SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

LMS ACTIVITIES - SHORT TERM 2020

Week 2 – June 15-19, 2020

Course Code Teacher

031, 033, 034 Jerome D. Marquez
FMGT 1013 – Financial
032, 035, 037 Rovelle Concepcion S. Siazon
Management
036 Rommel Royce V. Cadapan

FINANCIAL STATEMENT ANALYSIS, PART 1

Learning Objectives:

At the end of this session, you should be able to:

1. Explain the basic objectives of analyzing financial statements.
2. Describe the general approach to financial statement analysis.
3. Enumerate the steps in financial statements analysis.
4. Apply the following techniques in financial statement analysis:

 Horizontal analysis of Comparative Statements (Increase-Decrease Method)
 Trend Analysis
 Vertical Analysis or Common Size Financial Statements
 Financial Ratios Analysis
5. Explain the limitations of financial statement analysis.

DISCUSSION

Motivation:

Good day, guys!

I have read several outputs of your activities (expectations, debate, and essay) and surprisingly, I was
inspired. Inspired because I never expected that many of you have good written communication and
research skills. Many of you are good in using the business language. It just shows that the passion to
learn the rigors of business is already there. Keep it up! This is accounting. If you want to learn accounting
effectively and efficiently, you must know how to relate it to other fields like finance. Learning accounting
should go beyond the walls of accounting. And having a good grasp of finance is an edge in the
accounting world.

Some reminders before we proceed to the discussion proper:

1. We allow late submissions for a maximum of 3 days after the deadline. This is in compliance
with the new policies on reporting student’s non-compliance and inactivity in flexible learning
modality. However, we will monitor those students who habitually submit outputs after the
deadline. Do not abuse this privilege because we want you to have a healthy pacing while
learning.
2. Please be loyal in the power of learning. In today’s set-up, there are few possible means to
complete your output. The most fulfilling among them is when you submit yourself to self-
directed learning. Hence, we should always remind ourselves that in order to grow, leave your
comfort zones. Work independently without any guilt of cheating. Remember, as future
accounting professionals, honesty is our core foundation in all business transactions. So,
keep that young vibe. The vibe to improve and grow. Keep the passion to learn!
3. I believe that online learning should go beyond accumulation of knowledge. It is more than
reading and comprehending all forms of discussion – whether in a written form or in an oral form.
It should direct you to a higher form of learning, i.e., learning how to learn. Being proactive is
a must in today’s highly competitive accounting arena. Knowledge-based learning is an old-
school concept. It is where spoon-feeding greatly resides. And as future accounting
professionals, we do not want you to reside there. Instead, we want you to be accountants who
can work with less supervision, who can work under pressure, who can work collaboratively
with others, who can work with critical thinking and problem solving skills, and who can work
with an end of self-improvement.
Hence, for the weeks to come, expect for learning tasks that would challenge and excite you a lot. Your
study hours should be devoted greatly doing learning tasks and not merely reading or watching video
tutorials. You must apply that knowledge accumulated to reinforce a higher form of learning. No worries,
we will provide you the best possible content discussion here. If you have concerns on the content or
you cannot comprehend them, feel free to collaborate with your classmates, ates, kuyas, and to us –
your mentors.

Follow-Up and Recap:

We have learned during week 1 that Financial Management or Corporate Finance aims ultimately to
maximize the wealth of the owners or shareholders. Equally important concept was also introduced
in the name of Corporate Social Responsibility (CSR). It has been a long-time debate among
academicians and scholars on what should be the primary objective of financial management. One
viewpoint (stockholders) emphasizes that FinMan should aim for wealth maximization. The other
viewpoint (other stakeholders) emphasizes that FinMan should aim for CSR. All your arguments have
strong basis.

I appreciate all your arguments, however financial practitioners and academics now tend to believe that
the manager’s responsibility should be to maximize shareholders’ wealth and give only secondary
consideration to other stakeholders’ welfare.

