ANALYSIS AND INTERPRETATION OF

FINANCIAL STATEMENTS
INTENDED LEARNING OUTCOMES

• Define the measurement levels – liquidity, solvency, stability and

profitability
• Perform vertical and horizontal analysis of financial statements of a single
proprietorship
• Compute and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turn-over, deb-to-equity ratio.
Financial statement analysis - is the process of evaluating risks, performance,
financial health, and future prospects of a business by subjecting financial
statement data to computational and analytical techniques with the objective of
making economic decisions.
There are three kinds of FS analysis techniques:
• Horizontal analysis
• Vertical analysis
• Financial ratios

Objectives of Financial Analysis

• Reviewing the performance of a company over the past periods.
• Assessing the current position and operational efficiency
• Predicting growth and profitability prospects
• Loan Decision by financial Institutions and Banks.
 Horizontal Analysis
analyzes the trend of the company’s financials over
a period of time. Each line items shows the
percentage change from the previous period.

PESO CURRENT YEAR BASE YEAR

CHANGE FIGURE FIGURE

PERCENTAGE PESO CHANGE

CHANGE BASE YEAR FIGURE 100 %
 MAESTRO MERCHANDISING ENTERPRISES
COMPARATIVE STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2020
2020 2019 VARIANCE %
ASSETS
CASH 235,000 185,000 50,000 27.03%
ACCOUNTS RECEIVABLE 355,000 300,000 55,000 18.33%
INVENTORY 476,350 348,815 132,835 38.64%
TOTAL CURRENT ASSETS 1,066,350 828,815 237, 535 28.66%
FIXED ASSETS 847,450 900,000 (52,550) (5.8 %)
TOTAL ASSETS 1,913,800 1,728,815 184,985 10.70%
LIABILITIES & OWNER’S EQUITY
ACCOUNTS PAYABLE 115,500 177,745 (62,245) (35.02%)
ACCRUED LIABILITIES 17,385 25,155 (7,770) (30.00%)
TOTAL CURRENT LIABILITIES 132,885 202,900 (70,015) (34.51%)
NOTES PAYABLE 800,000 900,000 (100,000) (11.11%)
TOTAL LIABILITIES 932,885 1,102,900 (170,015) (15.41%)
OWNER’S CAPITAL 980,915 625,915 355,000 56.71%
TOTAL LIABILITIES & OWNER’S EQUITY 1,913,800 1,728,815 184,985 10.70%
 MAESTRO MERCHANDISING ENTERPRISES
COMPARATIVE INCOME STATEMENT
FOR THE YEAR 2020
2020 2019 VARIANCE %

SALES 3,000,000 2,500,000 500,000 20.0%

COST OF GOOD SOLD (1,600,000) (1,400,0000 (200,000) (14.0%)
GROSS MARGIN 1,400,000 1,100,000 300,000 27.0%
OPERATING EXPENSES
SALRIES WAGES EXPENSE ( 575,000) ( 450,000) (125,000) ( 27.0%)
OFFICE RENT EXPENSE (180,000) (150,000) (30,000) (20.0%)
SUPPLIES EXPENSE (50,000) (40,000) (10,000) (25.0%)
UTILIEXPENSETIES ( 130,000) (100,000) (30,000) (30.0%)
OTHER EXPENSES (110,000) (90,000) (20,000) (22.2%)
NET PROFIT 355,000 270,000 105,000 38.9%
 Vertical Analysis
It compares the relationship between a single
item on the Financial Statements to the total
transactions within one given period. It also
shows the percentage of change since the last
period. It can be performed both an income
statement and a balance sheet.
BALANCE BS ITEM
SHEET TOTAL ASSETS/LIAB 100 %

INCOME IS ITEM
STATEMENT TOTAL SALES 100 %
 MAESTRO MERCHANDISING ENTERPRISES
COMPARATIVE STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2020
2020 % 2019 %
ASSETS
CASH 235,000 12.28% 185,000 10.70%
ACCOUNTS RECEIVABLE 355,000 18.55% 300,000 17.35%
INVENTORY 476,350 24.89% 348,815 20.18%
TOTAL CURRENT ASSETS 1,066,350 55.72% 828,815 47.94%
FIXED ASSETS 847,450 44.28% 900,000 52.06%
TOTAL ASSETS 1,913,800 100,000% 1,728,815 100%
LIABILITIES & OWNER’S EQUITY
ACCOUNTS PAYABLE 115,500 6.04% 177,745 10.28%
ACCRUED LIABILITIES 17,385 0.91% 25,155 1.46%
TOTAL CURRENT LIABILITIES 132,885 6.95 202,900 11.74%
NOTES PAYABLE 800,000 41.80% 900,000 52.06%
TOTAL LIABILITIES 932,885 48.75% 1,102,900 63.80%
OWNER’S CAPITAL 980,915 51.25% 625,915 36.20%
TOTAL LIABILITIES & OWNER’S EQUITY 1,913,800 100% 1,728,815 100%
 MAESTRO MERCHANDISING ENTERPRISES
COMPARATIVE INCOME STATEMENT
FOR THE YEAR 2020
2020 % 2019 %

SALES 3,000,000 100% 2,500,000 100%

COST OF GOOD SOLD (1,600,000) 53.33% (1,400,000) 56%
GROSS MARGIN 1,400,000 46.67% 1,100,000 44%
OPERATING EXPENSES
SALRIES WAGES EXPENSE ( 575,000) 19.17% ( 450,000) 18%
OFFICE RENT EXPENSE (180,000) 6% (150,000) 6%
SUPPLIES EXPENSE (50,000) 1.67% (40,000) 1.6%
UTILIEXPENSETIES ( 130,000) 4.33% (100,000) 4%
OTHER EXPENSES (110,000) 3.67% (90,000) 3.6%
TOTAL EXPENSES 1,045,000 34.83% 830,000 33.2%
NET PROFIT 355,000 11.83% 270,000 10.8%
 PRACTICE TEST
LOVIE STORE
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2020 LOVIE STORE
2020 2019 STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD OF 2020
CASH 110,000 87,400
2020 2019
ACCOUNTS RECEIVABLE 90,000 69,920
SALES 810,000 686,000
INVENTORY 129,000 218,500
COGS 348,300 301,750
PREPAID RENT 12,000 4,370
GROSS PROFIT 461,700 384,250
DELIVERY VAN 550,000 493,810
TOTAL ASSETS 891,000 874,000
OPERATING EXPENSE 234,900 205,800
INTEREST EXPENSE 40,500 17,150
ACCOUNTS PAYABLE 75,000 67,298
NET INCOME 186,300 161,300
LOAN PAYABLE 400,000 393,300
LOVIE CAPITAL 416,000 413,402
TOTAL LIABILITIES AND 891,000 874,000
EQUITY