FINANCIAL STATEMENTS PRESENTATION AND ANALYSIS

FOUR BASIC FINANCIAL STATEMENTS

• WHY ARE FINANCIAL STATEMENTS NECESSARY?
A formal way of communicating financial information that can be used by a variety of parties in making economic decisions.
o Internal Users – owners / managers would like to know the progress of their business, they use information
derived from FS in planning and evaluating business activities
o External Users
▪ Investors – whether or not they will put their money in the business, estimate the rate of return on their
investment
▪ Customers – whether or not they can get the services of the business on a particular product or commodity
▪ Employees – whether or not the company can provide the salaries & other benefits they need.
▪ Creditors – whether or not the loans extended to the business can be paid at maturity
▪ Government – can regulate the activities of the business for purposes of taxation & gov’t needed information
▪ Public – contribution of the business to the national economy of the country.
• THE FOUR BASIC FINANCIAL STATEMENTS
o STATEMENT OF FINANCIAL CONDITIONS (Balance Sheet)
o STATEMENT OF PROFIT OR LOSS / STATEMENT OF OPERATIONS (Income Statement)
o STATEMENT OF CHANGES IN EQUITY
o STATEMENT OF CASH FLOWS
• NOTES TO FINANCIAL STATEMENTS – an integral part of financial statements

STATEMENT OF FINANCIAL CONDITION

• An expanded version of the fundamental accounting equation, and thus expresses the dual effect concept of accounting.
ASSETS = LIABILITIES + EQUITY

What the company owns = Who provided the assets? (others or owners)

• It shows the assets or the things owned by the business, liabilities or the debts owed by the business to persons other than
the owner and the equity or investment of the owner of the business.
• It follows that the sum of assets must always equal the sum of liabilities plus owner’s equity
• Main objective: to provide users with useful and reliable information concerning the financial position of the firm as of a
given period.

Forms of Statement of Financial Condition:

1. Account Form – assets placed at the LEFT side and liabilities & owner’s equity at the RIGHT side.
2. Report Form – TOP to BOTTOM arrangement of assets, followed by liabilities and then equity

STATEMENT OF CHANGES IN EQUITY

o To report the changes in each separate component of owners’ equity and in total owners’ equity for a period of time.

EQUITY claims by the owners on the resources of the organization

What affects the equity accounts?
1. Investment - increase
2. Withdrawal - decrease
3. The results of operation: REVENUE – EXPENSES
a. Net Income : Revenues > Expenses - increase
b. Net Loss : Revenues < Expenses - decrease

STATEMENT OF OPERATIONS
• Represents a yardstick of operating performance as well as management’s report card
• Is a statement showing the result of the business operation for a certain period
• It shows the income received by the business and the costs and expenses incurred in realizing that income.

Forms of Statement of Operations:

1. Single-step 2. Multi-step

STATEMENT OF CASH FLOW

• Reflects the sources and uses of cash during an accounting period.
• Provides information about cash receipts and cash payments of an entity during a period.
• Shows specifically where the cash of the hospitality firm has been obtained and how it has been used by management.
• Serves as a summary of the overall CASH OPERATING, INVESTING and FINANCING Activity of the firm.

o The 3 Categories of Cash Flow Activities and Examples of each One

o Examples of cash flows from operating activities:
▪ Cash collections from customers
▪ Cash received for dividends or interest earned
▪ Cash payments to suppliers for inventory purchased for resale to customers
▪ Cash payments to suppliers for raw materials used to manufacture goods
▪ Cash payments to employees for salaries and wages

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 FINANCIAL STATEMENTS PRESENTATION AND ANALYSIS
▪ Cash payments for other operating expenses
▪ Cash payments for interest
▪ Cash payments for taxes
o Examples of cash flows from investing activities:
▪ Cash paid to purchase fixed assets used by the business
▪ Cash paid for investments made by the business
▪ Cash received from the sale of assets used in the business
▪ Cash received from the sale of assets used in the business
▪ Cash received from the sale of business investments
o Examples of cash flows from financing activities:
▪ Cash received from borrowing
▪ Cash used to pay back a loan
▪ Cash invested by the owner cash distributed to the owner

METHODS OF PRESENTING STATEMENT OF CASH FLOWS:

1. Direct method 2. Indirect method

FINANCIAL STATEMENT ANALYSIS

COMMON-SIZE STATEMENTS – a separate financial statements that reports only PERCENTAGES. It can be used to compare
companies of different sizes
1. Common-size income statement – each item is expressed as a percentage of net sales amount
2. Common-size balance sheet – each item is expressed as a percentage of total assets or the sum of the total liabilities and
equity

TOOLS OF FINANCIAL STATEMENT ANALYSIS

1. Horizontal Analysis – (trend analysis) is a technique for evaluating a series of financial statement data over a period of time.
Its purpose is to determine the INCREASE or DECREASE that has taken place, expressed as either an amount or a percentage
2. Vertical Analysis – is a technique for evaluating financial statement data that expresses each item in a financial statement
in terms of a percent of a base amount
3. Ratio Analysis – expresses the relationship among selected items of financial statement data

FINANCIAL CHARACTERISTICS OF A COMPANY THAT MUST BE EVALUATED

1. Liquidity - measuring the ability to pay current liabilities. It is also used to evaluate management’s current operating efficiency
2. Profitability
3. Solvency – measure the ability of the company to survive over a long period of time. Long-term creditors and shareholders are
interested in the long-run solvency, particularly its ability to pay interest as it comes due and to repay the principal of the debt
at maturity.
4. Operating Performance – measure the effective utilization of the firm’s assets while relating business success to the company’s
ability to generate revenues and control expenses