The strongest argument was that of Adam Smith, first and well-known proponent of this viewpoint. He
argued that, in capitalism, an individual pursuing his interest tends also to promote the good of his
community. He also pointed out that acting through competition and the free price system, only those
activities most efficient and beneficial to society as a whole would survive in the long run. Thus,
those same activities would also profit the individual most. Owners of the firm hire managers to work on
their behalf, so the manager is morally, ethically, and legally required to act in the owners’ best interest.
Any relationships between the manager and other firm stakeholders are necessarily secondary to the
objective that shareholders give to their hired managers.

Therefore, the overriding premise of financial management is that the firm should be managed to
enhance owner(s) well-being.

Remember the following grounds of wealth maximization:

1. it considers the risk and time value of money – we will elaborate the concept of risk in your
Financial Market course and the time value of money at the later part of this course.

2. it considers all future cash flow, dividends and earnings per share- Cash flows analysis is
part of this chapter. Dividends and earnings per share will be covered at the later part of this
course.

3. it suggests the regular and consistent dividend payments to the shareholders

- While dividend payment has disadvantages like giving less priority for future expansion
and scalability, it is also viewed by the existing stockholders as a means of showing
financial strength to potential shareholders’ hence inviting them to invest in the company.

4. the financial decisions are taken with a view to improve the capital appreciation of the
share price
- When a company has shown consistent growth of profitability (normally EPS), the
company’s intrinsic value (the true value of the company) would definitely increase. An
increase in intrinsic value would ultimately be reflected on the market price of the share.
Since a share price is market-driven (remember the law of supply and demand), as the
company looks promising (consistent growth of profitability), investors would come in.
The demand from investors to have a share or part of the pie (company) would increase
thereby pushing the price of the company’s shares to rise.

5. maximization of firm's value is reflected in the market price of share.

- This is widely accepted quantitative measure of wealth maximization. This is supported
by the Efficiency Market Hypothesis (EMH) Theory where when market or public
becomes efficient (lahat nalang about sa company alam ng public) in obtaining
information about the financial condition of the entity including all future plans of the
company, the public will make decisions whether to invest or add more investments or
to sell their current holdings in the company. Hence, all actions and decisions will
ultimately be reflected in price of the share.

With an end of maximizing the wealth of the shareholders, a financial manager has many tools of
assessing the financial health of a company. One of them is Financial Statement Analysis:
New Topic:

Financial Statement Analysis

-involves careful selection of data from financial statements for the primary purpose of forecasting
the financial health of the company.

Sample specific questions to be resolved in arriving at the BEST DECISION after careful analysis of the
financial statements may include the following:
1. Will the e-commerce industry like Amazon, Lazada or Shoppee continue to make good results
after this COVID 19 pandemic? How about the oil industry, can they still recover from massive
losses after this COVID 19 pandemic? What could be the effects of the unending US-China
trade war to emerging economies like the Philippines. (This is a macro environment scanning
where a company may be greatly impacted by the current economic developments in the world
or in the Philippines)
2. Can BPI extend more credit to potential short-term creditors despite the increase in credit
defaults due to government-imposed regulation during this pandemic?
3. Do online sellers have sufficient stock of goods to meet promptly orders despite problems in
logistics brought about by this pandemic?
4. Can ABS-CBN pay its huge long-term obligation amid suspension of franchise renewal?
5. Can GMA7 maintain its position as one of the publicly listed companies in the Philippines which
gives high and consistent dividend payments to the shareholders amid this pandemic?
6. Can DITO Telecommunity, having a huge debt over equity, translate borrowings into earnings
in 3 to 5 years?
7. Does Gilead Sciences Inc have competitive advantage in the discovery of vaccine against
COVID 19 virus?
8. Despite Ramon Ang’s philanthropic activities (CSR) which entails substantial cost, could this
greatly affect San Miguel Corporation’s profitability? How about its effect on the company’s
stock price?

In summary of the foregoing questions, we can have the following as general approach when analyzing
financial statements:

1. Background study and evaluation of firm industry, economy and outlook.

2. Analysis of the short-term solvency (working capital analysis)
3. Analysis of the capital structure and long-term solvency (Equity and long term assets and
liabilities analysis)
4. Analysis of operating efficiency and profitability (revenues and expenses analysis)
5. Other considerations:
 Quality of earnings – Baka naman one-time gain lang kaya mataas ang profit nila
ngayong taon. A good quality of earnings are those that are result of recurring revenues
(operating income).
 Quality of assets and relative amount of debt – Baka naman profitable yung business
pero hindi naman makabayad ng utang on time ang company, or deteriorating na rin
pala mga PPE nila.
 Transparent financial reporting – The more reliable the economic information
provided by a company through the financial statements, the more confidence potential
investors can place in that information.

