Financial Statement Analysis: Lesson 5.2

Unit 5: Interpreting and Analyzing Financial Statements
Lesson 5.2
Financial Statement Analysis
Contents
Introduction 1
Learning Objectives 2
Quick Look 3
Learn the Basics 6

Financial Statement Analysis 7
Horizontal Analysis 7
Vertical Analysis 9
Ratio Analysis 11
Financial Analysis of a Single Proprietorship 12
Vertical Analysis of a Single Proprietorship 12
Horizontal Analysis of a Single Proprietorship 14
Uses of Financial Statement Analysis in Business 16
Benefits and Drawbacks of Horizontal and Vertical Analysis 17
Advantages and Disadvantages of Horizontal Analysis 17
Advantages and Disadvantages of Vertical Analysis 18
Case Study 19
Keep in Mind 20
Try This 21
Practice Your Skills 22
Challenge Yourself 25
Bibliography 28
3.1. Introduction to Statement of Changes in Owner's Equity
Lesson 5.2
Introduction
Recall the purpose of preparing financial statements. Is it to simply report accurate financial
data? In your other courses, you learned that financial information users derive information
from these statements to make sound decisions. However, before making these decisions,
users should analyze these reported data.
A financial statement analysis will give you a more comprehensive understanding of the
business's financial health and performance. In this lesson, you will learn the methods of
financial statement analysis. The insights these processes provide will help your business
grow.
5.2. Financial Statement Analysis 1

Learning Objectives DepEd Competency
At the end of this lesson, you should be able to Perform vertical and horizontal analyses of
do the following: financial statements of a single proprietorship
(ABM_FABM12-Ig-h-13).
● Define financial statement analysis in
business.
● Perform the steps required in vertical

and horizontal analysis.
● Explain the importance of vertical and

horizontal analysis.

Quick Look
How much did my allowance change?

Analyzing financial statements will enable you to gain a more in-depth understanding of
how a business is doing in a more quantifiable sense. Seeing actual amounts reflected in the
financial statements is suitable for a quick assessment of the operations for the period.
Comparing the current results with previous productivity and analyzing values in a common
denominator will help you make decisions and plans.
Assume that you want to know how much your school-related expenses changed in the last
month compared to the previous month to plan your spending. The details below show
your allowance and costs for the previous two months.
Table 1. Comparison of expenses for Months 1 and 2
Allowance for the month
Particulars Month 1 Month 2
Allowance for the month ₱2,000 ₱2,500
Transportation for errands ₱ 300 ₱ 250

School supplies ₱ 300 ₱ 430
Expenses for subject requirements ₱1,000 ₱1,050
Unplanned expenses ₱ 200 ₱ 190
Total spending for the month ₱1,800 ₱1,920
Remaining allowance ₱200 ₱580
It will be easier to display whatever the changes that occurred in the last two months and
make a side-by-side comparison for easier understanding, as shown in the following table.

Table 2. Changes in spending for Months 1 and 2
Particulars Month 1 Month 2 Change
Allowance for the month ₱2,000 ₱2,500 ₱500
Transportation for errands ₱ 300 ₱ 250 (₱ 50)

School supplies ₱ 300 ₱ 430 ₱130
Expenses for subject requirements ₱1,000 ₱1,050 ₱ 50
Unplanned expenses ₱ 200 ₱ 190 (₱ 10)
Total spending for the month ₱1,800 ₱1,920 ₱120
Remaining Allowance ₱200 ₱580 ₱380
It is evident what particular items increased and decreased in the second month compared
to the first month concerning your school-related spending.
Assume that aside from the various increases and decreases, you also want to establish the
percentages of the expenses comprising your second month as far as your allowance is
concerned. You want to know what particular expense eats up most of your budget.

