CHAPTER I THE PROBLEM AND ITS BACKGROUND

Introduction Financial statement provides an insight into the business of any organization. This information are processed in the organization and then to the management which further uses this information for the decision making in the organization. Financial statement analysis is useful for managers to arrive at sound decisions, using this analysis, they add a lot in the success and progress of the company. In line with this, as one of the most promising company today in the finance and insurance industry, Metropolitan Bank and Trust Company is the best example of the success of using financial statement analysis as tool for making sound decisions.

Metrobank is making its legacy to be the best banking institution in the Philippines. For the years of its excellence, Metrobank still having its steady growth in the industry and making a lot of expansions and partnerships with other banks and companies. Metrobanks growth and stability had been increasing over the years even if some economical difficulties are arising. This event leads us researchers to study the success of the company, on how they achieve this peak that they are having right now. On how particularly, they formulate better and sound decisions and on how they make use of certain information such as information regarding the financial statements of the company. How their decision makers react on this information. And to better understand the companys steady growth even though lots of economic difficulties are happening.

This study will help in the better understanding of the companys growth, and may also add to the knowledge of some outside parties. It may also show how stable Metrobank is in this industry, and can add some learning not only in the part of us researchers but also in the industry itself. It may also show how Metrobank faces their weaknesses and make use of it to strengthen their business.

Background of the Study Metropolitan Bank and Trust Company also known as Metrobank is now one of the most successful business in the Philippines. In fact, it is now in rank 17 in the list of top 100 corporations in the Philippines. Forty eight years ago, Metropolitan Bank and Trust Company (Metrobank) was established by a group of businessmen on September 5, 1962 at the Wellington Building in Binondo, Manila. In August 1963, the banks first branch was established in Divisoria. Four years later, Metrobank opened its Davao branch, the banks first provincial branch. At the onset of the 70s, Metrobank opened its first international branch in Taipei. Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. This analysis intends to show assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may (1) continue or discontinue its main operation
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or part of its business; (2) make or purchase certain materials in the manufacture of its product; (3) acquire or rent/lease certain machineries and equipment in the production of its goods; (4) issue stocks or negotiate for a bank loan to increase its working capital; (5) make decisions regarding investing or lending capital; and (6) other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. Metropolitan Bank and Trust Company (Metrobank), a finance and insurance company is known for its steady growth and stability. It is also known in the industry as a trustworthy bank and gives a very best service it can possibly give; it is shown by its tag line Youre in good hands. It also provides quality services to its stakeholders and good relationship with its investors and financers. In this study, the Metrobanks decision makers are the respondents, particularly, they are the department heads, accountants, auditors and top and middle management. They are asked by the researchers to answer certain questions regarding their financial statements. This is to gather knowledge about the companys financial stability and to analyze and compare data provided by the financial statement to understand the companys way of using such data to formulate sound decisions. This study may also tackle the problems regarding the use of financial statements such as the limitations encountered. It may also show the relationship of the respondents way of using financial statements in terms of (1) balance sheet; (2) income statement; and (3) cash flow statement, to develop the best decision they can possibly made. This study further tackles the way of the respondents evaluation of some financial analysis such as ratio analysis and comparative analysis. Ratio analysis includes particular ratios like profitability,
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solvency and stability ratios while comparative analysis includes horizontal and vertical analysis. Furthermore, researchers would be able to determine why Metrobank stays stable in the industry even though hardships in economy are arising. How they face limitations and problems, weaknesses and threats and transform it into another way of opportunity.

Theoretical Framework The main documents of the accounting reports are called financial statements. These accounting records of the activities of company provide most of the quantitative data in a summary form which reflect the general financial status of the business and indicate the financial health of company over a given period of time. Accounting records form the basis of action. A general objective of financial statements is to provide reliable financial information about economic resources and obligations of a company. The information is important in evaluating the companys strengths and weaknesses. It indicates how enterprise resources are financed and the patterns of its holdings of sources. It aids in evaluating the enterprise ability to meet its commitments. The information indicates the present resource base available to exploit opportunities and make future progress. In other words, financial statements provide essential information on the resources of the company, not only the obligations, but more importantly, information to be able to come up with sound judgment about the ability of the enterprise to survive, to adopt, to grow, and to prosper in spite of the changing economic conditions.