Ok, guys, hinga na muna! Take a break! Inom ng tubig! Kain ng Kitkat! Basta break muna tayo! Baka
pagod na utak mo! Heavy ba? Hindi naman diba. Sige tuloy na natin a!

After knowing the general considerations as mentioned above, we should also look into the procedures
or steps in conducting FS analysis (Pagdadaanan mo ito later sa napakaganda at makatotohanang
learning task na gagawin mo matapos maunawaan itong discussion natin)

Steps in Financial Statement Analysis

1. Establish objectives of the analysis

- May balak ka bang pautangan ulit si ABS CBN o si DITO?
- Magiinvest kaba sa GMA7 o Meralco kasi mataas at consistent silang magbayad ng
dividends?
- Gusto mo bang mag-invest kay Jollibee despite huge downside ng stock price niya?
- O baka naman bored ka lang kaya nagaaral ka ng financial ratios? Sanaol!

2. Study the industry in which firm operates and relate industry climate to current and projected
economic development
 Siguro magandang mag-invest kay PUREGOLD or FRUITAS ngayong panahon ng
pandemya. Kasi tumataas ang consumption ng basic goods ngayon.
 Siguro maganda rin mag-invest kay Netflix ngayon. Lahat ng tao nasa loob ng bahay at
nanonood ng movies and series.
  Iiwas ba muna ako kila PETRON ay PHOENIX kasi bagsak presyo ang langis? Baka
masunog pera ko.hahaha #relatemuch toinks

3. Develop knowledge of the firm and the quality of management

 Diba si DITO, siya yung 3rd Telco major player na inawardan ng franchise last year.
Tapos ang may-ari si Dennis Uy, isa sa pinakabatang business tycoon sa Pilipinas, 45
yrs. Old ata, at crony ni PDUTS. Tas 40% ng shares outstanding at pag-aari ng China
Telecom. Tas nagistart na sila ng roll-out sa Davao City. Sabi nila tatapatan daw nila
ang bilis ng Singapore. Chismosa..haha

4. Evaluate financial statements using any of the techniques below: (This is the gist of the topic)

A. Horizontal analysis of Comparative Statements (Increase-Decrease Method)

 presents a comparative financial statements for the current and previous years. For
every line item, the difference between the two years are computed and divided by the
amount of the base year or previous year to determine the percentage of change.
(Refer to Illustrative Case No. 1. Pasensiya, walang hyperlink tool 'tong LMS natin.
Scroll down mo nalang. Andiyan lang naman sa baba :))

B. Trend Analysis

 a modification of the vertical and horizontal analysis. The percentage changes are
determined for several successive periods instead of the typical two-year period
horizontal analysis. In here, items not seen in two-period analysis may surface in a
longer-based study such as trend analysis.
 in computing the trend, the oldest year becomes the base year. The percentage
relationship of each account in the statements is then computed by dividing each amount
by the base year figure. A trend is then determined by comparing percentage
relationships. Based on the trends, interpretations, conclusions and implications are
derived. (Refer to Illustrative Case No. 2)

C. Vertical Analysis or Common Size Financial Statements

 uses percentages/ratios that present the relationship of the different accounts/items in

the financial statement relative to a base figure or amount. It presents the relative
size of an account/item in proportion to the whole or the base amount. For the Statement
of Financial Condition, the total asset is the base amount while the Statement of Income
uses the net sales/revenue as the base amount.
 The outcome of the percentages is presented in the common-sized statement which
management looks into to have a better understanding if the changes to total assets
(SFP) or net sales/revenue (SI) that have transpired from one period to another. This
also aids management to assess their financial position and performance by comparing
their statements with other companies belonging to the same industry. (Refer to
Illustrative Case No. 3)

