Topic 7: Tools in Financial Analysis and Planning

Prepare by: Mrs. Catherine U. Malig, MBA

• Financial Statement Analysis is a crucial process that helps businesses understand their financial
performance over a given period. In the Philippines, companies are required to prepare financial
statements in accordance with the Philippine Financial Reporting Standards (PFRS) to ensure accuracy
and consistency in financial reporting. Financial statement analysis includes the examination of financial
statements such as the balance sheet, income statement, and cash flow statement to evaluate the financial
position, profitability, and liquidity of the company. Financial ratios such as liquidity ratios, profitability
ratios, and solvency ratios are commonly used in financial statement analysis to evaluate the financial
performance of a company in the Philippines.

• Funds analysis is a financial analysis technique that helps companies determine the sources and uses of
funds. It involves analyzing the financial statements of a company to determine the inflow and outflow
of funds. In the Philippines, funds analysis is important for companies to manage their financial
resources effectively. This analysis involves examining the sources of funds such as equity and debt and
the uses of funds such as investments in assets, repayment of debt, and payment of dividends. By
analyzing funds, companies can make informed decisions about financing options and determine
whether they have enough funds to meet their obligations.

• Cash flow analysis is an essential tool for businesses to manage their cash flow effectively. It involves
analyzing the inflow and outflow of cash from the operating, investing, and financing activities of the
company. By examining the cash flow statement, companies in the Philippines can identify cash flow
problems and take corrective measures to improve their cash position. The cash flow analysis is also
important for assessing a company's ability to generate cash to meet its financial obligations and invest
in new opportunities.

• Financial planning is a critical process that helps businesses achieve their financial goals. In the
Philippines, financial planning involves setting financial goals and developing strategies to achieve
them. Financial planning includes creating budgets, analyzing cash flows, forecasting financial
statements, and identifying potential financial risks. Financial planning helps companies in the
Philippines make informed decisions about investments, financing, and other financial activities that can
impact their financial performance. By conducting financial planning, businesses can improve their
financial performance, reduce risks, and achieve their long-term financial goals.

Funds Analysis:
PAS 1 - Presentation of Financial Statements PAS 36 - Impairment of Assets
PFRS 7 - Financial Instruments: Disclosures PAS 39 - Financial Instruments: Recognition and
Measurement
PAS 16 - Property, Plant and Equipment
PAS 40 - Investment Property
Cash Flow Analysis:
PAS 1 - Presentation of Financial Statements PAS 36 Impairment of Assets -
PAS 7 Statement of Cash Flows - PAS 39 - Financial Instruments: Recognition and
Measurement
PAS 16 - Property, Plant and Equipment
PAS 40 Investment Property

Financial Analysis:
PAS 1 Presentation of Financial Statements PAS 39 - Financial Instruments: Recognition and
Measurement
PAS 16 - Property, Plant and Equipment
PAS 40 Investment Property
PAS 36 Impairment of Assets
PAS 41 - Agriculture
PAS 38 Intangible Assets
These standards provide guidance on the presentation and recognition of assets, liabilities, equity,
income and expenses in the financial statements, including the analysis of a company's financial performance.

Financial Planning:
PAS 1 Presentation of Financial Statements
PAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors
PAS 10 Events after the Reporting Period
PAS 21 The Effects of Changes in Foreign Exchange Rates
PAS 32 Financial Instruments: Presentation

PAS 39 - Financial Instruments: Recognition and Measurement

PAS 40 Investment Property
PFRS 9 Financial Instruments

These standards provide guidance on the preparation of financial plans, including the selection and
application of accounting policies, the treatment of events after the reporting period, and the recognition and
measurement of financial instruments and investment property.
ABC Corporation is a manufacturing company in the Philippines. Below are the summarized financial
statements of the company for the year ended December 31, 2022.

Balance Sheet
Assets:
Cash P500,000
Accounts receivable 1,000,000
Inventory 1,500,000
Total Assets P3,000,000
Liabilities and Equity
Liabilities:
Accounts Payable P500,000
Notes payable 1,000,000
Total Liabilities P1,500,000
Equity
CS P1,000,000
Retained earnings 500,000
Total equity P1,500,000
 Income Statement
Revenue P5,000,000
Cost of Goods Sold 3,000,000
Gross profit P2,000,000
Operating expenses 1,500,000
Net Income P500,000

Help me compute the liquidity ratio and analyze them.

ABC Corporation is a manufacturing company in the Philippines. Below are the summarized financial
statements of the company for the year ended December 31, 2022.

ABC Corporation is a manufacturing company in the Philippines. Below are the summarized financial
statements of the company for the year ended December 31, 2022.

Liquidity Ratios:
Current Ratio = Current Assets / Current Liabilities = PHP 3,000,000 / PHP 500,000
=6
Quick Ratio = (Current Assets - Inventory) / Current Liabilities = (PHP 3,000,000 - PHP 1,500,000) / PHP
500,000
=3
Profitability Ratios:
Gross Profit Margin = Gross Profit / Revenue = 0.40 or 40%
= PHP 2,000,000 / PHP 5,000,000
Net Profit Margin = Net Income / Revenue = PHP 500,000 / PHP 5,000,000 = 0.10 or 10%
Solvency Ratios:
= PHP 1,500,000 / PHP 1,500,000
Debt-to-Equity Ratio = Total Liabilities / Total Equity = 1
ABC Corporation is a manufacturing company in the Philippines. Below are the summarized financial
statements of the company for the year ended December 31, 2022.

Based on the above ratios, we can infer that ABC Corporation has good
liquidity and profitability, but its debt-to-equity ratio indicates that it has a
moderate level of debt relative to equity.

XYZ Corporation is a retail company in the Philippines. Below are the summarized financial statements of the
company for the year ended December 31, 2022.