Table 3. Percentage of each expense on your monthly budget
Particulars Month 2 Formula Percentage
Allowance for the month ₱2,500 2,500/2,500 100%
Transportation for errands ₱ 250 250/2,500 10%

School supplies ₱ 430 430/2,500 17%
Expenses for subject requirements ₱1,050 1,050/2,500 42%
Unplanned expenses ₱ 190 190/2,500 8%
Total spending for the month ₱1,920 1,920/2,500 77%
Remaining allowance ₱580 580/2,500 23%
It is much easier to see which expense eats up the most considerable portion of your
allowance. Moreover, it is more comprehensible when presented in terms of a percentage
of the monthly allowance.
Questions to Ponder
1. What expenses increased or decreased for the second month?
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
2. What steps can you take to maximize your savings and increase the amount of your
remaining allowance for the next few months?
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

3. How will you use your assessment results to plan your expenses in the third month?
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
Learn the Basics
Financial statements are the foundation and starting point in financial statement analysis.
From here, one can make evaluations of liquidity and profitability and do a comparative
analysis. Various tools are used because these assessments require extensive calculations
(Dauderis & Annand, 2014).
Much of this financial statement analysis is performed using indicators, such as how one
amount is related to another—dividing one or more amounts by other amounts that are
reflected as a decimal or a percentage. However, such values will only be meaningful when
compared to other variables, such as desired or expected results, previous results, results
of other companies, or industry norms. This comparison tells you where your business
stands. Furthermore, it will provide a quantifiable result indicating whether your company
performed better, worse, or precisely as expected.
This lesson will focus on two comparative methodologies in financial analysis: vertical and
horizontal analysis.
Essential Question
Why should a business conduct financial analysis?

Financial statement analysis is analyzing a company's financial statements for
decision-making purposes. Long-term success requires understanding the organization's
overall health and using it to assess its financial performance and business value.
Management uses it as a monitoring tool to control their finances.
A company's financial statements reflect essential financial data on the business's activities.
From here, it can make evaluations of past, current, and future performance.
Internal and external stakeholders generally use the same financial methodologies for
maintaining business activities and evaluating overall financial performance.
Financial analysts typically compare multiple periods of data to facilitate horizontal

analysis. On the other hand, they can also analyze each line item in a vertical analysis to
understand how the different categories of transactions affect the results. Finally, they also
use ratio analysis to separate performance metrics for each statement and merge data
points between the accounts.
Horizontal Analysis
Calculating the monetary and/or percentage changes that happened from one period to the
next in an item presented in the financial statements is called horizontal analysis
(Hermanson, Edwards, and Maher, n.d.).
Horizontal analysis is an approach for analyzing financial statements by comparing specific

financial information for a particular accounting period with data from other periods.
Analysts use such an approach to analyze trends. Trends or changes are measured by
comparing the current year's value with the base year value. Such a purpose is the reason
why horizontal analysis is also called trend analysis. The primary goal is to determine how
a particular value increased or decreased through time. Horizontal analysis can present the
comparisons in percentages or absolute values.

The formula for horizontal analysis in absolute values is as follows.
On the other hand, the formula for horizontal analysis in percentage is:
Closer Look
Performing a Horizontal Analysis

Suppose you want to determine the change in total income your business
realized for 2021 compared to 2020. The business reported a total
income of ₱167,000.00 and ₱203,000.00 for 2020 and 2021, respectively.
To compute the change in terms of monetary value,
To compute the change in terms of percentage,

Check Your Progress
Explain why horizontal analysis is also called trend analysis.

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
Vertical Analysis
Vertical analysis is a method of financial statement analysis in which each line item is
calculated as a percentage of a base number in the same statement. For this reason, vertical
analysis is also known as common-size analysis as it relates values to a common figure. For
example, an income statement item can be presented as a percentage of total income. A
balance sheet item can also be displayed as a percentage of total assets or liabilities.
Furthermore, vertical analysis of the cash flow statement will show each cash inflow or
outflow item as a percentage of the total cash inflows.
The vertical analysis makes it much easier to compare financial statements from one
company to another and across the industry. It allows the user to see the relative ratio of
each account balance. Users can also utilize it to compare quarterly and yearly figures over
multiple years to see if performance is improving or declining.
For example, by displaying various expense items as percentages of total income in the
income statement, you can see the extent of the item's effect on the profit and whether
profitability has increased and improved over time. It will also make it easier to compare a
company's profitability with industry standards.
The formula for vertical analysis is as follows.

Closer Look
Performing a Vertical Analysis

Assume that Daryl Rodriguez, who operates a furniture repair business,
wants to know how much the total expenses are compared to the total
income the business generates. For March, his business reported a total
income of ₱35,000, and total expenses amounted to ₱23,000;
coincidentally, the net operating income is equal to ₱12,000.
Since Daryl wants to compare the items relative to the total income. The
base amount in the vertical analysis shall be ₱35,000.
To perform a vertical analysis of total expenses compared to the total

income,
To perform a vertical analysis of the net operating income compared to

the total income,
Examine how these values are presented in the following figure.

