Handout Fin Man 2303

SAINT COLUMBAN COLLEGE
College of Business Education

Pagadian City
HANDOUT FIN-MAN 2303

FINANCIAL STATEMENTS ANALYSIS
This involves careful selection of data from financial statements in order to assess and evaluate
the firm’s past performance, present condition and future business potentials. Behind the numbers
are interesting stories of strategies and performances. Simply, financial statements analysis aims
to reveal the great and interesting stories behind each number and account presented on the
financial reports. It should be able to tell what happened in the past, what is happening now, and
what is expected to happen in the next business season.
OBJECTIVES OF FS ANALYSIS (MASEA)

1. Maximizing Profitability – This pertains to the ability of the firm to yield a sufficient
amount of return on company sales assets and invested capital. It also refers to the firm’s
capacity to generate earnings vis-à-vis its expenses and other relevant costs incurred
during a specific period of time.
2. Ability to Pay Obligations – This pertains to liquidity and solvency. Liquidity is also
referred to as working capital position or short-term financial position. This is the ability of
the company to pay short-term obligations. On the other hand, solvency is the ability of
the company to pay long-term financial obligations.
3. Safety of the Investment in Business – This pertains to the benefits of financial
statements towards internal and external stakeholders. Financial Statement Analysis
provides them the opportunity to make informed decisions so that they can enhance their
investment and make their value increase as the business continue its operations.
4. Efficiency of Management on Resources Entrusted to them – This pertains to how
efficient the company is in managing its resources. It also refers to the firm’s speed or
pace in turning over accounts receivable, inventory and long-term assets. This reveals the
frequency of the firm in selling its products or in collecting its receivable. In so far as fixed
or long-term assets are concern, it reveals how the company uses their fixed assets to
yield revenue.
5. Attainment of Stability – This pertains to the state in which the financial system of a
business is stable and resistant to economic shocks and is fit to smoothly fulfill its basic
functions such as the intermediation of financial funds, management of risks, and the
arrangement of payments.
FS ANALYSIS TECHNIQUES
1. Horizontal Analysis
2. Vertical Analysis
3. Trend Analysis
4. Ratio Analysis
A. HORIZONTAL ANALYSIS
This is also called interperiod, cross-period, comparative or intercompany analysis. Horizontal
analysis presents the differences in absolute amount and in percentage differences between two
compared variables or sets of data. Such comparisons may be made between two periods,
between two companies, between actual and budgeted data, or between data of different entities
or other bases of analysis. Horizontal Analysis enables investors and analysis to see what has
been driving a company’s financial performance over time, as well as identify trends and growth
patterns. This focuses on the comparison of financial statements data across accounting periods.
1|P age
FINANCIAL MANAGEMENT HANDOUT 2303
MYLENE P. ALFANTA, CPA
Characteristics of Horizontal Analysis
▪ The base may be the last year’s data, budgeted data, average industry data, chief
competitor’s data, government standard data, or any data that serves as meaningful basis
for analysis.
▪ The percentage change is not computed if the base is ZERO or NEGATIVE.
▪ Getting the changes in amount and percentage is not the end-in-view of financial
statements analysis. The interpretation about those changes is of more relevance.
Formula for Computation:

1. Amount of Change in Pesos = Current Period Value – Base Period Value
2. Percentage Change = Amount Change / Base Period Value
B. VERTICAL ANALYSIS
This is also called common-size analysis. This is a financial statement analysis technique in which
each line item is listed as a percentage of a base figure in the statement. Vertical Analysis makes
comparing financial statements from one company to another and across industries much easier.
Characteristics of Vertical Analysis

▪ The vertical analysis gets the proportional component of each of the variables in financial
statements in relation to a chosen base which is equal to 100%.
▪ The financial statements are treated individually and each is analyzed independent of the
others financial statements.
▪ The base in the Income Statement is the net sales.
▪ The base in the Statement of Financial Position is the total assets.
▪ Size alone does not reflect the true merits of managerial performance. To compare the
financial data, they should be put in equal standing by expressing financial figures of
presented items into percentage of a common base (100%).
Relevant Base
1. Income Statement 100% = Net Sales
2. Balance Sheet 100% = Total Assets
C. TREND ANALYSIS
This is a more longitudinal and modification of the horizontal and vertical analysis. Under this
method, the percentage changes are determined for several successive periods instead of the
typical two-year period horizontal analysis.
Characteristics of Trend Analysis

