It explains that a balance sheet shows a company's assets, liabilities, and owners' equity at a point in time. The income statement shows revenues and expenses over a period of time. The cash flow statement reports cash inflows and outflows. The document also discusses the importance of financial statements and provides examples of each type. It describes methods for analyzing financial statements through horizontal and vertical analysis and calculating financial ratios.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    61 views21 pages

    Understanding The FS

    Uploaded by

    Divina Gammoot
    The document provides an overview of financial statements and financial statement analysis. It defines the three primary financial statements as the balance sheet, income statement, and cash flow statement. It explains that a balance sheet shows a company's assets, liabilities, and owners' equity at a point in time. The income statement shows revenues and expenses over a period of time. The cash flow statement reports cash inflows and outflows. The document also discusses the importance of financial statements and provides examples of each type. It describes methods for analyzing financial statements through horizontal and vertical analysis and calculating financial ratios.

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    © All Rights Reserved
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    of 21

    UNDERSTANDING THE

    FINANCIAL STATEMENTS

    Lecture Notes By:


    Noreen Castillo-Estrada
    TRAINING OUTLINE:
    • Definition of Financial Statements
    • Purposes of the Financial Statements
    • Primary Financial Statements
    – Balance Sheet (Statement of Financial
    Condition)
    – Income Statement (Profit & Loss Statement)
    – Cash Flow Statement
    • Financial Statement Analysis
    FINANCIAL STATEMENTS DEFINED
    • Financial statements are a collection of
    reports about an organization's financial
    results, financial condition, and cash flows.
    – What is the company’s current financial status?
    – What was the company’s operating results for the
    period?
    – How did the company obtain and use cash during
    the period?
    IMPORTANCE OF FINANCIAL STATEMENTS

    • To determine the ability of a business to


    generate cash, and the sources and uses of that
    cash.
    • To determine whether a business has the
    capability to pay back its debts.
    • To track financial results and spot any looming
    profitability issues.
    • To derive financial ratios from the statements
    that can indicate the condition of the business.
    IMPORTANCE OF FINANCIAL STATEMENTS

    • For lending purposes, it will help you


    determine:
    –If a client can afford to pay a loan
    –The loan amount
    –The loan term
    –What kind of loan product to offer
    BALANCE SHEET
    Assets are what a company owns.
    Cash, accounts receivable, inventory, land, buildings,
    equipment and machineries.
    Liabilities are the debts of company.
    Accounts payable, notes payable and mortgages payable.
    Owners’ Equity is the amount of capital invested by a
    firm’s equity investors and the earnings of the
    corporation.
    Owner’s Capital & Retained Earnings
    ACCOUNTING EQUATION

    Assets = Liabilities + Owners’ Equity

    Resources Sources of Funding

    Resources Creditors’ Owners’


    to use to claims claims
    generate = against + against
    revenues resources resources
    Summary of the financial position of a company at a particular date.
    SAMPLE BALANCE SHEET
    Assets Liabilities
    Cash P 40 Accounts payable P 50
    Accounts receivable 100 Notes payable 150
    Land 200 P200
    Owners’ Equity
    Total assets P340
    Capital stock P100
    Amount in thousand Php
    Retained earnings 40
    P140
    Must Total liabilities
    Equal and owners’ equity P340
    PROFIT & LOSS STATEMENT
    • What goods were sold or services performed
    that provided revenue for the company?
    • How much is the Gross Profit – how much
    money is left for the rest of the business after
    deducting what it cost to produce or purchase
    the product?
    • What costs were incurred in normal
    operations to generate these revenues?
    • What are the earnings or company profit?
    PROFIT & LOSS STATEMENT
    Revenues
    • Assets (cash or AR) created through business
    operations
    Expenses
    • Assets (cash or AP) consumed through
    business operations
    Net Income or (Net Loss)
    • Revenues - Expenses
    SAMPLE INCOME STATEMENT
    ABC COMPANY
    Profit & Loss Statement
    for the period ending December 31,

    Y2015 Y2014

    REVENUES 200,000 185,000


    Less: OPERATING EXPENSES
    Salaries & Allowances 54,000 54,000
    Utilities Expense 43,200 30,000
    Rental Expense 30,000 30,000
    Depn & Amort 12,500 12,500
    Representation & Entertainment 4,000 3,500
    Office & Cafeteria Supplies 11,000 10,000
    Other Operating Expense 3,250 2,000
    Interest Expense 5,600 7,000
    OPERATING EXPENSES 163,550 149,000

    NET INCOME 36,450 36,000


    CASH FLOW STATEMENT
    • Reports the amount of cash collected and
    paid out by a company in operating,
    investing and financing activities for a
    period of time.
    • How did the company receive cash?
    • How did the company use its cash?
    • Indicates ability of a company to generate
    income in the future.
    FINANCIAL STATEMENT ANALYSIS
    is the process of reviewing and analyzing a
    company's financial statements to help
    users make better decisions.

