ANALYSIS OF

FINANCIAL
STATEMENTS
FINANCIAL
STATEMENTS CAN BE
ANALYZED IN TERMS
OF:
Liquidity is the ability of the company to settle its
current obligations as they fall due.
Solvency is the ability of a company to meet its
long-term financial obligations and the interest
related to these obligations.
Financial stability is a state in which the
financial system, i.e. the key financial markets and
the financial institutional system is resistant to
economic shocks and is fit to smoothly fulfill its
basic functions: the intermediation of financial
funds, management of risks and the arrangement
of payments.
FINANCIAL
STATEMENTS CAN BE
ANALYZED IN TERMS
OF:
Profitability measures the company’s
operating performance as a return on
its investment.
Market Value or Valuation measures
the company’s potential for future
earnings, dividend payments and stock
price growth.
ANALYZING
FINANCIAL
STATEMENTS
The two phases involved in the
analysis of financial statements are:
 Computation Phase – we compute for
differences, percentages, or ratios
 Interpretation Phase – we interpret the
results of the figures we get from the first
phase
TOOLS IN ANALYZING
THE FINANCIAL DATA
Horizontal Analysis compares the
same account in the financial
statements of two periods (current and
past year) determining the amount of
changes and computing its percentage
change using a base year as
comparison.
 It should be noted that for accounts in the
base year with zero or negative balances,
the computation of percentage of change
will not apply.
TOOLS IN ANALYZING
THE FINANCIAL DATA
Vertical Analysis shows the
relationship of each part to the whole
in a single financial statement.
 In the statement of financial position, each
item is expressed as a percentage of total
assets or total liabilities and owner’s equity.
 In the statement of comprehensive income,
each item is presented as a percentage of
net sales.
TOOLS IN ANALYZING
THE FINANCIAL DATA
Trend Analysis compares not only
two years but covers three, four, five
years’ financial statements.
 This is to determine the trends in the
industry.
HORIZONTAL
ANALYSIS
TOOLS IN ANALYZING
THE FINANCIAL DATA
Financial Ratio Analysis describes
the significant relationship between the
numbers presented in the financial
statements.
 Ratios can be expressed either as a rate,
percentage, or a proportion.
HORIZONTAL
ANALYSIS
Otherwise known as comparative
analysis, it helps management
analyze increases and decreases in
balance sheet and income statement
accounts.
 In the balance sheet, a significant increase
in property, plant, and equipment will
indicate purchases of land, equipment,
machinery or other plant assets necessary
for use in the business. On the other hand, a
significant decrease will reveal disposal of
such assets as management may have
HORIZONTAL
ANALYSIS
Otherwise known as comparative
analysis, it helps management
analyze increases and decreases in
balance sheet and income statement
accounts.
 For income statement accounts, horizontal
analysis helps management analyze
significant increases or decreases in sales,
cost of sales, and expenses.
STEPS IN PERFORMING
HORIZONTAL ANALYSIS
1. Prepare comparative financial
statements of two consecutive years.
2. Add a third column for the increase
or decrease in amount and a fourth
column for the percentage of the
increase or decrease.
3. Get the percentage of increase or
decrease for each year.
STEPS IN
PERFORMING
HORIZONTAL
ANALYSIS
 Choose a base year which is usually the initial
year of analysis.
 Deduct the amount of the current year from the
base year.
 Divide the difference above by the amount of the
base year.
 Multiply the quotient by 100 to get the percentage
of change

% change = Current year amount – Base year Amount x

100%
Base year amount
STEPS IN
PERFORMING
HORIZONTAL
ANALYSIS
Interpretation of Data:
 It is important to note that the materiality of
increase or decrease depends on the size of
the company. A material amount may not be
material to another.
 In analyzing the significance of a percent
change in value, the analysis should not only
center on internal factors controllable by
management.
 Internal factors are not the only factors
considered in data analysis and
interpretation but external factors as well.