D. Financial Ratios Analysis

 A comparison in fraction, proportion, decimal or percentage form of two significant

figures taken from financial statements.
 It expresses the direct relationship between two or more quantities in the statement of
financial position and income statement of a business firm.
 Through ratio analysis, the financial statement user comes into possession of measures
which provide insight into the profitability of operations, the soundness of the firm’s
short-term and long-term financial condition and the efficiency with which
management has utilized the resources entrusted to it. (Ito ‘yung medyo matrabaho
kasi andaming available ways or ratios to measure profitability and efficiency,
liquidity, or solvency. In practice, not all these available ratios are used. May mga
common ratios lang na ginagamit. But for board exam sake, i-cover narin natin
yung iba. This topic will be elaborated in a separate module)

5. Summarize findings based on analysis and reach conclusions about firm relevant to the
established objectives.

 At the end of the day, you will go back to your objectives. Based on the figures which you
obtained after applying the various techniques, we must make a decision.
Ok, guys. Sana kinakaya pa. Pero wait, para mas maintidihan mo yung mga apat na techniques of
financial statement analysis, kailangan natin ng illustrative cases. Ok ready ka na? Actually yung iba dito
pinagaralan mo na sa Business Finance subject mo nung SHS ka. Kaya kung tutuusin, review mo na rin
‘to.

Before we proceed to our illustrative cases, let’s have first a quick review of financial statements which
you have learned in your FAR, CFAS and IA series especially in IA 3.

The Financial Statements

1. Statement of Financial Position – it shows the financial condition or financial position of a

company on a particular date. It is a summary of what the firm owns (assets) and what the firm
owes to outsiders (liabilities) and to internal owners (stockholders equity)

a. Assets
CURRENT ASSETS:
 Cash and cash equivalents
 Marketable securities
 Accounts receivable
 Inventories
 Prepaid expenses

NON-CURRENT ASSETS:
 Property, plant and equipment (Land, Buildings and Leasehold Improvements,
and Equipment)
 Other non-current assets (Long-term investments, Intangible assets, Goodwill,
Deferred tax assets)
b. Liabilities
CURRENT LIABILITIES
 Accounts payable
 Short-term Notes payable
 Current Maturities of Long-term debt
 Accrued liabilities

NON-CURRENT LIABILITIES
 Long-term debt
 Deferred tax liabilities

c. Equity
 Share capital
 Additional paid-in capital/Share Premium
 Retained earnings
 Other Equity accounts

2. Statement of Income – the performance of the firm for a period of time.

a. Net sales
b. Cost of goods sold
c. Gross profit or gross margin
d. Operating expenses
 Selling and administrative
 Marketing/Advertising Costs
 Lease payments
 Depreciation and amortization
 Repairs and Maintenance
e. Operating income
f. Other income/expense (dividend income, interest income, interest expense, gains
(losses) from investments, and gains (losses) from sale of fixed assets)
g. Income from continuing operations before income tax
h. Provision for income taxes on continuing operations
i. Income from continuing operations
j. Gains (losses) on discontinued operations
k. Net income
Net Sales or service revenues
− Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
+ Interest and dividend income
− Interest expense
+/− Non-operating gains/(losses)
= Income from continuing operations before income tax
− Provision for income taxes on continuing operations
= Income from continuing operations
+/− Gains/(losses) on discontinued operations (net of applicable taxes)
= Net Income

WARNING: There are income statement terms that are used in Financial
Statement Analysis which cannot be seen from a pro-forma or standard
income statement (for external use).

Earnings Before Interest and Taxes (EBIT) is a term you will see frequently in financial
statement analysis. EBIT is not the same as operating income, though in some cases they
may be the same.

A line titled “EBIT” does not appear on a standard income statement because EBIT is a
calculated amount used in financial statement analysis and other types of analysis. Earnings
Before Interest and Taxes is equivalent to net income adjusted to add back any deduction for
interest expense and any deductions for taxes. EBIT can be calculated in more than one way.
Beginning with operating income, it would be calculated as follows:

Operating income
+ Interest and dividend income
+/− Non-operating gains/(losses)
+/− Gains/(losses) from discontinued operations (gross, not net of applicable taxes)
= Earnings Before Interest and Taxes (EBIT)

 In other words, in contrast to operating income, EBIT includes non-operating gains and
losses such as gains and/or losses on acquisitions or investments, interest and
dividend income, pretax additions or deductions for discontinued operations.

