Saint Columban College

College of Business Education

Summer 2020
FIN MAN 301 – Financial Management

CHAPTER 3 – FINANCIAL STATEMENT ANALYSIS

TRADITIONAL MODELS FOR FINANCIAL STATEMENT ANALYSIS:

1. Horizontal or Comparative Analysis
2. Vertical or Common-Size Analysis
3. Trend Analysis
4. Financial Mix Ratio Analysis

HORIZONTAL (OR COMPARATIVE) ANALYSIS

➢ Horizontal Analysis – presents the differences in absolute amount and in percentage differences
between two compared variables or sets of data

➢ Such comparisons maybe made between two periods, between two set of data, between actual and
budgeted data, or between data of different entities or other bases of analysis.

➢ A percentage change is computed as follows:

Percentage of Change = Amount of Change / Base

Example: Assuming the comparison is between two periods (Current Year and Last Year):
Percentage of Change = Current Year – Last Year / Last Year

➢ 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.

VERTICAL (OR COMMON-SIZE) ANALYSIS

➢ The vertical (or common-size) analysis gets the proportional component of each of the variables in
financial statements in relation to a chosen base (i.e. 100%).

➢ As in horizontal analysis, the financial statements are treated individually and each is analyzed
independent of the others.

➢ The base in the Income Statement is the “net sales”; the base in the Statement of Financial Position is
the “total assets”.

➢ By expressing the financial data in percentage using a particular base, the size of different
companies is brought to an ordinary expression.

➢ 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%).

TREND ANALYSIS
➢ Trend analysis is used to analyze 3 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 judgemental.

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PROBLEM 1. Horizontal & Vertical Analysis – Statement of Financial Position
The financial position of CORONA COMPANY at the end of 2017 and 2018 is as follows:
2017 2018

ASSETS
Cash and Cash Equiv alents 5,000,000 3,000,000
Trade and Other Receiv ables 25,000,000 40,000,000
I nv entories 30,000,000 27,000,000
Total Current Assets 60,000,000 70,000,000

Long-term I nv estments - 15,000,000

Property, Plant & Equipment 75,000,000 100,000,000
I ntangible Assets 10,000,000 10,000,000
Other Non-current Assets 20,000,000 5,000,000
Total Noncurrent Assets 105,000,000 130,000,000

TOTAL ASSETS 165,000,000 200,000,000

LIABILITIES
Current Liabilities 47,000,000 30,000,000
Long-term Liabilities 74,000,000 88,000,000
Total Liabilities 121,000,000 118,000,000

SHAREHOLDERS' EQUITY
8% Preference Shares 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 13,000,000
Total Shareholders Equity 44,000,000 82,000,000

TOTAL LIAB & EQUITY 165,000,000 200,000,000

Requirements:
1. Prepare a Comparative Statement of Financial Position showing peso and percentage changes
for 2018 as compared with 2017.
2. Prepare a Common-Size Statements of Financial Position as of December 31, 2017 and 2018.

ANSWER KEY:
Requirement #1: HORIZONTAL ANALYSIS
CORONA COMPANY
Comparative Statements of Financial Position
December 31, 2017 and 2018

Increase (Decrease)
2017 2018
Amount Percentage
ASSETS
Cash and Cash Equiv alents 5,000,000 3,000,000 - 2,000,000 -40.00%
Trade and Other Receiv ables 25,000,000 40,000,000 15,000,000 60.00%
I nv entories 30,000,000 27,000,000 - 3,000,000 -10.00%
Total Current Assets 60,000,000 70,000,000 10,000,000 16.67%

Long-term I nv estments - 15,000,000 15,000,000 N/A

Property, Plant & Equipment 75,000,000 100,000,000 25,000,000 33.33%
I ntangible Assets 10,000,000 10,000,000 - 0.00%
Other Non-current Assets 20,000,000 5,000,000 - 15,000,000 -75.00%
Total Noncurrent Assets 105,000,000 130,000,000 25,000,000 23.81%

TOTAL ASSETS 165,000,000 200,000,000 35,000,000 21.21%

LIABILITIES
Current Liabilities 47,000,000 30,000,000 - 17,000,000 -36.17%
Long-term Liabilities 74,000,000 88,000,000 14,000,000 18.92%
Total Liabilities 121,000,000 118,000,000 - 3,000,000 -2.48%

SHAREHOLDERS' EQUITY
8% Preference Shares 9,000,000 10,000,000 1,000,000 11.11%
Ordinary Share Capital 42,000,000 54,000,000 12,000,000 28.57%
Share Premium 5,000,000 5,000,000 - 0.00%
Retained Earnings - 12,000,000 13,000,000 25,000,000 N/A
Total Shareholders Equity 44,000,000 82,000,000 38,000,000 86.36%

TOTAL LIAB & EQUITY 165,000,000 200,000,000 35,000,000 21.21% Page 2 of 7

Requirement 2: VERTICAL ANALYSIS
CORONA COMPANY
Common-size Statements of Financial Position
December 31, 2017 and 2018

