Financial Analysis

and Accounting
Basics
Prince Arvic M. Victorio
FINANCIAL ANALYSIS
IS THE PROCESS OF
EVALUATING BUSINESSES,
PROJECTS, BUDGETS, AND
OTHER FINANCE-RELATED
TRANSACTIONS TO DETERMINE
THEIR PERFORMANCE AND
SUITABILITY.
TYPES OF FINANCIAL ANALYSIS

FUNDAMENTAL ANALYSIS
● Uses ratios gathered from data within the
financial statements, such as a company's
earnings per share (EPS), in order to
determine the business's value.

● The end goal is to arrive at a number that

an investor can compare with a security's
current price in order to see whether the
security is undervalued or overvalued.
TYPES OF FINANCIAL ANALYSIS

TECHNICAL ANALYSIS
● Uses statistical trends gathered from
trading activity, such as moving averages
(MA).

● Attempts to understand the market

sentiment behind price trends by looking
for patterns and trends rather than
analyzing a security’s fundamental
attributes.
TYPES OF FINANCIAL ANALYSIS

HORIZONTAL VS. VERTICAL ANALYSIS

• Horizontal analysis entails selecting several years of comparable financial
data. One year is selected as the baseline, often the oldest. Then, each
account for each subsequent year is compared to this baseline, creating a
percentage that easily identifies which accounts are growing (hopefully
revenue) and which accounts are shrinking (hopefully expenses).

• Vertical analysis entails choosing a specific line item benchmark, then

seeing how every other component on a financial statement compares to
that benchmark. Most often, net sales is used as the benchmark. A
company would then compare cost of goods sold, gross profit, operating
profit, or net income as a percentage to this benchmark. Companies can
then track how the percent changes over time.
 FINANCIAL
ACCOUNTING
IS THE PROCESS OF EVALUATING
BUSINESSES, PROJECTS, BUDGETS,
AND OTHER FINANCE-RELATED
TRANSACTIONS TO DETERMINE THEIR
PERFORMANCE AND SUITABILITY.
 ELEMENTS OF BOOK-KEEPING
ASSETS LIABILITIES OWNER’S
• ECONOMIC
RESOURCES OWNED EQUITY
BY THE BUSINESS
FOR FUTURE GAIN
• PROPERTY AND
RIGHTS OF VALUE
OWNED BY THE
BUSINESS

INCOME EXPENSES
ASSETS (CURRENT / NON-CURRENT)
1 CURRENT ASSETS
● CASH
● CASH EQUIVALENTS
● MARKETABLE SECURITIES
● TRADE AND OTHER RECEIVABLES (ACCOUNTS
RECEIVABLES, NOTES RECEIVABLE, INTEREST
RECEIVABLE, ADVANCES TO EMPLOYEES, ACCRUED
INCOME)
● INVENTORIES
● PREPAID EXPENSES
● CONTRA-ASSET ACCOUNTS (ALLOWANCE FOR BAD
DEBTS, ACCUMULATED DEPRECIATION)
ASSETS (CURRENT / NON-CURRENT)
2 NON-CURRENT ASSETS
● LONG-TERM INVESTMENTS
● PROPERTY, PLANT, AND EQUIPMENT
(LAND, BUILDING, EQUIPMENT,
FURNITURE AND FIXTURES,
INTANGIBLE ASSETS)
 ELEMENTS OF BASIC ACCOUNTING
ASSETS LIABILITIES OWNER’S
INCLUDE DEBTS,
• ECONOMIC
RESOURCES OWNED
•
OBLIGATIONS TO
EQUITY
BY THE BUSINESS
FOR FUTURE GAIN PAY, AND CLAIMS OF
• PROPERTY AND THE CREDITORS ON
RIGHTS OF VALUE THE ASSETS OF THE
OWNED BY THE BUSINESS
BUSINESS

INCOME EXPENSES
 LIABILITIESS (CURRENT / NON-CURRENT)
1 CURRENT LIABILITIES
● ACCOUNTS PAYABLE
● NOTES PAYABLE
● LOAN PAYABLE
● UTILITIES PAYABLE
● UNEARNED REVENUES
● ACCRUED LIABILITIES (SALARIES PAYABLE, UTILITIES
PAYABLE, TAXES PAYABLE, INTEREST PAYABLE)