 EBIT does not include any deductions for interest expense or for taxes.

 Therefore, if the company has gains and/or losses on acquisitions or investments, interest
or dividend income, and income/losses from discontinued operations, its Earnings Before
Interest and Taxes will not be the same as its operating income. All of those items
constitute the difference between operating income and EBIT. If the company has none of
those items, its operating income will be the same as its EBIT, but that will be true only
because the items that would create the difference are zero.

 Earnings Before Taxes (EBT) is another term used in financial statement analysis that you
will not see on a standard income statement. Earnings Before Taxes is Earnings Before
Interest and Taxes minus Interest Expense.

3. Statement of Cash Flow – the sources and uses of funds during an accounting period

 Operating – generation of the principal revenue of the firm or ability to generate sufficient
cash to meet maturing obligations, sustain the firms operating capability and pay dividends
without recourse to external source of financing
 Financing – borrowings to support firm’s operation
 Investing – cash flow from sale or purchase transaction wherein non-operating assets are
involved.
(There will be a separate module for Cash Flow Analysis)
After reviewing the basic financial statements, I will now present to you the illustrative cases for
the first three techniques of financial statement analysis:

Illustrative Case No. 1 - Horizontal analysis of Comparative Statements (Increase-Decrease

Method)

REQUIRED:
Evaluate the company's financial position and results of operations using the Comparative
Statements Analysis.
SOLUTION:

Financial Statements Analysis of Golden Garments, Inc.

a. Short-term Solvency Analysis

( Habang tumataas ang current liabilities, sumasabay rin ba ang mga current assets sa
pagtaas? Kung "Oo" ang sagot, maari ngang may pambayad sila ng current liabilities
when they fall due at hindi mailalagay sa alanganing posisyon ang company. Minsan
tinitignan din dito kung mabilis ba ang conversion ng A/R at Inventories into Cash
because ultimately cash parin naman pambabayad mo ng utang )

 As shown on the statement of financial position, the percentage of increase in total current
assets (10.1%) was lower than the percentage of increase in total current liabilities (15%).
It can be observed that accounts payable and bank loans increased significantly. Accounts
receivable and inventory increased at a much higher percentage than the percentage of
increase in Sales revenue (11%). (Segue ako dito, guys. If AR increased at a higher rate
than sales revenue during the period, ibig sabihin nun, mabagal collection or
nahihirapan silang makacollect ng cash from customers. If Inventory increased at a
higher rate than Sales revenue, ibig sabihin nun marami silang production na hindi
nabebenta.) This indicates slower conversion of inventory and receivables to cash. The
changes mentioned resulted to the deterioration in the short-term solvency position of
the company as of the end of year 2014 compared with year 2013.

b. Long-term Financial Position Analysis

(Tumataas ba ang non-current assets ng entity? Alam naman natin na malaki ang
pakinabang ng long-term assets sa kakayahan ng company to generate revenues in the
long-run. Mga "investments" ito like PPE, Intangibles or long-term investments na
naglalayung palakasin ang posisyon ng company sa malayong hinaharap. Aside from long
term asset, tinitignan din dito kung ano ang mas daks, este mas malaki - TOTAL LIABILITIES
o EQUITY? Alam naman natin na ang equity represents the invested capital of the owners
including accumulated earnings. Kung mas mabilis ang pagtaas ng porsyento sa liabilities
kesa sa equity, medyo red flag yun. Parang sinasabi kasi nun na hindi kayang pondohan
ng equity ang pangangailan ng company kaya nag-reresort sila sa utang. Otherwise, kung
mas malaki ang porsyento ng pagtaas ng equity kesa sa liabilities, magandang senyales
yun, may pondo ang company, kumikita sila.)