HORIZONTAL
ANALYSIS: SFP
HORIZONTAL
ANALYSIS: SCI
Fidas Merchandising
Income Statement
For Years Ended December 31
(in millions)

Increase (Decrease
)
2017 2016 Amount Percentag
e
Net Sales ₱ 2,213.3 ₱ 1,738.7 ₱ 474.6 27.3
Cost of Goods Sold 1,032.1 831.8 200.3 24.1
Gross Profit ₱ 1,181.2 ₱ 906.9 ₱ 274.3 30.2
Selling and Administrative Expenses 889.2 659.5 229.7 34.8
Operating Income ₱ 292.0 ₱ 247.4 ₱ 44.6 18.0
Interest Expense 90.9 30.5 60.4 198.0
Income Before Income Taxes ₱ 201.1 ₱ 216.9 (₱ 15.8) (7.3)
Income Tax Expense 60.3 65.0 (4.7) (7.2)
Net Income ₱ 140.8 ₱ 151.9 (₱ 11.1) (7.3)
ANALYSIS
1. The current assets increased by 9.1%. This
increase is a result of a 64.1% increase in
accounts receivable entails management to
check their credit and collection policy for
prompt collection of accounts especially in net
sales was only 27.3% and cash decreased by
32.5%. Likewise, the increase in merchandise
inventory necessitates management to check
their inventory stocks for obsolescence or slow
moving items comparing to their increase in
sales and the increase in inventory.
ANALYSIS
2. Property, Plant, and Equipment
showed a 235.6% increase. This may
be due to purchases made by the
companies to invest in plant assets. It
is possible for the owner to invest
property and equipment in the
business. However, in the case of Fidas
Merchandising, owner’s equity showed
a decrease of 2.9%. This might not be
possible unless the owner invested
non-current assets then afterwards
ANALYSIS
3. Current liabilities and owner’s equity decreased
despite increase in total liabilities and owner’s equity.
This can be explained by the 383.3% increase in the
company’s non-current liabilities which means that
the company made heavy borrowings during the
year. Sources of business funds are generated either
from the investment of the owner or loans from banks
or financial institutions. In case of Fidas
Merchandising, the company obtained additional
funds through loan. With the significant increase in
non-current assets, it can be inferred that the loan
obtained by the company was used to finance the
acquisitions of the plant, property, and equipment.
ANALYSIS
4. Net sales increase by 27.3% during the year.
However, despite the increase in sales, income
decrease by 7.3%. Looking at the other
components of the income statement, cost of
goods sold increase by 24.1%. Even with this
increase in cost of goods, gross margin registered a
30.2% increase. Selling and administrative
expenses showed a 34.8% increase. Despite this,
income from operations recorded an 18% increase.
The company’s increase in interest expense of
198% resulted in a decrease in income before
taxes despite the increase in net sales. Analyzing
the components of the income statement, we were
able to explain the net decrease in net income
despite the increase in net sales. Hence,
VERTICAL
ANALYSIS
VERTICAL ANALYSIS
Otherwise known as common-size
analysis, it helps management
analyze the components of the total
assets as well as the components of
the total liabilities and owner’s equity.
VERTICAL ANALYSIS
It helps management answer certain
questions as follows:
 Of the total assets, what percent is classified
as current? Non current?
 Of the total assets, what percent is accounts
receivable? Merchandise Inventory?
 Of the total liabilities, what percent is
classified as current? Non current?
 Of the total liabilities and owner’s equity,
what percent is liabilities? What percent is
owner’s equity?
VERTICAL ANALYSIS
IN INCOME
STATEMENT
In the income statement, vertical analysis helps
management analyze the components of the
income statement in relation to its revenue
account, which is sales.
It helps management answer certain questions as
follows:
 What percentage of net sales is cost of sales or cost of
goods sold? Gross profit? Operating expenses?
 If operating expenses were divided between selling and
administrative expenses, what percent of net sales is
absorbed by selling expenses? Administrative expenses?
 What is the percentage of net income to sales?
STEPS IN
PERFORMING
VERTICAL ANALYSIS
1. Prepare comparative financial statements of two
consecutive years.
2. Add one addition column on the right side of each
year.
3. For the comparative statement of financial
position, express each account as a percentage of
the total assets. The total assets is automatically
100%. Likewise, total liabilities and owner’s equity is
automatically 100%.
4. For the comparative income statement, express
each account as a percentage of net sales. Net sales
is automatically 100%.