    First Method – use of Horizontal and Vertical


    Analysis.
    Second Method – use of various financial
    ratios.
    FINANCIAL STATEMENT ANALYSIS
    Horizontal Analysis Vertical Analysis
    ABC COMPANY
    ABC COMPANY
    Profit & Loss Statement
    Profit & Loss Statement
    for the period ending December 31,
    for the period ending December 31,

    Y2015 Y2014 Inc/(Dec) in %


    Y2015 Y2014
    REVENUES 200,000 185,000 15,000 7.50%
    Less: OPERATING EXPENSES REVENUES 200,000 185,000
    Salaries & Allowances 54,000 54,000 - 0.00% Less: OPERATING EXPENSES
    Utilities Expense 43,200 30,000 13,200 30.56% Salaries & Allowances 54,000 27.00% 54,000 29.19%
    Rental Expense 30,000 30,000 - 0.00% Utilities Expense 43,200 30,000
    Depn & Amort 12,500 12,500 - 0.00% Rental Expense 30,000 15.00% 30,000 16.22%
    Rep & Ent 4,000 3,500 500 12.50% Depn & Amort 12,500 12,500
    Office & Cafeteria Supplies 11,000 10,000 1,000 9.09% Representation & Entertainment 4,000 3,500
    Other Operating Expense 3,250 2,000 1,250 38.46% Office & Cafeteria Supplies 11,000 10,000
    Interest Expense 5,600 7,000 (1,400) -25.00% Other Operating Expense 3,250 2,000
    OPERATING EXPENSES 163,550 149,000 14,550 8.90% Interest Expense 5,600 7,000
    OPERATING EXPENSES 163,550 81.78% 149,000 80.54%
    NET INCOME 36,450 36,000 450 1.23%

    NET INCOME 36,450 18.23% 36,000 19.46%


    FINANCIAL RATIO ANALYSIS

     Liquidity Ratio
     How well the Company manages CASH

    2010 Definition
    Liquidity Ratios
    Current Ratio 2.57x CA/CL
    Quick ratio 1.85x (Cash + A/R) / CL
    Accounts Receivable Turnover (ART) 21.14x Revenue/Avg AR
    Accounts Receivable Days 17.26 365 / ART

    16
    FINANCIAL RATIO ANALYSIS

     Solvency Ratio
     How well the Company manages DEBT

    2010 Definition
    Solvency Ratios
    LTD / Total Capitalization 38.1% LTD / (LTD + Equity)
    EBITDA / Interest (Coverage Ratio) 3.61x EBITDA / Interest
    LTD / EBITDA (Leverage Ratio) 2.73x LTD / EBITDA

    17
    FINANCIAL RATIO ANALYSIS

     Activity and Operating Ratios


     It measures productivity and efficiency for running the business

    2010 Definition
    Activity Ratios / Operating Ratios
    Inventory Ratio (IR) 11.20x Cost of Revenues/Avg Inventory
    Inventory Ratio - Days 32.59 365 / IR

    18
    FINANCIAL RATIO ANALYSIS

     Profitability Ratio
     How profitable is the company

    2010 Definition
    Profitability Ratios
    Gross Margin 62.2% Gross Margin / Revenues
    EBITDA Margin 39.0% EBITDA / Revenue
    EBIT Margin 33.2% EBIT / Revenue
    Return on Assets (ROA) 4.8% NI / Avg Assets
    Gross Return on Assets 11.8% EBIT / Avg Assets
    Return on Equity (ROE) 8.1% NI / Avg Equity

    19
    BUILDING BLOCKS OF ANALYSIS
    Ability to meet Ability to
    short-term generate future
    obligations and Liquidity and revenues and
    to efficiently Efficiency Solvency meet long-term
    generate obligations
    revenues

    Ability to provide Ability to


    financial rewards generate
    sufficient to Profitability Market positive market
    expectations
    attract and retain
    financing
    End of presentation

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