 The book value of property, plant and equipment declined because of the depreciation
provision for the year. Total liabilities increased by only 1%, whereas shareholders' equity
increased by 11.8%. Thus, the company's capital structure shifted slightly away from
borrowing and toward capital provided by profitable operations. These changes can be
viewed favorably because they indicate strengthening of the long-term financial position
by end of year 2014.

c. Operating Efficiency and Profitability Analysis

(Ang mga tanong dito ganito: Nakatipid ba ang company (efficiency) o kumita ba sila
(profitability)? Hindi lang bottom figure (net income) ang tinitignan dito. Binubusising
mabuti talaga dito ang composition ng income items at expense items.
Pinakacomplikadong part ng FS analysis ang aspetong ito, pero pinaka-exciting aralin.
Minsan magtataka ka, mas malaki naman ang airtime revenues ni ABS kesa ni GMA, pero
bakit mas malaki ang net income ni GMA kesa ABS nung 2018? Ibig ba sabihin nun mas
efficient si GMA? Bakit si ABS nagreport ng operating loss, pero net income parin? Bakit
si Shopify or si UBER net loss parin pero tumataas ang kanilang revenues yearly? Si
Jollibbee, akala ko bida ang saya, pero bakit ang laki ng net loss niya sa 1st quarter ng
2020?)

 Sales revenues increased by 11% while cost of goods sold increased by 12.4%. This is
unfavorable because this could indicate that the company was unable to adjust the selling
price of the goods commensurate to the increase in cost of goods purchased or manufactured
or it was unable to control the price factor of its cost of sales. These changes resulted to the
reduction in the gross profit rate which is unfavorable. The 11% increase in sales was
accompanied by a 7.8% and 2.8% increase in selling and administrative expenses,
respectively. This is favorable because this could indicate management's efficiency in
keeping expenses within control.

 On an overall basis, operating performance could be considered satisfactory or favorable

because of the lower increase in operating costs of 10.5% as compared with the increase in
revenue of which resulted to an 18.4% increase in operating income. Repayment of notes
payable reduced interest expense by 4.7%. Reduced interest expense together with higher
operating income increased income before taxes by 25.9%.
Illustrative Case No. 2 - Trend Analysis

REQUIRED:
1. Compute the trend percentages for the Statement of Financial Position and Income
Statements from 2010 to 2014.
2. Evaluate the company’s short-term solvency, long-term financial position and profitability
using the trend percentages obtained in No. 1.
SOLUTION:

Requirement 1 – Computation of trend percentages

Requirement 2 – Analysis and Evaluation

1. Short-term Solvency
- Current assets increased by 9% while current liabilities decreased by 27% by 2014. The
current financial position of the Gilbert Company improved as reflected by the upward
trend in total current assets accompanied by the downward trend in current liabilities.
The improvement in the current financial position is also indicated by the fact that the
current assets were 2.05 times the current liabilities as of December 31, 2010 and 3.05
times at the most recent date.

- The trend data reveal that cash, receivables and inventory showed upward tendencies
over the years. The increase in receivables and inventory is favorable because net sales
increased at a faster rate. The favorable tendency indicates that more effective credit,
collection and merchandising policies, could have been established and made effective.
The relatively smaller amount of trade receivable reflects more rapid turnover of
customer accounts and possibly a large increase in cash sales.

- The decline in marketable securities and other current assets over the years also
indicates lesser investment in not-so-productive assets. All these trends in different
directions reflect an increasing efficiency of working capital management.

2. Long-term financial position

- A comparison of the trends in total liabilities and equity reveals that the former declined
and the latter increased. As a result of these variations, the creditors' margin of safety
increased significantly.
 - The expansion in property, plant and equipment which substantially increased was
financed by shareholders' capital through the issuance of share capital at a premium,
long-term liabilities and working capital derived from operations.

- A greater reliance on equity funds rather than on creditor funds increased the margin of
safety of the creditors and therefore strengthened the financial position of the company.

3. Profitability
- It will be observed that both sales and cost of sales showed upward trends with sales
increasing at a faster rate. These data reflect a favorable situation from the point of view
of managerial ability to control costs relative to change on sales volume. This more
desirable percentage may have been the result of one or more factors such as favorable
price-level changes, more effective markup policies or greater efficiency in purchasing.

- An unfavorable tendency is reflected by the fact that trend percentages for selling,
general and administrative expenses increased at a faster rate than the net sales. The
company could have earned more profit if better and more effective control over
operating expenses were instituted.