VERTICAL ANALYSIS:
SFP
VERTICAL ANALYSIS:
SCI
INTERPRETATION OF
DATA AND ANALYSIS
1. Current assets was 54.5% total assets in
2016. however, this percentage decreased to
28% in 2017. this was due to the significant
increase in property, plant and equipment.
Hence, the dramatic change in total assets
composition.
2. Non-current assets represented by property,
plant, and equipment was 45.5% of total
assets in 2016 and 72% in 2017. This may be
due to purchases made by the company during
the year to invest in plant assets.
INTERPRETATION OF
DATA AND ANALYSIS
3. Current liabilities was 50.8% of total liabilities and
owner’s equity in 2016 but significantly decreased to
21.3% in 2017. This is opposite to non-current liabilities
which was 30.8% of total liabilities and owner’s equity
in 2016 but increased to 70.3% in 2017. The company
made a loan during the year and might have paid its
current liabilities. Hence, the opposite change in the
two liabilities. Percentage of owner’s equity to total
liabilities and owner’s equity was 18.4% in 2016 and
8.4% in 2017. This means that the equity financed by
creditors represented by total liabilities was 81.6% in
2016 and 91.6% in 2017. This is not a good sign as the
company’s business funds are heavily provided by
creditors.
INTERPRETATION OF
DATA AND ANALYSIS
4. From the income statement, the percentage of net
income to sales decreased from 8.7% to 6.4%. This
decrease has been explained by the onerous interest
expense in the horizontal analysis. The percentage
of cost of goods sold in relation to net sales
indicated a minimal decrease from 47.8% to 46.6%
while selling and administrative expenses indicated
a minimal increase from 38% to 40.2%. The relation
of interest expense to net sales during the year
increased more than double from 1.8% to 4.1%.
Finally, net income in relation to net sales decreased
from 8.7% to 6.4% despite the company’s
acquisition of property, plant, and equipment.
 TREND
ANALYSIS
TREND ANALYSIS
In trend analysis, a base year is
established which is labeled as the
100% thereby expressing figures of all
other years as a percentage of the
base year.
The amount under each year is divided
by the amount in base year thereby
determining the amount of the other
years in relation to the base year.
STEPS IN
PERFORMING TREND
ANALYSIS
1. Prepare comparative financial statements
for three, four, or five consecutive years.
2. Choose a base year. Usually the first year is
the base year.
3. Calculate the trend percentage for each
item by dividing the amount of each item by
the base year. Base year is automatically
100%.
Trend % = Chosen Year x 100%
Base Year
TREND ANALYSIS:
SFP
TREND ANALYSIS:
SFP
TREND ANALYSIS: SCI
TREND ANALYSIS: SCI
INTERPRETATION OF
DATA AND ANALYSIS
1. Cash increased in 2016 but
significantly decreased in 2017.
Accounts receivable and Inventory
continued its upward trend for three
years. Although net sales has an
upward trend, its increase is not on a
par with the increase in accounts
receivable and inventory in 2017. The
company’s credit and collection policy
should be reviewed and inventory
should be checked for obsolete and
INTERPRETATION OF
DATA AND ANALYSIS
2. Property, Plant and Equipment decreased
in 2016 but drastically increased in 2017 due
to acquisitions made by the company.
Likewise, non-current liabilities significantly
increased in 2017 which means that the
company used the loan to acquire the
property, plant, and equipment.
3. Total liabilities has an upward trend while
owner’s equity has a downward trend
indicating that the company heavily relied on
outside funds from creditors.
INTERPRETATION OF
DATA AND ANALYSIS
4. Net sales had an upward trend for three years
while property, plant, and equipment decreased
in 2016 but significantly increased in 2017. This
may indicate that the company is benefitting
from the use of the newly acquired non-current
assets as evidenced by the increase in sales.
5. Cost of sales has an upward trend but despite
this, gross profit managed to follow an upward
trend. Selling and administrative expenses has
an upward trend, income from operations
decreased in 2016 but increased in 2017.
INTERPRETATION OF
DATA AND ANALYSIS
6. Interest expense has the most
significant increasing trend in three
years culminating to more than 300
percent increase in 2017. With cost of
sales and all expenses going up,
income understandably went on a
downward trend despite an upward
trend in net sales.