CHAPTER 7

FINANCIAL
STATEMENT
ANALYSIS
Financial Statement
• Financial statement is a the important documents prepared by the business that summarize the overall operation of
the business at the specified period.
• There are basically two important financial statement documents which are:
- Income Statement
- Balance Sheet
• The following explains the difference between Income Statement and Balance Sheet.

Income Statement Balance Sheet

Summarize revenues and Summarize assets, liabilities

expenses and equities

Monitor the financial Monitor financial position

performance (compute net (total assets = liabilities +
profit/loss) equities)

Prepare at the end of the Prepare at any time but usually at

financial period the same time with income
statement
Financial Performance Analysis

• Financial Performance analysis is an evaluation made to the financial statement at the end of the accounting period
(fiscal year/end of year).
• The analysis is carried out to evaluate the performance of the business to understand how the company maximizing
sales, minimizing revenues, utilizing resources, settling debts, and generating incomes.

• Financial performance analysis is important because it enables the company to:

i. Assess the solvency and potential value
ii. Assess annual performance of a company for future improvement
iii. Develop budgets and strategies for the future
iv. Benchmarking (By comparing to industry average / industry standard)

• There are three technique of financial performance analysis:

i. Analysis of Historical Data
ii. Comparative and Common Size Analysis
iii. Trend Index Analysis
iv. Financial Ratio
Historical Data Analysis

• Historical Data analysis is a method that assess the financial year for several years to examine the trend of the
performance.
• Usually the historical data analysis is conducted in five-year period.
• The following showed the important component for the historical analysis.

Income Statement Balance Sheet

• Net Profit • Total Assets
• Sales Revenue • Total Liabilities
• Cost of Sales • Total Equities
• Fixed Cost • Account Receivables
• Overhead Cost • Account Payables

• Table and graph are used for the historical data analysis.
• Historical data analysis usually prepared in the annual report for the company to understand the progress of the
business in the past five to ten years.
Example of Historical Data Analysis
How to Explain the Historical Data Analysis:
Table 1: Sales and Expenditures from 2015 to 2019
i. Explain the top three highest
Year Sales (RM) Expenditures (RM)
ii. Explain the biggest jump
2015 50,000 40,000 iii. Explain the biggest drop
2016
2017
60,000
70,000
45,000
52,000
iv. Explain the most profitable Suggestion
2018 65,000 63,000 v. Explain the least profitable
2019 72,000 60,000 vi. Explain the biggest loss
vii. Explain the smallest loss

Sales Performance from 2015 - 2019

80,000 Sales and Expenditure Performance from 2015 - 2019
80000
70,000
65000 72000
70000 70000
60,000
60000 60000 63000 60000
50,000 52000
50000 50000
45000
40,000 40000 40000

30,000 30000

20000
20,000
10000
10,000
0
0 2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
Sales (RM) Expenditures (RM)
Figure 1: Sales Performance from 2015 to 2019
Figure 2: Sales and Expenditure Performance from 2015 to 2019
Example of Historical Data Analysis

Sales Performance from 2015 - 2019 Sales and Expenditure Performance from 2015 - 2019
80,000 80000
65000 72000
70,000 70000 70000

60000 60000 63000 60000

60,000
50000 50000 52000
50,000 45000
40000 40000
40,000
30000
30,000 20000

20,000 10000

10,000 0
2015 2016 2017 2018 2019

0 Sales (RM) Expenditures (RM)

2015 2016 2017 2018 2019
Figure 1: Sales Performance from 2015 to 2019 Figure 2: Sales and Expenditure Performance from 2015 to 2019

Example Explanation: Example Explanation:

By looking at Figure 1, the highest sales is recorded in 2019, From Figure 2, the best performance of the company is recorded
followed by 2017 and 2018. The company has recorded a steady in 2017 while the worst performance is recorded in 2018. The
performance from 2015 before a slight reduction in 2018. company recorded an increasing trend of expenditures from
2015 to 2018 before a slight fall in 2019.
COMPARATIVE AND COMMON-SIZE ANALYSIS

Comparative Horizontal Analysis

• Comparative Analysis also known as “Comparative Horizontal Analysis” analyze the performance between two period
namely:
Current Period (Y1) versus Previous Period (Y0)

• It is called “Horizontal” analysis because this analysis will look at two different data that is placed next to each other (
) in the financial statement.
• There are two analysis carried out in the Comparative Horizontal Analysis namely:

Change in Dollar (Δ in $) = Current Period (Y1) versus Previous Period (Y0)

[Current Period (Y1) - Previous Period (Y0) x 100%

Change in Percentage (Δ in %) =
Previous Period (Y0)]
Comparative Horizontal Analysis for Balance
Sheet Example Application:
Change in Dollar (Δ in $) = Current Period (Y1) versus Previous Period (Y0)
Cash (Δ in $) = $35,400 - $22,900 = +$12,500
Cash (Δ in %) = $35,400 - $22,900 x 100%
$22,900
= +54.6%

The sign represent:

• Positive (+) = increment
• Negative (-) - reduction
For Assets and Equities
• Positive (+) = increment (Favorable)
• Negative (-) – reduction (Unfavorable)
For Liabilities
• Positive (+) = increment (Unfavorable)
• Negative (-) – reduction (Favorable)

The reporting of Balance Sheet can covers the following

• Change in Total Assets
• Change in Current Liability & L/Term Liability
• Change in Current Assets
• Change in Cash
• Change in Ac Receivable
• Change in Ac Payable
Comparative Horizontal Analysis for Balance
Sheet Example Explanation:
Looking at the Current Assets, the most highest change was recorded in
cash with increment of $12,500 (54.6%). The second highest change jump
is recorded in Inventories with 24.1 percent ($4,800).