The balance sheet portrays the financial condition of a business, as reflected in the accounting records at one particular moment of time, usually the close of business on the day indicated by the date of the statements. The balance sheet lists are assets, liabilities, and shareholders equity items. Various types of items are classified on a balance sheet as assets. Some have value in exchange such as cash, while others are in-amortized costs, which will be amortized over their useful lives and which may or may not have exchange value (such as buildings and equipments). Liabilities represent legal obligations of the concern, usually to disburse assets. Shareholders equity items represent the obligation of the concern, as a company to its owner. While ownership entitles the owner to certain right, the liabilities and its owner equity elements in a balance sheet are supposed to represent, collectively, the forms of all claims against the enterprise. The income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the bottom line). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to

show managers and investors whether the company made or lost money during the period
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being reported (http://en.wikipedia.org/wiki/Income_statement, Retrieved September 8, 2010). The income statement of finance and insurance company shows primarily the revenue realized from interest income and non-interest income. Interest income such as interest from bank loans and non-interest income such as fees, commission and brokerage income, dividend income, income from dealing in foreign currencies and other income earned by the company. These are the typical revenue of a finance and insurance company. While expenses incurred by this type of company are the same in other types, expenses incurred are like, administrative expenses, write-offs and other relevant expenses for the period. Cash flow statement also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. (http://en.wikipedia.org/wiki/Cash_flow_statement, Retrieved September 8, 2010). Cash flow statement of a finance and insurance company are the same with the others, it also includes cash flows from operating activities, investing activities and financing activities.

Financial statement analysis (or financial analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Its purpose is to relate the firms balance sheet in its income statement. By means of this financial statement analysis, the firm may decide to whether continue or discontinue its main operation or part of its business, make or purchase certain materials in the manufacture of its product, issue stocks or negotiate for a bank loan to increase its working capital, and decisions regarding investing or lending capital. (http://en.wikipedia.org/wiki/Financial_statement_analysis, 2010). Retrieved September 8, make

External
Assessments of Financial Statements

Financial Analysis
Main Goal

Internal
Improving of financial performance

Open for Public Accounting Statements

Data Source

Any companys data required

Standard

Method

Any required for the task

On comparison with similar companies

Emphasis

On defining dependencies

Company as a whole

Main Object

The whole company, its department, strategies, products. etc.

Figure 1. Classification of Financial Analysis. (Gitman, 2009) Ratio analysis refers to a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis

(http://www.investopedia.com/terms/r/ratioanalysis.asp, Retrieved September 8, 2010). These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and or the income statement. Comparing financial ratios is merely one way of conducting financial analysis. Profitability is the ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income
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statement, which reports on the company's results of operations. Solvency is ability to pay its obligation to creditors and other third parties in the long-term. Stability is the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Comparative analysis such as horizontal analysis and vertical analysis are widely used in determining the growth and stability of the firm. Horizontal analysis is comparing two periods and becomes trend analysis if extended to three or more periods having the earliest year as the base period. It a Observation evaluating a series of data over a is technique for Recommendations: Profile To continue the use o Age; period of time to determine the increase or decrease that has taken place, financial either of express as o Gender; Unstructured statement and o Civil Status; Interview an amount or percentage (Payongayong, 2006). financial analysis in o Highest Educational succeeding years. Attainment; Documentary To continue the o Average Monthly Search good evaluation of Income; Conceptual Framework information o Current Position in Survey provided by the Company; and The study is formulated on the Questionnaire financial statements are analysis. concept that financial the main o Years in Service To take into Statistical Tools Financial Statement documents of the accounting reports. The study used the closed-system approach. The consideration the o Frequency o Balance Sheet risk involved in Distribution o Income Statement system of three frames is composed of inputs which went through the process or decision making o Percentage o Cash Flow where financial o Ranking Statement operation and emerged as the out. analysis is involved. o Weighted Mean Financial Analysis o ANOVA o Ratio Analysis o Comparative o Likert Scale Analysis Limitations of Financial statements o Data provided does not estimate risk tolerance level o Informatio n provided is INPUT PROCESS OUTPUT general in nature Prepared on actual INPUTS PROCESSES OUTPUT basis o Data does not reflect current value of the 9 firm o Ratio analysis is limited to a particular accounting