2 NON-CURRENT LIABILITIES
● MORTGAGE PAYABLE
● BONDS PAYABLE
 ELEMENTS OF BOOK-KEEPING
OWNER’S
ASSETS LIABILITIES
• • INCLUDE DEBTS,
EQUITY
ECONOMIC • INCLUDES THE INTEREST OF
RESOURCES OWNED OBLIGATIONS TO PAY, THE OWNER ON THE
BY THE BUSINESS FOR AND CLAIMS OF THE BUSINESS, CLAIMS OF THE
FUTURE GAIN CREDITORS ON THE OWNER ON THE ASSETS OF
• PROPERTY AND RIGHTS ASSETS OF THE THE BUSINESS, AND THE
OF VALUE OWNED BY BUSINESS INVESTMENT OF THE OWNER
THE BUSINESS PLUS OR MINUS THE RESULTS
INCOME EXPENSES •
OF OPERATIONS
COMES FROM TWO MAIN
• REFERS TO THE • ARE COSTS OR CHARGES SOURCES-INVESTMENT OF
REVENUES EARNED OR INCURRED IN THE OWNER AND EARNINGS OF THE
GENERATED BY THE PROCESS OF BUSINESS
BUSINESS IN GENERATING OR
PERFORMING SERVICES EARNING REVENUE
FOR A CUSTOMER OR
CLIENT
● CAPITAL
OWNER’S EQUITY
● DRAWING
● INCOME SUMARY

● SERVICE INCOME
INCOME
EXPENSES
● SALARIES OR WAGES EXPENSE
● UTILITIES EXPENSE
● SUPPLIES EXPENSE
● INSURANCE EXPENSE
● DEPRECIATION EXPENSE
● UNCOLLECTIBLE ACCOUNTS EXPENSE / DOUBTFUL ACCOUNTS EXPENSE /
BAD DEBTS EXPENSE
BASIC ACCOUNTING EQUATION
SHOWS THE RELATIONSHIP OF THE BASIC
ACCOUNTING ELEMENTS: ASSETS, LIABILITIES,
AND OWNER'S EQUITY.

ASSETS LIABILITIES OWNER’S

EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY
 EXAMPLES
GIVEN LIABILITIES OF P50,000 AND THE OWNER'S EQUITY OF P150,000, FIND THE
VALUE OF ASSETS.
SOLUTION:
ASSETS = LIABILITIES + OWNER'S EQUITY
= P50,000 + P150,000
= P200,000

GIVEN ASSETS OF P180,000 AND THE OWNER'S EQUITY OF P110,000, FIND THE LIABILITIES.
SOLUTION:
LIABILITIES = ASSETS - OWNER'S EQUITY
= P180,000 - P110,000
= P70,000

GIVEN ASSETS OF P250,000 AND LIABILITIES OF P90,000, FIND THE OWNER'S EQUITY.
SOLUTION:
OWNER'S EQUITY = ASSETS - LIABILITIES
= P250,000 - P90,000
= P160,000
TYPES OF BUSINESS TRANSACTIONS
ALL BUSINESS TRANSACTIONS RESULT IN AT LEAST TWO
CHANGES TO THE BOOKKEEPING EQUATION. IN OTHER
WORDS, A TRANSACTION THAT CHANGES A BUSINESS’S
ASSETS MUST ALSO CHANGE THAT BUSINESS’S LIABILITIES
OR OWNER’S EQUITY.

● IF A BUSINESS’S ASSETS INCREASE, THEN THERE MUST

ALSO BE AN INCREASE IN EITHER LIABILITIES OR OWNER’S
EQUITY.
● IF A BUSINESS’S ASSETS DECREASE, SO MUST EITHER ITS
LIABILITIES OR ITS OWNER’S EQUITY.
 EXAMPLE
BUSINESS X HAS P5,000,000 WORTH OF ASSETS, WHICH IS EQUAL TO
P2,000,000 WORTH OF LIABILITIES PLUS P3,000,000 WORTH OF NET
ASSETS.