2017 2018
ASSETS
Cash and Cash Equiv alents 5,000,000 3.03% 3,000,000 1.50%
Trade and Other Receiv ables 25,000,000 15.15% 40,000,000 20.00%
I nv entories 30,000,000 18.18% 27,000,000 13.50%
Total Current Assets 60,000,000 36.36% 70,000,000 35.00%

Long-term I nv estments - 0.00% 15,000,000 7.50%

Property, Plant & Equipment 75,000,000 45.45% 100,000,000 50.00%
I ntangible Assets 10,000,000 6.06% 10,000,000 5.00%
Other Non-current Assets 20,000,000 12.12% 5,000,000 2.50%
Total Noncurrent Assets 105,000,000 63.64% 130,000,000 65.00%

TOTAL ASSETS 165,000,000 100.00% 200,000,000 100.00%

LIABILITIES
Current Liabilities 47,000,000 28.48% 30,000,000 15.00%
Long-term Liabilities 74,000,000 44.85% 88,000,000 44.00%
Total Liabilities 121,000,000 73.33% 118,000,000 59.00%

SHAREHOLDERS' EQUITY
8% Preference Shares 9,000,000 5.45% 10,000,000 5.00%
Ordinary Share Capital 42,000,000 25.45% 54,000,000 27.00%
Share Premium 5,000,000 3.03% 5,000,000 2.50%
Retained Earnings - 12,000,000 -7.27% 13,000,000 6.50%
Total Shareholders Equity 44,000,000 26.67% 82,000,000 41.00%

TOTAL LIAB & EQUITY 165,000,000 100.00% 200,000,000 100.00%

PROBLEM 2. Horizontal & Vertical Analysis – Income Statement

The operating activities of VIRUS COMPANY for the year ended December 31, 2017 and 2018 are
summarized below:

2017 2018

Gross Sales 450,000 500,000

Less: Sales Returns & Allowances 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 Administrativ e Expenses 120,000 90,000
Operating I ncome 80,000 70,000
Less: I nterest Expense 30,000 35,000
I ncome Before Tax 50,000 35,000
Less: I ncome Tax Expense 15,000 10,500
Profit (loss) 35,000 24,500

Requirements:
1. Prepare a Comparative Income Statements showing peso and percentage changes for 2018 as
compared with 2017.
2. Prepare a Common-Size Income Statement as of December 31, 2017 and 2018.

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 ANSWER KEY:
Requirement #1: HORIZONTAL ANALYSIS
VIRUS COMPANY
Comparative Income Statements
For the Years Ended December 31, 2017 and 2018

Increase(Decrease)
2017 2018
Amount Percentage
Gross Sales 450,000 500,000 50,000 11.11%
Less: Sales Returns & Allow ances 10,000 20,000 10,000 100.00%
Net Sales 440,000 480,000 40,000 9.09%
Less: Cost of Goods Sold 240,000 320,000 80,000 33.33%
Gross Profit 200,000 160,000 - 40,000 -20.00%
Less: Selling and Administrativ e Expenses 120,000 90,000 - 30,000 -25.00%
Operating I ncome 80,000 70,000 - 10,000 -12.50%
Less: I nterest Expense 30,000 35,000 5,000 16.67%
I ncome Before Tax 50,000 35,000 - 15,000 -30.00%
Less: I ncome Tax Expense 15,000 10,500 - 4,500 -30.00%
Profit (loss) 35,000 24,500 - 10,500 -30.00%

Requirement 2: VERTICAL ANALYSIS

PROBLEM 3. Trend Analysis

COVID 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 8,650,000 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

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Requirements: Express all the sales, current assets, and current liabilities on trend index and trend ratios.
1. Use 2014 as the base year.
2. Use 2018 as the base year.

ANSWER KEY:
Requirement #1: Using 2014 as the base year.

2014 2015 2016 2017 2018

Sales 8,000,000 8,650,000 9,200,000 9,600,000 10,800,000

Trend Ratio 1.00 1.08 1.15 1.20 1.35
Trend I ndex 100 108 115 120 135

Current Assets 2,225,000 2,270,000 2,220,000 2,180,000 2,630,000

Trend Ratio 1.00 1.02 1.00 0.98 1.18
Trend I ndex 100 102 100 98 118

Current Liabilities 250,000 325,000 350,000 450,000 475,000

Trend Ratio 1.00 1.30 1.40 1.80 1.90
Trend I ndex 100 130 140 180 190

Requirement #2: Using 2018 as the base year.