D. Rodriguez Furniture Repair Services

Vertical Analysis
Items %
Total Income ₱35,000 100%
Total Expenses 23,000 65.71%
Net Income ₱12,000 34.29%
The vertical analysis results on Daryl Rodriguez's business performance show that total
income is 100% as the base amount. The total expenses comprise 66% of total income, and
net income is 34% of total income.
Ratio Analysis
Ratio analysis is a quantitative way to gain insights into a company's liquidity, operational
efficiency, and profitability. It examines financial statements such as balance sheets and
income statements.
Investors and analysts use ratio analysis to assess a company's financial position by
examining historical and current financial statements. Comparative data can show if a
company is performing well over time and can be used to estimate future performance. This
data can also be used to compare a company's financial position to the industry average
and measure how a company is performing compared to other companies in the same
sector. Investors can use ratio analysis easily. Every figure needed to calculate the ratios is
found on a company's financial statements.
The specific steps in performing a ratio analysis will be discussed in the next lesson.

Financial Analysis of a Single Proprietorship
Now, you will apply what you have learned regarding vertical and horizontal analysis to the
financial statements of a single proprietorship business. For this, you will analyze the
financial statements of Emilia Santos's car rental service.
Vertical Analysis of a Single Proprietorship

Emilia wants to know how much each expense item takes up from the total income
generated by her business for the current year. Furthermore, she wants to identify which
expenses have the highest and lowest percentage considering the total income.
Below is her income statement for the fiscal year ended March 2022.
E. Santos Car Rental Services

Income Statement
For the Year Ended March 31, 2022
Revenue
Rent Income ₱98,000
Total Income 98,000
Expenses
Salaries and Wages 20,880
Electricity and Water Expense 5,760
Rent Expense 7,200
Depreciation Expense 21,168
Total Expenses 55,008
Net Income ₱42,992

The vertical analysis performed shows the following results.

Vertical Analysis
For the Year Ended March 31, 2022
Revenue
Rent Income ₱98,000
Total Income 98,000 100%
Expenses
Salaries and Wages 20,880 21%
Electricity and Water Expense 5,760 6%
Rent Expense 7,200 7%
Depreciation Expense 21,168 22%
Total Expenses 55,008 56%
Net Income ₱42,992 44%
The vertical analysis of Emilia's car rental business shows that the depreciation expenses
(22%) takes up most of the total income, while electricity and water expenses (6%) takes up
the smallest portion.
Check Your Progress
Based on the horizontal analysis performed, give an example of what

decisions the business owner can make.
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

Horizontal Analysis of a Single Proprietorship
You will now apply what you have learned in horizontal analysis to practice. Below is the
income statement of Emilia Santos for the years 2019 to 2021. Conduct a horizontal analysis
of the three-year data with 2019 as the base year. Moreover, help Emilia calculate how
much her net income increased from 2019 to 2021.

Income Statement
2019 2020 2021

Revenue
Rent Income ₱87,115 ₱91,811 ₱98,000
Total Income 87,115 91,811 98,000
Expenses
Salaries and Wages 22,621 31,736 20,880
Electricity and Water Expense 6,238 7,280 5,760
Rent Expense 10,695 9,120 7,200
Depreciation Expense 32, 117 27,269 21,168

Total Expenses 71,671 75,405 55,008
Net Income ₱15,444 ₱16,406 ₱42,992

The next step is to calculate the monetary and percentage changes using the base year data
as the divisor for your calculations.