Furniture and Equipment have recorded an increment of 10.9 percent

($40,900) while Land and Building are unchanged.

The company has recorded an increment of credit purchase in 0003 of 38

percent from $19,200 to $26,500.

To have better explanation, you can use other terms for the financial
component like:
• Accounts Receivable – Credit Sales
• Accounts Payable – Credit Purchase
Comparative Horizontal Analysis for Income
Statement Example Application:
Change in Dollar (Δ in $) = Current Period (Y1) versus Previous Period (Y0)
Dining Room (Δ in $) = $221,900 - $201,600 = +$20,300
Dining Room (Δ in %) = $221,900 - $201,600 x 100%
$201,600
= +10.1%

The sign represent:

• Positive (+) = increment
• Negative (-) - reduction
For Revenue
• Positive (+) = increment (Favorable)
• Negative (-) – reduction (Unfavorable)
For Expenses
• Positive (+) = increment (Unfavorable)
• Negative (-) – reduction (Favorable)

The reporting of Income Statement should covers the following:

• Change in Sales Revenue
• Change in Total Cost
• Change in Net Income
• Change in Food Cost
• Change in Department’s revenue
Comparative Horizontal Analysis for Income
Statement Example Explanation:

From the revenue, the highest increment is recorded by Dining Room with
10.1 percent ($20,300) jumped from the previous year. Bar came second
highest with 9.5 percent increment ($10,600) from the previous year.

By looking at the Income Statement, the company has recorded 24.2 percent
($37,100) reduction in Departmental Income as compared to previous year.
Common-Size Vertical Analysis

• Common-size Analysis also known as “Common-size Vertical Analysis” analyze the proportion of each component in
the financial statement against common denominator (common-size).
• It is called “Vertical” analysis because this analysis will cover the components in the same year that usually position in
a vertical position ( ) in the financial statement.
• The common denominator for financial statement is as follows:

Balance Sheet = Either “Total Assets” or “Total Liabilities and Equities”

Income Statement = Sales Revenue

Common-size Vertical Analysis for Balance Sheet
Example Application:
Common-size Analysis= Each component / Total Assets
Cash (0003) = $22,900/$1,448,800 = 1.6%
Cash (0004) = $35,400/$1,408,800 = 2.5%

Explanation:
Cash accounted for 1.6 percent from total assets in 0003 while
increased to 2.5 percent in 0004.

The reporting of Balance Sheet can covers the following

• Proportion of Current Assets from Total Assets
• Proportion of Fixed Assets from Total Assets
• Proportion of Current Liabilities from Total Liabilities
and Equities
• Proportion of Long-term Liabilities from Total
Liabilities and Equities
• Proportion of Equity from Total Liabilities and Equities
• Proportion of Total Liabilities from Total Liabilities and
Equities

Dining room contributed the biggest portion of revenues with 10.1 percent
($20,300) from the overall sales revenue. The second largest portion is
contributed by Bar with 9.5 percent (10,6000)
Common-size Vertical Analysis for Balance Sheet
Example Explanation:
From the components of assets, Building accounted the largest proportion
with 101.7 percent and followed by furniture and equipment (29.5%). It is
not surprising to note that majority of the assets were contributed by Fixed
Assets that comprised of 93.5% in 0004, which is a slight reduction from the
previous year (94.1%)
Common-size Vertical Analysis for Income Statement
Example Application:
Common-size Analysis= Each component / Sales Revenue
Dining Room (0003) = $201,600/$851,600 = 23.7%
Dining Room (0004) = $221,900/$869,100= 25.5%

Explanation:
Dining Room accounted for 23.7 percent from overall sales in
0003 and increased to 25.5 percent in 0004.

The reporting of Income Statement can covers the following

• Proportion of each department’s sales revenue from
Total Sales Revenues
• Proportion Cost of sales from Total Sales Revenues
• Proportion Net Income from Total Sales Revenues
• Proportion Salaries and Wages from Total Sales
Revenues
• Proportion Total Expenses from Total Sales Revenues
Common-size Vertical Analysis for Income Statement
Example Explanation:
Banquets contributed the biggest portion of revenues with 27.7 percent from
the overall sales revenue in 0004, which is lower than the previous year
(30.7%). The second highest sales is contributed by Dining room with 25.5
percent, which is slightly higher than the previous year (23.7%).

Net cost of foods sold are consistent with slight changes from 39.1 percent in
0003 to 40.5 percent in 0004. The company maintained good performance
according to the industry standard of 40 percent.
Trend Index Analysis

• Trend index analysis is an analysis to compare the real value of the current performance by using comparable value.
• The annual performance of sales revenues and costs are usually contributed by different variables (i.e. number of
guest, number of operating days, inflation, etc.)
• Therefore, trend index will use comparable index to compare current performance and historical performance.
• The trend index will utilize additional ratio for the analysis.
• For the restaurant operation, the following ratio will be taken into account:

Average Check= Sales Revenue / Total Guest

Average Cost of Sales = Cost of Sales / Total Guest

Trend Index

• Trend index is the annual increment from the base year until current year.
• The formula is:

Trend Index = Current Year / Base Year

* Set Base year at 100

Conversion of historic dollar to current dollar

• After determining the trend index, the analysis will continue to determine the value of historic dollar as compared to
the current dollar
• The conversion formula is:

Historic Dollar x Index number for current period

= Current Dollar value
Index number for historic period

The reporting of Trend Index

• Top three performance
• The lowest current dollar