Illustrative Case No. 3 - Vertical Analysis or Common Size Financial Statements

The percentages here are computed based on the Illustrative Case No.2
Evaluation of the Financial Position

1. The Gilbert Company's statements of financial position showed that there had been substantial
changes in the proportions of current and fixed assets and current and long-term liabilities during
the period from December 31, 2010 to December 31, 2014. The percentages showed a declining
liquidity in the company's assets accompanied by a consistent reduction in liabilities over the
five-year period.

2. It can be observed that Cash balance and accounts receivable as a percentage of total assets
had been increasing while investment in inventory in relation to total assets had been decreasing.
Considering that the volume of sales was increasing, these changes can be viewed as beneficial
to the company.

3. The increase in investment in fixed assets had been financed largely from owners' investment
as indicated in the increasing percentage of equity to total assets.

4. The decreasing percentage of total liabilities to total assets further indicates lesser reliance of
the company from creditors in raising additional capital. This, of course, is favorable as far as
the long-term financial position of the company is concerned because a wider margin of safety
is provided among the creditors.

Evaluation of Profitability

1. Favorable changes could be observed in the gross margin percentage in relation to net sales.
The increase in percentage over the years could be due to improvement in the company's mark-
up policy or better procurement policy.

2. Selling expenses in relation to sales however, show increasing percentages from 2010 to 2014,
while administrative expenses had more or less remained constant. Better control over the
selling expenses should be instituted to further improve the profitability of the company.

3. Decrease in percentage of other expenses to net sales is traceable to the decreasing amount of
notes payable and long-term debts.
It can be concluded that the figures presented will have no meaning without interpreting it.
Financial statement analysis does not end on computation. A good financial manager must be
able to articulate in his financial statement analysis report the relevance and meaning of the
figures computed. Hence, in order to maximize the objectives of this topic, we will not focus
only on computations. The essay part could be challenging for you, but that is the essence of
the topic - to summarize findings based on your analysis and reach conclusions about firm
relevant to your established objectives.

Outline of the Topic

1. Definition of Financial Statement Analysis
2. General Approach in the conducting FS analysis
3. Steps in FS Analysis
4. Review of Basic Financial Statements
5. Discussion of the four techniques of FS analysis:

 Horizontal analysis of Comparative Statements (Increase-Decrease Method)
 Trend Analysis
 Vertical Analysis or Common Size Financial Statements
 Financial Ratios Analysis
6. Illustrative Cases for:

 Horizontal analysis of Comparative Statements (Increase-Decrease Method)
 Trend Analysis
 Vertical Analysis or Common Size Financial Statements

If you have realized, the computation part is essentially procedural. Tiyagaan lang talaga kasi
buong financial statements ang subject ng FS analysis. The challenging part is really on the
interpretation of the figures. But having a good grasp on the nature of the accounts or line item
is a big help for you to have good and sound interpretation of the figures. Ang maganda sa
interpretation part, may kalayaan ka to draw conclusions out of the computed figures, so long as
na-cacapture ng interpretation mo yung important aspects - Short term solvency, long-term
financial position, and profitability. O diba, napakadaming nakatagong kwento at hiwaga ang
financial statements. Sana sa mga susunod na exercises, mahasa pa ang financial analyst
instinct mo. Kaya yan! Kung may di kayo nagets, PM IS THE KEY!

That ends the 1st part of Financial Statements Analysis. The 2nd part is exclusively reserved for
Financial Ratios Analysis.
But before you proceed to Financial Ratios Analysis, try to test your knowledge of the 1st part by
answering the Exercises.

Supplemental Readings:

 https://courses.lumenlearning.com/boundless-finance/chapter/asset-management-
ratios/
 https://www.accountingverse.com/managerial-accounting/fs-analysis/financial-
ratios.html
 https://www.thebalancesmb.com/how-do-you-do-financial-statement-analysis-393235
 https://www.principlesofaccounting.com/chapter-16/statement-analysis/
 https://www.bdc.ca/en/articles-tools/money-finance/manage-finances/pages/financial-
ratios-4-ways-assess-business.aspx