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ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
17-2
Other sources
(1) Newspapers (e.g., PDI, TMB, TPS )
(2) Periodicals (e.g. Forbes, Fortune)
(3) Financial information organizations such
(4) Other business publications
17-6
Methods of
Financial Statement Analysis
Horizontal Analysis
Vertical Analysis
Common-Size Statements
Trend Percentages
Ratio Analysis
17-7
Horizontal Analysis
Vertical Analysis
For a single financial
statement, each item
is expressed as a
percentage of a
significant total,
e.g., all income
statement items are
expressed as a
percentage of sales
17-9
Common-Size Statements
Financial statements that show
only percentages and no
absolute peso amounts
17-10
Trend Percentages
Show changes over time in
given financial statement items
(can help evaluate financial
information of several years)
17-11
Ratio Analysis
Expression of logical relationships
between items in a financial
statement of a single period
(e.g., percentage relationship
between revenue and net income)
17-12
Ratios
Ratios can be expressed in three
different ways:
1. Ratio (e.g., current ratio of 2:1)
2. % (e.g., profit margin of 2%)
3. Pesos (e.g., EPS of Ph125.25)
CAUTION!
“Using ratios and percentages without
considering the underlying causes may
lead to incorrect conclusions.”
17-13
Categories of Ratios
Liquidity Ratios
Indicate a company’s short-term
debt-paying ability
Equity (Long-Term Solvency) Ratios
Show relationship between debt and
equity financing in a company
Profitability Tests
Relate income to other variables
Market Tests
Help assess relative merits of stocks in
the marketplace
17-14
FINANCIAL RESOURCES
MANAGEMENT
Financial Management
One reason small businesses fail is
they do not manage their finances
properly.
A financial plan is an important part of
a business plan.
Businesses must manage the money
they take in and pay out to become
profitable and stay in business.
17-20
Financial Planning
Profit – what is left over after
expenses are paid
Business Budget – a detailed plan for
meeting the financial needs of the
business
Anticipating sources and amounts of
income
Predicting the types and amounts of
expenses
17-21
Budgeting
Budget – a detailed plan for the
financial needs of an individual, family,
or business
Business budget – projects the
amounts of income and expenses; a
financial forecast
Well-prepared budget helps avoid
costly financial mistakes
Lets managers know how the business
is doing in terms of meeting its
17-23
Financial Records
Show the financial performance of the
business
Used to prepare 2 important financial
statements – Income Statement, Balance
Sheet
Asset records name the buildings and equipment
owned by the business, their original and current
value and amount owed
Depreciation records identify the amount that assets
have decreased in value due to age and use
Inventory records identify the type and number of
products on hand for sale
Payroll records contain information on all employees’
compensation and benefits
Cash records list all cash received and spent
17-27
Income Statement
A financial statement that shows
revenues, expenses, and net income
(profit) or loss for a period of time.
Usually covers a period of 6 months or
a year but may be shorter
End-of-year statement shows how the
business did for the entire year
Basis for payment of taxes and
decision-making
17-28
Balance Sheet
A financial statement that lists a
business’ assets (what a company
owns) and liabilities (what a
company owes)
Shows what the business is worth
on a particular date, usually the end
of a year
Shows owners equity (value of the
owner’s investment in the business
(also called net worth)
Owner’s equity equation:
Assets – Liabilities = Owner’s Equity
17-29
AgriBusiness, Inc.
Income Statement
For the Year Ended December 31, 2016
Revenue
Cash Sales 38,200
Charge Sales 180,600
Other Revenue 12,900
231,700
Expenses
Salaries and Wages 70,800
Marketing 22,250
Administrative Costs 31,900
Materials and Supplies 24,800
Other Expenses 19,100
Total Expenses 168,850