▪ Trend analysis is used to analyze three or more sets of comparable data.
▪ Trend analysis used indexes and ratios to simplify the visible complications of numbers
contained in the financial reports.
▪ Financial data expressed in indexes and ratios are easily readable than those presented
in terms of millions or billions of a given currency unit.
▪ Indexes are expressed in hundreds while ratios are expressed in normal decimal places.
▪ In computing the trend index or ratio, the base year is normally the earliest year. The
choice of the base is, however, purely judgmental.
2|P age
ILLUSTRATIVE PROBLEM 1:
The Statement of Financial Position of the SHUTTLE COMPANY at the end of 2022 and 2023 is
as follows:
SHUTTLE COMPANY
Comparative Statements of Financial Position
As of December 31, 2022 and 2023
2022 2023 Amount Percentage

ASSETS:
Cash 5,000,000 (40.00%)
Trade Receivables 25,000,000 15,000,000
Inventories 27,000,000
Total Current Assets 60,000,000 70,000,000 10,000,000 16.67%
Long-Term Investments 0 15,000,000 15,000,000

PPE 100,000,000 25,000,000
Intangible Assets 10,000,000 10,000,000
Other Noncurrent Assets 20,000,000 (75.00%)
Total Noncurrent Assets 105,000,000 130,000,000 25,000,000 23.81%
TOTAL ASSETS 200,000,000 35,000,000 21.21%
LIABILITIES:
Current Liabilities 47,000,000 (17,000,000) (36.17%)
Noncurrent Liabilities 88,000,000 14,000,000 18.92%
Total Liabilities 121,000,000 118,000,000 (3,000,000) (2.48%)
SHAREHOLDER EQUITY:
Preference Share Capital 9,000,000 10,000,000
Ordinary Share Capital 42,000,000 54,000,000
Share Premium 5,000,000 5,000,000
Retained Earnings (12,000,000) 25,000,000
Total Shareholders Equity 44,000,000 38,000,000 86.36%
TOTAL LIAB AND SHE 200,000,000
Requirements:
1. Complete all the missing figures.
2. Prepare a Common Size Statement of Financial Position as of December 31, 2022 and
2023.
3|P age
The operating activities of MOONLIGHT COMPANY for the year ended December 31, 2022 and
2023 were summarized below:
1. Complete the Vertical Analysis below.
MOONLIGHT COMPANY
Common Size Income Statements
For the Years Ended December 31, 2022 and 2023
2022 2023
Gross Sales 450,000 500,000
Less: Sales Discounts (10,000) (20,000)
Net Sales 440,000 480,000
Less: Cost of Goods Sold (240,000) (320,000)
Gross Profit 200,000 160,000
Less: Selling and Admin Expenses (120,000) (90,000)
Operating Income 80,000 70,000
Less: Interest Expense (30,000) (35,000)
Income Before Tax 50,000 35,000
Less: Income Tax Expense (15,000) (10,500)
NET INCOME 35,000 24,500
2. Complete the Horizontal Analysis below.
MOONLIGHT COMPANY
Common Size Income Statements
For the Years Ended December 31, 2022 and 2023
2022 2023 Amount Percentage

Gross Sales 450,000 500,000
Less: Sales Discounts (10,000) (20,000)
Net Sales 440,000 480,000
Less: Cost of Goods Sold (240,000) (320,000)
Gross Profit 200,000 160,000
Less: Selling and Admin Expenses (120,000) (90,000)
Operating Income 80,000 70,000
Less: Interest Expense (30,000) (35,000)
Income Before Tax 50,000 35,000
Less: Income Tax Expense (15,000) (10,500)
NET INCOME 35,000 24,500
4|P age
SHOWER Corporation’s sales, current assets, and current liabilities have been reported as
follows over the last five years.
2014 2015 2016 2017 2018

Sales 8,000,000 8650,000 9,200,000 9,600,000 10,800,000
Current Assets 2,225,000 2,270,000 2,220,000 2,180,000 2,630,000
Current Liabilities 250,000 325,000 350,000 450,000 475,000
Requirements: Express all sales, current assets, and current liabilities on trend index and ratios.
1. Use 2014 as the base year.
2. Use 2018 as the base year.
5|P age

Handout Fin Man 2303

Uploaded by

Copyright:

Available Formats

Handout Fin Man 2303

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Handout Fin Man 2303

Uploaded by

Copyright:

Available Formats

SAINT COLUMBAN COLLEGE

College of Business Education

HANDOUT FIN-MAN 2303

OBJECTIVES OF FS ANALYSIS (MASEA)

Formula for Computation:

Characteristics of Vertical Analysis

Characteristics of Trend Analysis

2022 2023 Amount Percentage

Long-Term Investments 0 15,000,000 15,000,000

TOTAL ASSETS 200,000,000 35,000,000 21.21%

TOTAL LIAB AND SHE 200,000,000

1. Complete the Vertical Analysis below.

2. Complete the Horizontal Analysis below.

2022 2023 Amount Percentage

2014 2015 2016 2017 2018

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.