Balance Sheet
Assets:
Cash P1,000,000
Accounts receivable 1,500,000
Inventory 2,000,000
Total Assets P4,500,000
Liabilities and Equity
Liabilities:
Accounts Payable P1,500,000
Short term loans payable 500,000
Notes payable 1,000,000
Total Liabilities P3,000,000
Equity
CS P1,000,000
Retained earnings 500,000
Total equity P1,500,000
Help me do the fund analysis.

Illustration: Funds Analysis

Using the above financial statements, we can compute the sources and uses of funds as follows:
Sources of Funds:
Total Liabilities: P3,000,000
Equity: P1,500,000
Analysis:
Total Sources of Funds: P4,500,000
Based on the sources and uses of funds analysis, we
Uses of Funds:
can infer that XYZ Corporation is financing its
Cash: PHP 1,000,000 operations through a combination of debt and
equity. The company is using most of its funds to
Accounts Receivable: PHP 1,500,000
maintain its inventory, which is a key component of
Inventory: PHP 2,000,000 its business.
Total Uses of Funds: PHP 4,500,000

Illustration: Cashflow Analysis

ABC Corporation is a service company in the Philippines. Below are the summarized cash flow statements of
the company for the year ended December 31, 2022.

Cash from Operating Activities:

Cash Collections from Customers: P 2,500,000 Cash from Financing Activities:

Cash Payments to Suppliers: P1,000,000 Proceeds from Long-term Debt: PHP 1,000,000

Cash Payments for Operating Expenses: P 1,200,000 Payment of Short-term Debt: PHP 500,000

Net Cash from Operating Activities: P 300,000 Net Cash from Financing Activities: PHP 500,000

Cash from Investing Activities: Net Increase in Cash: PHP 300,000

Purchase of Property, Plant and Equipment: P 500,000 Cash at Beginning of Year: PHP 200,000

Net Cash Used in Investing Activities: P 500,000 Cash at End of Year: PHP 500,000
Using the above cash flow statement, we can compute the following cash flow ratios:
Operating Cash Flow Ratio = Net Cash from Operating Activities / Current Liabilities
= P 300,000 / (P 1,000,000+ P 500,000)
Analysis: Based on the above ratios,
= 0.20 or 20% we can infer that ABC Corporation is
Free Cash Flow = Operating Cash Flow - Capital Expenditures generating positive operating cash
flows, but its free cash flow is negative
P 300,000 P 500,000
due to the high level of capital
= -P 200,000 expenditures.

Relevance to the business:

1. Operating Cash Flow Ratio is also known as the cash flow coverage ratio. It measures a company's ability to
generate cash from its operations to cover its current liabilities. It is an important financial metric that can
provide insight into a company's liquidity, financial health, investment opportunities, and relative performance
within its industry.
The higher the ratio the better since the company has sufficient cash flow from operations to cover its current
liabilities, which may help reduce the risk of default or bankruptcy.
2. Free cash flow (FCF) is an important financial metric that measures the cash flow available to a company
after it has paid for all of its capital expenditures like investments in property, plant, and equipment which are
necessary to maintain its operations.
It is a valuable metric for assessing a company's financial performance, evaluating investment opportunities,
and forecasting future cash flows.
If a company has positive FCF, it has cash available to invest in growth opportunities or return to shareholders
through dividends or share repurchases. Negative FCF, on the other hand, may indicate that a company is not
generating enough cash to fund its operations and growth.

Illustration: Financial Planning

ABC Corporation is a new startup company in the Philippines. The company plans to sell fashion accessories
online. The following information is available:
Estimated revenue for the first year of operation: PHP 5,000,000
Estimated cost of goods sold for the first year of operation: PHP 2,500,000
Estimated operating expenses for the first year of operation: PHP 2,000,000 Estimated income tax rate: 30%

Estimated required rate of return: 12%

Using the above information, we can compute the following financial planning ratios:

Gross Profit Margin = Gross Profit / Revenue

= (Revenue - Cost of Goods Sold) / Revenue
= (PHP 5,000,000 - PHP 2,500,000) / PHP 5,000,000
= 0.50 or 50%

Illustration: Financial Planning

Net Profit Margin = Net Income / Revenue

= (Revenue - Cost of Goods Sold - Operating Expenses) * (1 - Tax Rate) / Revenue = (PHP 5,000,000 - PHP
2,500,000 - PHP 2,000,000) * (1 - 0.30) / PHP 5,000,000 = 0.7 or 7%
Return on Investment (ROI)= Net Income / Total Investment

= Net Income / (Cost of Goods Sold + Operating Expenses)/(1 - Tax Rate)

= PHP 350,000 / (PHP 2,500,000 + PHP 2,000,000) / (1 – 0.30)
= 0.11 or 11%

Based on the above ratios, we can infer that ABC Corporation has a positive gross profit margin and net profit
margin, but its ROI is slightly lower than the required rate of return of 12%. This means that the company needs
to improve its efficiency in utilizing its resources to generate profits.

Suggestions:
• To improve its ROI, ABC Corporation can explore various strategies such as reducing its costs of goods
sold and operating expenses, increasing its revenue through marketing and sales efforts, and optimizing
its inventory management to minimize waste and excess inventory.
• The company can consider financing its operations through a combination of debt and equity to raise
capital for growth and expansion. The company can also invest in technology and automation to improve
its efficiency and reduce its costs.
• Overall, financial planning is crucial for startups like ABC Corporation SEATWORK
to ensure their financial sustainability and long-term success.
1. Conduct a financial, fund,
and cashflow analysis on the
FS provided.
2. Prepare a financial
END OF TOPIC 7 THANK YOU SO MUCH!
planning.