LORNA S.

BULOSAN, CPA, DBA

Instructor
 The Financial Statements
➢ these are the key product or the end product of accounting process.
1. Statement of Financial Position or Balance Sheet
- shows the financial condition / position of a business as of a
given period. It consists of the assets, liabilities and capital.
2. Income Statement or Statement of Comprehensive Income
- shows the result of operations for a given period. It consists of
the revenue and expense accounts.
3. Statement of Changes in Owner’s Equity
- shows the changes in the capital or owner’s equity as a result of
additional investment or withdrawal by the owner, plus or minus net
income or net loss for the year.
4. Statement of Cash Flows
- summarizes the cash receipts and cash disbursements for the
accounting period. It shows the net increase or decrease of cash in a given
period and the cash balance at the end of the period
 Financial Statement Analysis
2 Phases involved in analyzing financial statements:
1. Computation Phase
- Compute for the differences, percentages, or
ratios.
2. Interpretation Phase
-more difficult than the first phase, makes the
analysis of financial statements more meaningful
because it communicates to the users the
significance of the results.
 Tools in analyzing the financial data
provided by the financial statements.
Horizontal Analysis – compares the same
account in the financial statements of two
periods (current and past year) determining the
amount of changes and computing its
percentage change using a base year as
comparison. It should be noted that for
accounts in the base year with zero or negative
balances, the computation of percentage of
change will not apply.
 Tools in analyzing the financial data
provided by the financial statements.
Vertical Analysis – shows the relationship of
each part to the whole in a single financial
statement. In the statement of financial position
or balance sheet, each item is expressed as a
percentage of total assets or total liabilities and
owner’s equity. In the income statement , each
item is presented as a percentage of net sales.
 Tools in analyzing the financial data
provided by the financial statements.
Trend Analysis – compares not only two years
but covers three, four, or five years’ financial
statements. This is to determine the trends in
the industry.
Financial Ratio Analysis – describes the
significant relationship between the numbers
presented in the financial statements. Ratios can
be expressed either as rate, percentage, or a
proportion.
 Horizontal Analysis
Horizontal Analysis – otherwise known as
comparative analysis, helps management
analyze increase and decreases in balance sheet
and income statement accounts.
 The following are the steps in
performing a horizontal analysis:
1. Prepare a comparative financial statements
of two consecutive years.
2. Add a third column for the increase or
decrease in amount and a fourth column for the
percentage of the increase or decrease.
3. Get the percent of increase or decrease for
each account
 The following are the steps in
performing a horizontal analysis:

a. Deduct the amount of the current year from

the base year
b. Divide the difference above by the amount of
the base year
c. Multiply the quotient by 100 to get the
percentage of change.
 Sample Computation for Increase
(decrease) in percentages
• This is presented by the following formula:

Current year amount − Base year amount

% change = x 100
Base year amount

665.4 − 725.8
% change in current assets = x 100
665.4

= 9.1 %
Note: For Accounts with zero balance in the earlier or initial year, the formula
for the percentage of change will not apply.
 Fidas Merchandising
Statement of Financial Position
As of December 31
(in millions)
 Fidas Merchandising
Statement of Financial Position
As of December 31
(in millions)
Fidas Merchandising
Income Statement
As of December 31
(in millions)
 Analysis
1. Current assets increased by 9.1%. The increase is a
result of 64.1% increase in accounts receivable and a
57.7% increase in inventory. The increase in accounts
receivable entails management to check their credit
and collection policy for prompt collection of
accounts especially that increase in net sales was only
27.3% and cash decreased by 32.5%. Likewise, the
increase in merchandise inventory necessitates
management to check their inventory stocks for
obsolescence or slow moving items comparing their
increase in sales and the increase in inventory.
 Analysis
2. Property, Plant, And Equipment showed a 235.6%
increase. This may be due to purchase made by the
company to invest in plant assets. It is possible for
the owner to invest property and equipment in the
business. However, in the case of Fidas
Merchandising, owner’s equity showed a decrease
of 2.9%. This might not be possible unless the
owner invested non-current asset then afterwards
made large amounts of withdrawals during the
year.
 Analysis
3. Current Liabilities and owner’s equity decreased
despite increase in total liabilities and owner’s equity.
This can be explained by the 383.9% increase in the
company’s non-current liabilities which means that the
company made heavy borrowings during the year.
Sources of business funds are generated either from the
investment of the owner or loans from banks or financial
institutions. In the case of Fidas Merchandising, the
company obtained additional funds through loan. With
the significant increase in non-current assets, it can be
inferred that the loan obtained by the company was used
to finance the acquisition of the property, plant, and
equipment.
 Analysis
4. Net Sales increased by 27.3% during the year. However,
despite the increase in sales, net income decreased by 7.3%.
Looking at the other components of the income statement,
cost of goods sold increased by 24.1%. Even with this increase
in goods sold, gross margin registered a 30.2% increase.
Selling and administrative expenses showed a 34.8% increase.
Despite this, income from operations recorded an 18%
increase. The company’s increase in interest expense of 98%
resulted in a decrease in income before taxes despite the
increase in net sales. Analyzing the components of the income
statement, we were able to explain the decrease in net
income despite increase in net sales. Hence, management can
now understand that the magnanimous increase in interest
expense caused the decrease in overall net income.
 On the Dot Trading
Statement of Financial Position
As of December 31
 On the Dot Trading
Income Statement
For the Years Ended December 31
(in millions)
 Vertical Analysis

