Analysis of Financial Statements: Traditional Approaches - Nature of Financial Statement Analysis

ANALYSIS OF FINANCIAL
STATEMENTS: TRADITIONAL
APPROACHES – NATURE OF
FINANCIAL STATEMENT
ANALYSIS
FINANCIAL STATEMENT ANALYSIS
DEFINITION:
Financial statement analysis is the process of

selecting related data from financial statements to
evaluate the entities past financial position and
operating performance and predict the outcome of
future operations.
THE IMPORTANCE OF FS ANALYSIS
The FS become more meaningful,

understandable, and relevant to the users
if the pieces of information contained
therein are analyzed and interpreted.
TYPES OF INFORMATION PROVIDED BY
THE FS THAT FOCUS PRIMARILY
 The type of information provided by the financial statements

focus primarily on the following areas:
1. Financial position
2. Result of financial operation
3. Cash flows
4. Management stewardship of resources
OBJECTIVE OF FS ANALYSIS
The basic objective of financial

statement analysis is to assist the
different users in the decision
making process.
PROCEDURES IN ANALYSING FS
The following procedures may be adopted in analyzing financial

statements:
1. Establish the objective of the financial statement analysis
2. Gather complete information about the firm and study the industry in
which the firms operates
3. Perform mathematical analysis using the applicable tools
4. Make conclusions relative to the established objectives
METHODS IN ANALYZING FS
The methods of analyzing financial statements include

the following:
1. Horizontal or comparative approach
2. Vertical or common-size approach
3. Trend approach
HORIZONTAL OR COMPARATIVE APPROACH
Is an analytical tool that evaluates the present

performance of an entity compared to last year
It reflects the differences in absolute amount and
percentage between two periods only, the present year
and the previous year.
PRIMARY OBJECTIVE OF HORIZONTAL OR
COMPARATIVE APPROACH
Itsprimary objective is to determine the

present status of the business particularly in
terms of financial position, result of operation,
and cash flows against last year only.
HOW HORIZONTAL OR COMPARATIVE
APPROACH CONDUCTED?
Itis conducted on FS with the same day and month

but of different years because the findings and
evaluations made on financial statements with
different dates as to day and month do not provide
meaningful information.
TWO METHODS OF PERFORMING HORIZONTAL
OR COMPARATIVE ANALYSIS
 The two methods of performing horizontal or comparative analysis:

1. ABSOLUTE AMOUNT COMPARISON
 The absolute amount of each item appearing in the FS is determined by deducting
the amount of the current date from the previous amount of the previous year.
 It identifies the items that are changing the most.
2. PERCENTAGE COMPARISON
 Is determined by dividing the absolute amount of change by the base figure.
GUIDELINES IN CONDUCTING HORIZONTAL OR
COMAPARATIVE ANALYSIS
The following guidelines may be observed in the horizontal analysis:

1. Present the current and previous years’ FS in comparative format.
2. Compute the absolute amount of change or difference. The difference could be either an
increase or a decrease.
3. Express the difference by dividing the amount of change by the base.
4. The computation of percentage of change will not apply if the base amount is negative
or zero.
5. Interpret the change of an item by relating it with the change or movement of other
related items.
ACTIVITY: IDENTIFICATION
1. _________ is an analytical tool that evaluates the present performance of an entity compared to last year
2. _______ is the process of selecting related data from financial statements to evaluate the entities past
financial position and operating performance and predict the outcome of future operations
3. What are areas that types of information provided by the financial statements primarily focus, give the
four areas?
4. _________ is an analytical tool that evaluates the present performance of an entity compared to last year
5. ________ is determined by deducting the amount of the current date from the previous amount of the
previous year
6. _______ is determined by dividing the absolute amount of change by the base figure

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ANALYSIS OF FINANCIAL

Financial statement analysis is the process of

The FS become more meaningful,

 The type of information provided by the financial statements

The basic objective of financial

The following procedures may be adopted in analyzing financial

The methods of analyzing financial statements include

Is an analytical tool that evaluates the present

Itsprimary objective is to determine the

Itis conducted on FS with the same day and month

 The two methods of performing horizontal or comparative analysis:

The following guidelines may be observed in the horizontal analysis:

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