2014 2015 2016 2017 2018

Sales 8,000,000 8,650,000 9,200,000 9,600,000 10,800,000

Trend Ratio 0.74 0.80 0.85 0.89 1.00
Trend I ndex 74 80 85 89 100

Current Assets 2,225,000 2,270,000 2,220,000 2,180,000 2,630,000

Trend Ratio 0.85 0.86 0.84 0.83 1.00
Trend I ndex 85 86 84 83 100

Current Liabilities 250,000 325,000 350,000 450,000 475,000

Trend Ratio 0.53 0.68 0.74 0.95 1.00
Trend I ndex 53 68 74 95 100

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 WEEK 2 REQUIREMENT
PROBLEM 1
The financial position of FINMAN COMPANY at the end of 2017 and 2018 is as follows:
FINMAN COMPANY
Comparative Statement of Financial Position
As of the years ended December 31, 2017 and 2018

2017 2018

Current Assets:
Cash and Cash Equivalents 900,000 1,500,000
Accounts Receivable 300,000 500,000
Allowance for Doubtful Accounts - 30,000 - 50,000
Merchandise Inventory, Dec 31 200,000 250,000
Supplies Inventory 50,000 30,000
Prepaid Insurance 120,000 100,000
Prepaid Advertising 50,000 30,000
Total Current Assets 1,590,000 2,360,000

Noncurrent Assets:
Land 1,000,000 1,500,000
Building 1,500,000 1,500,000
Accumulated Dep – B - 210,000 - 280,000
Machinery & Equipment 600,000 800,000
Accumulated Dep – M & E - 180,000 - 200,000
Total Noncurrent Assets 2,710,000 3,320,000

TOTAL ASSETS 4,300,000 5,680,000

Current Liabilities:
Accounts Payable 150,000 220,000
Accrued Salaries Expense 60,000 90,000
Accrued Taxes & Licenses 40,000 20,000
Total Current Liabilities 250,000 330,000

Noncurrent Liabilities:
Long-term Notes Payable 200,000 500,000
Mortgage Payable - 500,000
Bonds Payable 1,500,000 1,000,000
Total Noncurrent Liabilities 1,700,000 2,000,000

Total Liabilities 1,950,000 2,330,000

Shareholders’ Equity:
Common Stock, P100 par value 1,000,000 1,200,000
Preferred Stock, P500 par value 500,000 800,000
Share Premium 500,000 900,000
Retained Earnings, Dec. 31 350,000 450,000
Total Shareholders; Equity 2,350,000 3,350,000

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY 4,300,000 5,680,000

Requirements:
1. Prepare a Comparative Statement of Financial Position showing peso and percentage changes
for 2018 as compared with 2017.
2. Prepare a Common-Size Statements of Financial Position as of December 31, 2017 and 2018.

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PROBLEM 2
The operating activities of FINMAN COMPANY for the year ended December 31, 2017 and 2018
are summarized below:

FINMAN COMPANY
Comparative Income Statement
For the years ended December 31, 2017 and 2018

2017 2018

Sales 1,000,000 1,500,000

Less: Sales Returns & Allowances - 60,000 - 80,000
Sales Discounts - 40,000 - 70,000
Net Sales 900,000 1,350,000

›Cost of Goods Sold:

Merchandise Inventory, Jan 1 150,000 200,000
Purchases 500,000 700,000
Freignt In 60,000 80,000
Purchase Returns & Allowance - 40,000 - 50,000
Purchase Discounts - 20,000 - 30,000
Total Goods Available for Sale 650,000 900,000
Less: Merchandise Inventory, Dec. 31 200,000 250,000
Cost of Goods Sold 450,000 650,000

›Gross Profit 450,000 700,000

›Operating Expenses:
Supplies Expense 10,000 20,000
Freight Out 20,000 35,000
Salaries Expense 40,000 60,000
Advertising Expense 10,000 20,000
Taxes & Licenses 20,000 25,000
Insurance Expense 20,000 20,000
Depreciation Expense-Building 70,000 70,000
Depreciation Expense-Mach & Eq 60,000 80,000
Doubtful Accounts Expense 10,000 20,000
Loss on Sale of Equipment - 40,000
Total Operating Expenses 260,000 390,000

› perating Income
O 190,000 310,000
›Less: Finance Cost - Interest Expense 40,000 60,000

›NET INCOME (PROFIT) 150,000 250,000

Requirements:
1. Prepare a Comparative Income Statements showing peso and percentage changes for 2018 as
compared with 2017.
2. Prepare a Common-Size Income Statement as of December 31, 2017 and 2018.

PROBLEM 3
FINMAN CORPORATION’s net sales, profit, long-term debt, shareholders’ equity anf total assets
have been reported as follows over the last five years:

2014 2015 2016 2017 2018

Net Sales 20,000,000 22,000,000 25,000,000 26,000,000 30,000,000
Pofit 500,000 450,000 400,000 380,000 350,000
Long-term Debt 10,000,000 8,000,000 12,000,000 11,000,000 8,000,000
Shareholders' Equity 20,000,000 21,000,000 22,000,000 20,000,000 19,000,000
Total Assets 34,000,000 33,200,000 38,400,000 35,000,000 30,800,000

Requirements: Express all the sales, current assets, and current liabilities on trend index and trend ratios.
1. Use 2014 as the base year.
2. Use 2018 as the base year.

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