Horizontal Analysis
2019 2020 2021
Particulars 2019 2020 2021 Change Change Change
Peso % Peso % Peso %
Revenue
Rent income 87,115 91,811 98,000 0 0% 4,696 5% 10,885 12%
Total income 87,115 91,811 98,000 0 0% 4,696 5% 10,885 12%
Expenses
22,621 31,736 20,880 0 0% 9,115 40% (1,741) (8%)
Salaries and wages
6,238 7,280 5,760 0 0% 1,042 17% (478) (8%)
Electricity and
Water Expense
10,695 9,120 7,200 0 0% (1,575) (15%) (3,495) (33%)
Rent expense
32,117 27,269 21,168 0 0% (4,848) (15%) (10,949) (34%)
Depreciation
Total Expenses 71,671 75,405 55,008 0 0% 3,734 5% (16,663) (23%)
15,444 16,406 42,992 0 0% 962 6% 27,548 178%

Net Income
The results of the horizontal analysis shows that Emilia’s net income increased by 178% in
2021 compared to her net income in 2019. It is because her total income increased by
₱10,885 or 12% while her total expenses decreased by ₱16,663 or 23% compared to 2019.
The decrease in the total expenses is mainly attributed to the 34% drop in depreciation
expense and the 33% drop in rent expense.

Check Your Progress
Based on the horizontal analysis performed, give an example of what

decisions the business owner can make.
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
Uses of Financial Statement Analysis in Business

Financial statement analysis provides insights to internal and external stakeholders to help
them make informed and timely decisions. The following table summarizes the importance
of financial analysis to various users of accounting information.
Table 4. Intended users of financial statement analysis and their interest areas.
Intended Users Interest Areas
● To understand the company's profitability, liquidity, solvency,

and stability.
Management
● To measure the effectiveness of the decisions made and take
the necessary corrective and strengthening measures.
● To know the company's profitability and future growth

prospects.
Investors
● To evaluate the security of investments and the reliability of
future returns.
● To gain knowledge of the company's liquidity and solvency

Creditors
position.
Government and
● To know the profitability position for tax purposes and assess
other regulatory
whether regulatory requirements are met.
bodies
Customers ● To evaluate the longevity of the company.
● To understand the company's progress and evaluate job

Employees
retention, security, and stability.

Benefits and Drawbacks of Horizontal and Vertical Analysis

The main difference between vertical and horizontal analysis is that vertical analysis focuses
on the relationship between the numbers at a single reporting period or at a particular
point in time. On the other hand, in the horizontal analysis, the amount from the annual
accounting is considered over a multi-year period.
The best way to utilize and maximize the results of analyzing financial data is to use both
horizontal and vertical analysis to address any weakness that the company faces.
Advantages and Disadvantages of Horizontal Analysis

Horizontal analysis is valuable because it allows analysts to evaluate the company's current
financial position, growth prospects, and past performance. Trends emerge, and you can
use them to predict future performance. You can also use horizontal analysis to compare
your company to competitors in the same industry.
However, there are also disadvantages to using horizontal analysis. Depending on the
accounting period used by the analyst and the number of accounting periods selected, the
current period may seem unusually good or bad.
For example, this quarter's revenue may seem better than the previous quarter alone, but it
might be inferior compared to last year's same quarter results.
A common problem with horizontal analysis is comparing account balances because the
aggregation of financial statement information can change over time, and income,
expenses, assets, or liabilities can shift between different accounts. Such situations can lead
to discrepancies.

Advantages and Disadvantages of Vertical Analysis
Vertical evaluation simplifies the correlation among single line items in the financial
statements, as they are expressed as percentages. A company can use these data results to
set desired goals and threshold limits. For example, management may decide to shut down
a selected unit if earnings appropriate for that unit fall below a selected threshold
percentage.
It is likewise beneficial in evaluating a company's economic operations as compared to

industry standards. Industry level scales will be better evaluated in terms of percentages
rather than using actual monetary amounts.
Although useful, there are some disadvantages to vertical analysis. When performing a
vertical analysis, you may tend to consider specific line items instead of the aggregate total.
This process might result in a lack of a standardized basis for comparing results. Without
standardized percentages to compare your findings to, this form of standardized analysis
may prove to have limited use.
Moreover, it does not give emphasis to liquidity measures; thus, it does not contribute to
understanding the liquidity of the company.
Check Your Progress
How can you address the drawbacks of using horizontal and vertical
analysis in business?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