ASSETS = LIABILITIES + OWNER’S EQUITY

5,000,000 = 2,000,000 + 3,000,000

BUSINESS X THEN BORROWS P2,000,000 FROM THE BANK. THIS IS A LIABILITY, BECAUSE
IT IS A DEBT OWED TO THE BANK.
THUS:

ASSETS = LIABILITIES + OWNER’S EQUITY

5,000,000 = 2,000,000 + 3,000,000
2,000,000 = 2,000,000 + 0
7,000,000 = 4,000,000 + 3,000,000
 EXAMPLE
LATER, BUSINESS X RECEIVES A 5,000,000 GRANT. THIS IS A NEW
ASSET, AS IT IS AN ITEM OF VALUE NOW OWNED BY THE BUSINESS.
THE NEW EQUATION WOULD BE:

ASSETS = LIABILITIES + OWNER’S EQUITY

7,000,000 = 4,000,000 + 3,000,000
5,000,000 = 0 + 5,000,000
12,000,000 = 4,000,000 + 8,000,000
BUSINESS X DECIDES TO PAY BACK HALF OF THE AMOUNT IT OWES THE BANK
(1,000,000). THE NEW EQUATION IS:

ASSETS = LIABILITIES + OWNER’S EQUITY

12,000,000 = 4,000,000 + 8,000,000
1,000,000 = 1,000,000 + 0
11,000,000 = 3,000,000 + 8,000,000
 RULES FOR DEBIT AND CREDIT
YOU DEBIT TO SHOW:
● INCREASE IN ASSETS
● DECREASE IN LIABILITIES
● DECREASE IN OWNER’S EQUITY
(OWNER’S WITHDRAWAL, EXPENSES)

YOU CREDIT TO SHOW:

● DECREASE IN ASSETS
● INCREASE IN LIABILITIES
● INCREASE IN OWNER’S EQUITY (INITIAL
INVESTMENT, ADDITIONAL INVESTMENT,
REVENUE/INCOME)
DEBIT CREDIT
ASSETS = LIABILITIES + OWNER’S EQUITY
DEBIT CREDIT
• ASSETS (↑) • ASSETS (↓)
• LIABILITIES (↓) • LIABILITIES (↑)
• OWNER’S • OWNER’S
EQUITY (↓) EQUITY (↑)
 EXAMPLE
INITIAL INVESTMENT
MAY 2 GISEL ONG LOVES TO WATCH ANIME. SHE DRAWS POSTERS OF
COLORFUL ANIME CHARACTERS. SOMETIMES SHE DISPLAYS THEM IN HER
OFFICE. TO HER SURPRISE, MANY ANIME FANS BUY HER DRAWINGS AND
PAINTINGS AND PLACE SPECIAL ORDERS FOR ANIME CHARACTERS OF THEIR
CHOICE. THUS, GISEL DECIDED TO OPEN ANIME WORLD GALLERY. GISEL
INVESTED P300,000 IN THIS INITIAL ENDEAVOR.

ANALYSIS: ASSETS INCREASED. OWNER'S EQUITY INCREASED.

RULES: DEBIT INCREASES IN ASSETS. CREDIT INCREASES IN OWNER'S
EQUITY.
ENTRY: INCREASE IN ASSETS IS RECORDED BY A DEBIT TO CASH. INCREASE
IN OWNER'S EQUITY IS RECORDED BY A CREDIT TO ONG, CAPITAL.

Dr Cr

Cash (A) 300,000

Ong, Capital (OE) 300,000
Initial investment
 EXAMPLE
ACQUISITION OF OFFICE EQUIPMENT FOR CASH
MAY 5 MS. ONG ACQUIRED OFFICE EQUIPMENT TO BE USED FOR THE
OFFICE PAYING P180,000 IN CASH.

ANALYSIS: AN ASSET INCREASED. ANOTHER ASSET DECREASED.

RULES: DEBIT INCREASES IN ASSETS. CREDIT DECREASES IN ASSETS.
ENTRY: INCREASE IN ASSETS IS RECORDED BY A DEBIT TO OFFICE
EQUIPMENT. DECREASE IN ASSETS IS RECORDED BY A CREDIT TO
CASH.

Dr Cr
Office Equipment (A) 180,000
Cash (A)
180,000
Purchased office equipment for cash
 EXAMPLE
PURCHASE OF ART SUPPLIES ON ACCOUNT
MAY 8 THE P7,200 WORTH OF ART SUPPLIES ORDERED FROM NATIONAL
BOOK STORE WERE DELIVERED ON ACCOUNT.

ANALYSIS: ASSETS INCREASED. LIABILITIES INCREASED.

RULES: DEBIT INCREASES IN ASSETS. CREDIT INCREASES IN
LIABILITIES.
ENTRY: INCREASE IN ASSETS IS RECORDED BY A DEBIT TO ART
SUPPLIES. INCREASE IN LIABILITIES IS RECORDED BY A CREDIT TO
ACCOUNTS PAYABLE.

Dr Cr
Art Supplies (A) 7,200
Accounts Payable (L)
7,200
Purchased art supplies on account
THANK YOU