Vertical Analysis – otherwise known as common size analysis,

helps management analyze the components of the total
assets as well as the components of the total liabilities and
owners equity. It helps management answer certain questions
as follows:
1. Of the total assets, what percent is classified as current?
Non – current?
2. Of the total assets, what percent is accounts receivable?
Merchandise Inventory?
3. Of the total liabilities, what percent is classified as
current? Non-current?
4. Of the total Liabilities and owners equity, what percent is
liabilities? What percent is owners equity?
 Vertical Analysis in the Income
Statement
In the income statement, vertical analysis helps
management analyze the components of the income
statement in relation to its revenue which is sales. It helps
management answer certain questions as follows:
1. What percentage of net sales is cost of sales or goods
sold? Gross Profit? Operating Expenses?
2. If operating expenses were divided between selling
and administrative expenses, What percent of net
sales is absorbed by selling expenses? Administrative
expenses?
3. What is the percentage of net income to sales?
 Steps in performing a vertical analysis
1. Prepare comparative financial statements of two consecutive years.
2. Add one addition column on the right side of each year.
3. For the comparative statement of financial position, express each account as a
percentage of the total assets. The total assets is automatically 100%. Likewise,
total liabilities and owner’s equity is automatically 100%.
Example:
₱725.8
% of current assets = x 100% = 28%
₱2,592.2

₱1,822.4
% of non − current liabilities = x 100% = 70.3%
₱2,592.2
4. For the comparative income statement, express each account as a percentage of net
sales. Net sales is automatically 100%.
Example:
₱1,032
% of cost of goods sold = x 100% = 46.6%
₱2,213
 Fidas Merchandising
Statement of Financial Position
As of December 31
(in millions)
 Fidas Merchandising
Income Statement
For the Years Ended December 31
(in millions)
 Interpretation of Data (Analysis)
• 1) Current asset was 54.5% of total assets in
2016. However, this percentage decreased to
28% in 2017. This was due to the significant
increase n property, plant, and equipment.
Hence, the dramatic change in total assets
composition.
 Interpretation of Data (Analysis)
2. Non-current assets represented by property,
plant, and equipment was 45.5% of total assets
in 2016 and 72% in 2017. This may be due to
purchases made by the company during the year
to invest in plant assets.
 Interpretation of Data (Analysis)
3. Current liabilities was 50.8% of total liabilities and
owner’s equity in 2016 but significantly decreased to 21%
in 2017. This is opposite to non-current liabilities which
was 30.8% of total liabilities and owner’s equity in 2016
but increased to 70.3% in 2017. The company made a
loan during the year and might have paid its current
liabilities. Hence, the opposite change in the two
liabilities. Percentage of owner’s equity to total liabilities
and owner’s equity was 18.4% in 2016 and 8.4 in 2017.
This means that the equity financed by creditors
represented by total liabilities was 81.6 in 2016 and 91.6
in 2017. This is not a good sign as the company’s business
funds are heavily provided by creditors.
 Interpretation of Data (Analysis)
4. From the income statement, the percentage of net
income to sales decreased from 8.7% to 6.4%. This
decrease has been explained by the onerous interest
expense in the horizontal analysis discussed in the
previous lesson. The percentage of cost of goods sold in
relation to net sales indicated a minimal decrease from
47.8% to 46.6% while selling and administrative expenses
indicated a minimal increase from 38% to 40.2%. The
relation of interest expense to net sales during the year
increased more than double from 1.8% to 4.1%. Finally,
net income in relation to net sales decreased from 8.7%
to 6.4% despite the company’s acquisition of property,
plant, and equipment.
 Trend Analysis
Steps in Performing a trend analysis
1. Prepare a comparative financial statements for three, four or five
consecutive years.
2. Choose a base year. Usually the first year is the base year.
3. Calculate the trend percentage for each item by dividing the
amount of each item by the base year. The base year is
automatically 100%.
𝐶ℎ𝑜𝑠𝑒𝑛 𝑌𝑒𝑎𝑟
𝑇𝑟𝑒𝑛𝑑% = x 100 %
𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟
Example:
₱665.40
Current Assets Trend % 2016 = x 100% = 111.3%
₱597.60
 Fidas Merchandising
Statement of Financial Position
As of December 31
(in millions)
Fidas Merchandising
Income Statement
As of December 31
(in millions)

(30%)
 Fidas Merchandising
Statement of Financial Position
As of December 31
(in millions)
Fidas Merchandising
Income Statement
As of December 31
(in millions)
 Interpretation of Data (Analysis)
1. Cash increased in 2016 but significantly
decreased in 2017. Accounts receivable and
inventory continued its upward trend for three
years. Although net sales has an upward trend,
its increase is not on a par with the increase in
accounts receivable, inventory should be
checked for obsolete and slow moving items.
 Interpretation of Data (Analysis)
2. Property, plant and equipment decreased in
2016 but drastically increased in 2017 due to
acquisition made by the company. Likewise,
Non-current liabilities significantly increased in
2017 which means that the company used the
loan to acquire the property, plant and
equipment.
 Interpretation of Data (Analysis)
3. Total liabilities has an upward trend while owners
equity has a downward trend indicating the
company heavily relied on outside funds from
creditors.
4. Net sales had an upward trend in 3 years while
property plant and equipment decreased in 2016
but significantly increased n 2017. This may indicate
that the company is benefitting from the use of the
newly acquired non-current assets as evidence by
the increase in sales.
 Interpretation of Data (Analysis)
5. Cost of sales has an upward trend but despite
this, gross profit managed to follow with an upward
trend. Selling and administrative expenses has an
upward trend, income from operations decreased
in 2016 but increased in 2017.
6. Interest expense has the most significant
increasing trend in three years culminating to more
than 300 percent increase in 2017. With cost of
sales and all expenses going up, income went
understandably went on a downward trend despite
an upward trend in net sales.