LIQUIDITY
ANALYSIS DEFINITION
WORKING The amount of capital
CAPITAL used to run day-to-day
business operations. It is
necessary to finance a
company’s cash
conversion cycle.
CURRENT Describes the ability of a
RATIO company to meet current
debt obligations with
assets that are readily
available (short-term debt
paying capacity)
QUICK Serve as a reflection of
RATIO the firm’s ability to pay its
current liabilities by
converting its most liquid
assets into cash. Quick
assets include cash, short-
term investments and
receivables
ACCOUNTS Measures the company’s
RECEIVABLE ability to collect from
TURNOVER credit customers. It
indicates the number of
INDICATOR FOR INDUSTRY FORMULA
LOW WC – the business could ❖ Current Assets less Current
have problems meeting current Liabilities
debt obligation
IDEAL – CA x 1 or x 2 of CL Current Assets P 50,580.00
HIGH WC – indicate ineffective Current Liabilities - ( 23,085.00)
management since CA seldom Working capital P 27,495.00
yield returns as great as long-
term assets
LOW CR – indicate potential ❖ Current Assets divided by
financial trouble Current Liabilities
NORMAL – 1:1 up to 2:1
HIGH CR – may point to poor Current Assets P 50,580.00
management if it reflects an Current Liabilities - / 23,085.00
excessive amount of cash or too Current Ratio 2.19:1
large receivables or investment
in inventories (unproductive use
of assets)
NORMAL - 0.9:1 to 1:1 ❖ Quick Assets divided by
LEVERAGE Current Liabilities
Quick Assets P 29,234.00
Current Liabilities - / 23,085.00
Current Ratio 1.27:1
LOW ArTO – lower 15x ❖ Net credit sales divided by
NORMAL -15 x to 30x or Average Net Accounts
between 12 & 24 days( the more Receivable

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times that the average successfully the business collects Net Credit Sales P 310,513.00
balance of accounts cash) Average Net AR - / 10,072.50
receivable is collected HIGH ArTO – the credit is too A/R turnover 30.83 times
during the period. tight, causing the loss of sales to
good customers

AGE OF Provides a rough
RECEIVABLES approximation of the
average time that it takes
to collect receivables
The general rule is that the ❖ 365 days divided by Average
collection period should not Accounts Receivable Turnover
materially exceed the credit
period Days in a year 365 days
A/R Turnover - / 30.83
Ave. age of receivables 12 days

PROFITABILITY
ANALYSIS DEFINITION INDICATOR FOR HOSPITALITY FORMULA
INDUSTRY
RETURN Measure of Above average industry ❖ (Net income + Interest Expenses
ON TOTAL management’s divided by Average Total Assets
ASSETS efficiency in using its NIBI P 9,595.00
assets to earn profits Ave. Total Assets - / 76,901.50
ROTA 12.48%

RETURN Measure of profitability Above average industry = 18% ❖ (Net income divided by Average
ON EQUITY from the standpoint of Equity
current and prospective NI P 8,395.00
investors Ave. Equity - / 51,016.50
ROTA 16.45%
PROFIT Expresses net income Above average industry ❖ Net income divided by Net sales
MARGIN per peso of sale. It
serves as an indication NI P 8,395.00
of the magnitude of Net sales - / 159,513.00
protection against PM 5.26%
future losses resulting
from decreases in sales
revenue or increases in
costs

SOLVENCY
ANALYSIS DEFINITION INDICATOR FOR HOSPITALITY FORMULA
INDUSTRY
TIMES Measure of how readily a NORMAL – between 2 and 5 ❖ Income before interest
INTEREST company can meet interest times expenses and income
EARNED payments with profit earned from taxes divided by Annual
operations. It indicates the margin interest expenses
of safety provided by current
earnings in meeting the
company’s interest
responsibilities
DEBT-TO- Is an expression of the creditors’ NORMAL – 1:1 to 2:1 ❖ Total Liabilities divided
EQUITY RATIO financing in relation to owners’ (showing that 50% of their by Total Equity
financing financing has been provided by TL –P 24,395.00
creditors and the remaining 50% TE / 63,429.00
by owners) D2ER .38:1
DEBT-TO- Shows the percentage of the HIGH RATIO – indicate that a ❖ Total Liabilities divided
TOTAL ASSETS company’s assets financed by company has financed a large by Total Assets
RATIO debt portion of assets with debt TL –P 24,295.00
TA / 87,824.00
D2AR 28%

OPERATING PERFORMANCE
ANALYSIS DEFINITION
INVENTORY Show how rapidly goods (food and
TURNOVER beverage) are being sold and
replaced during the period
The main factors that affect the
food and beverage inventory
turnovers are:
1. Sales forecasting
2. Purchasing policies
3. Control procedures
INDICATOR FOR
HOSPITALITY INDUSTRY
LOW – overbuying, poor
sales forecasting, waste,
spoilage or pilferage
HIGH – can lead to
dissatisfied customers if
the firm runs out of
inventory items
constantly
FORMULA
❖ Cost of sales divided by
Average inventory
Cost of F&B sold -P36,922.00
Ave. Inventory - / 7,727.00
Inventory Turnover 4.78 x
❖ Average days = 76 days
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4. Property location Example of low inventory

5. Type of operation turnover but consider
6. Perishable nature of food normal for hotel &
inventory restaurants
a. Wines & spirits
(7 to 9 x a year)
COST Measure the relative efficiency of ❖ Cost of sales divided by
PERCENTAGES the food and beverage operations Sales
by relating the cost of food or Cost of sales P 39,845.00
beverages sold to the revenues Sales / 100,950.00
generated from the sale of food or Cost % 39.47%
alcoholic beverages
OPERATING Measures the speed of the business ❖ Age of inventories + Age
TURNOVER cycle, the number of days cash was of receivables
invested in the normal business
operations until it was recovered
back

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