Feedback Figure 2. Conceptual Paradigm The input contains leading variables regarding the companys financial statements. It includes the profile of the employees, theres evaluation of financial statements and ways of using the financial statements as tool for decision making in
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terms of its effectiveness, the financial analysis and certain limitations that are encountered using financial statements. The second frame contains the process or operations to be used to analyze and gather information about the input variables by making questionnaires and conducting surveys, documentaries, interviews, and statistical tools to weigh the reliability of information. The third is the output. It contains recommendations that the researchers may suggest for improvement of effectiveness using financial statements as tool for decision making. The arrows include the workflow of information in the research process. The feedback loop connects the output to the process involved as well as the input. It made the system continuous.

Statement of the Problem The main concern of this study entitled Financial Statement Analysis of Metropolitan Bank and Trust Company is to analyze how Metrobanks decision makers make use of financial statements as a tool in arriving at sound decisions that affects the performance of the company. Further, the profile of the management and any significant differences between the decision makers and evaluation of financial statements and its financial analysis in terms of ratio and comparative analysis including the limitations experienced using financial statements in decision making are also part of the study. Specifically, the study sought to answer the following questions: 1.0 What is the profile of the decision makers of Metrobank in terms of the following:
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1.1 Age; 1.2 Gender; 1.3 Civil Status; 1.4 Educational Attainment; 1.5 Average Monthly Income; 1.6 Current Position in the Company; and 1.7 Number of Years in Service? 2.0 How do decision makers of Metrobank use the companys financial statement in developing sound decisions, 2.1Balance Sheet; 2.2 Income Statement; and 2.3 Cash Flow Statement? 3.0 How do decision makers of Metrobank evaluate the accounting information provided through the use of particular financial analysis such as: 3.1 Ratio Analysis; and 3.2 Comparative Analysis? 4.0 How do decision makers of Metrobank deals with the limitations experienced by the use of financial statement with respect to: 4.1 Data provided does not estimate risk tolerance level; 4.2 Information provided is general in nature; 4.3 Prepared on actual basis; 4.4 Data does not reflect current value of the firm; and 4.5 Ratio analysis is limited to a particular accounting period?
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5.0 Is there any significant difference between the profile of the decision makers and their: 5.1 Use of financial statements; 5.2 Evaluation of information provided by using financial analysis; and 5.3 Limitations experienced by using financial analysis in developing sound decisions?

Hypothesis The null hypothesis tested is: There is no significant difference between the profile of the respondents such as highest educational attainment, average monthly income, current position in the company and years in service in the company and their: 1. Use of financial statements; 2. Evaluation of information provided by using financial analysis; and 3. Limitations experienced by using financial analysis in developing sound decisions.

Scope and Limitations of the Study This study will look on how the decision makers of Metrobank use the financial statements as a tool for sound decision making. This was conducted to have a greater

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knowledge on how the decision makers of Metrobank react on the information provided by the financial statements. The respondents of the study were composed of 30 employees of Metrobank, they are purposively selected from different departments to answer the questionnaires. The respondents are from different departments such as accounting, internal auditors department, credit department and branch heads. The questionnaires were administered on September 2, 2010 and retrieve three days after the day of the survey. The questionnaires whose content were derived from different managerial accounting books, sample thesis and other materials will be administered to respondents selected through purposive sampling.

Significance of the Study The findings of this study would be beneficial to the following: Owners and Management Staff of the Metropolitan Bank and Trust Company. The findings of this study would give the owners and the management staff of the Metropolitan Bank and Trust Company the opportunity to pinpoint some of their weaknesses and strengths that would serve as bases in mapping out some strategic plans geared towards improving their business operations. Investors. They would be given opportunities to better understand the rapid growth of the company and how it cares about the stability of the company. General Public (Depositors). They would understand the position of the company in terms of its viability and be able to see the profitability of the company.

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Legislators. They would provide relevant inputs to legislators to review and strengthen some provisions of the policies or laws regulating insurance companies that may be found to have loopholes, weaknesses and needs to improved and further defined. Prospective Businessman. The results of the study will give those insights on what to have/do to achieve a financially stable company. Other Researchers. The study will provide the students who are in the future will be conducting further studies related to the present study. It will offer information and reference for those who will be interested to have follow-up research regarding this study.

Definition of Terms For clarity and understanding the following terms are operationally defined to enable the readers to understand their context: Age. It refers to the respondents span of life when the study was conducted whether in the range of below 30, from 30 to 34, from 35 to 39, from 40 up to 44, from 45 up to 49 and from 50 and above. Asset turnover. A measure of profitability that indicates the efficiency which the firm uses its assets to generate sales. Average collection period. A measure of liquidity that indicates the average amount of time needed to collect accounts receivable. Average monthly income. It pertains to the monthly income of the respondents whether in the range of less than P10,000; P10,000 up to less than P15,000; P15,000 up to less than P20,000; P20,000 up to less than P25,000; P25,000 up to less than P30,000 and more than P30,000.
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Balance Sheet. A financial statement that presents firms financial position at a given point in time. Book value per share. A measure of stability that measures the amount per share to receive in case of liquidation Cash flow per share. A measure of stability that measures cash generated internally. Cash flow statement. a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Current position. This refers to the position of the respondents when the study was conducted whether an accountant, an auditor, or a department head. Current ratio. A measure of liquidity that determines the ability of the company to pay short term debts. Debt ratio. A measure of stability that indicates proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt- load. Defensive internal ratio. A measure of liquidity that indicates how many days a company can operate without the access to its non-current (long-term) assets. Equity to debt ratio. A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

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Financial statement analysis. The process of determining financial strengths and weaknesses of a company by establishing strategic relationship between the items of balance sheet, income statement, and statement of cash flows. Fixed asset turnover. Determine the number of times investments in fixed assets are reinvested in sales. Fixed assets to long-term liabilities ratio. Measure the borrowing power of a firm. Highest Educational Attainment. This refers to the respondents degree of learning when the study was conducted. The respondents chose from bachelor, MA units, Masters degree, Doctoral units, and Doctorate. Horizontal Analysis. A technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. Income statement. Also referred as Profit and Loss Statement provides a financial summary of the firms operating results during a specified period. Reports the income and expenses in a given period. Operating ratio. A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Profitability. The relationship between revenues and costs generated by using the firms assets both current and fixed-in productive activities. Profile. In this study, it refers to the respondents classification as to age, sex, civil status, highest educational attainment, average monthly income, current position in the company, and number of years employed.
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Quick (Acid test) Ratio. A measure of liquidity calculated by dividing the firms current assets minus inventory by its current liabilities. Return on assets. Measures the overall effectiveness of management in generating profits with its available assets. Return on equity. Measures the return earned on the common stockholders investment in the firm. Return on sales. Also known as operating profit margin. Ratio used to evaluate a company's operational efficiency. Ratio analysis. A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Receivable turnover. An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Sex. This refers to the classification of respondents according to male or female. Stability. The firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Times interest earned ratio. Measures the ability of the firm to meet its annual interest payments. It also measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
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Trend analysis. An aspect of technical analysis that tries to predict the future movement of a stock based on past data. It is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Vertical analysis. Also known as common-size statement is a technique that expresses each item within a financial statement as a percentage of a relevant total or a base amount.

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