Case Study
2022 Automotive NFC Market: Trend Analysis, Financial Insights

and Growth Factors
The global "automobile NFC market" is growing rapidly. This contains
analysis on various companies, such as: Sony, FeliCa, NXP, Broadcom,
STMicroelectronics, Samsung, and Polaric.
A detailed analysis of the overall growth outlook for global and regional
markets is provided based on a detailed analysis of key industry players and
primary and secondary data. The global automotive NFC market will grow
from US $742.6 million in 2021 to US $337.6 million by 2028. The annual
growth is expected to be 24.0%. Full consideration of economic changes due
to the health crisis, it will be worth US $1 million by 2028 and is expected to
further grow for the period after COVID 19.
It is predicted that the On-Board Units segment will grow at a rapid pace
during the forecast period. It is predicted that China's proportion will reach
20% in 2028, trailing a magnificent annual growth rate through the analysis
period. Japan, South Korea, and Southeast Asia are noteworthy markets in
Asia for the next six-year period.
As for the European Automotive NFC landscape, Germany is trailing with a

magnificent annual growth rate over the forecast period. With
industry-standard accuracy in analysis and high data integrity, the report
makes a brilliant attempt to unveil key opportunities available in the global
Automotive NFC market to help players achieve a strong market position.
It is important to take note of these trends based on horizontal analysis as

the basis for future opportunities.

Automotive NFC Market In 2022 : Trend Analysis, Financial

Insights, Growth Factors, Product Information & Technology
Development and Forecasts (2022-2028)
ByTheExpressWire, “Automotive NFC Market in 2022 : Trend
Analysis, Financial Insights, Growth Factors, Product
Information & Technology Development and Forecasts
(2022-2028),” Digital Journal, April 22, 2022,
https://www.digitaljournal.com/pr/automotive-nfc-market-in-
2022-trend-analysis-financial-insights-growth-factors-product
-information-technology-development-and-forecasts-2022-20
28.
Keep in Mind
● Financial statements are the foundation and starting point in financial statement
analysis.
● Financial statement analysis is the process of analyzing a company's financial
statements for decision-making purposes.
● Horizontal analysis is an approach for analyzing financial statements by comparing

specific financial information for a particular accounting period with information
from other periods. The formulas used for horizontal analysis are:

● Vertical analysis is a method of financial statement analysis in which each line item is
displayed as a percentage of the base number within the statement. The formula for
vertical analysis is:
Try This
A. Matching Type. Match the words in column A with the words in column B.
Column A Column B
_____________ 1. It is also known as trend analysis. a. Common-size

analysis
_____________ 2. It is used to gain insights into a b. Financial statement

company’s liquidity, operational analysis
efficiency, and profitability.
_____________ 3. It is equal to the amount in c. Horizontal analysis

comparison year less amount in
base year.
_____________ 4. It is another term used for d. Horizontal analysis

vertical analysis. (monetary value)
_____________ 5. It is making assessments and e. Ratio analysis

conclusions that meet the needs
of stakeholders.

B. True or False. Write true if the statement is correct. Otherwise, write false.
________________ 1. The horizontal analysis calculates the monetary and percentage

changes from one year to another.
________________ 2. An advantage of vertical analysis is that it contributes to

understanding liquidity.
________________ 3. The common-size analysis relates line item values to a common

base figure.
________________ 4. The horizontal analysis only uses absolute values to describe

comparisons.
________________ 5. Horizontal analysis is valuable because it allows analysts to

evaluate the company's current financial position, growth
prospects, and past performance.
Practice Your Skills
Three-Year Assessment
Patricia Joy established her cakes and pastries business in 2018 and has been operating for
over three years now. She wants to conduct a more comprehensive analysis using
horizontal and vertical analysis using the three-year data on her income statement. The
following figure shows her business’s Income Statement from 2018 to 2020.

Patricia Joy Cakes and Pastries
Income Statement
2018 2019 2020
Revenue
Cakes and Pastries Income ₱ 145,760 ₱ 124,481 ₱ 207,707
Total Income 145,760 124,481 207,707
Expenses
Salaries and Wages 26,755 13,834 37,040
Utilities Expense 13,777 19,701 18,558
Supplies Expense 33,890 30,836 53,557
Internet Expense 4,900 5,254 4,382
Rent Expense 13,500 20,508 20,350
Depreciation Expense 9,580 9,580 12,580
Total Expenses 102,402 99,713 146,467
Net Income ₱ 43,358 ₱ 24,768 ₱ 61,240
Using the income statement presented above, perform the following tasks.
1. Compute for the percentage change in rent expense from 2018 to 2020.
2. Compute for the monetary change in Cakes and Pastries Income from 2018 to 2019.

3. Compute the percentage share of Supplies Expense from the Total Expense for the
year 2020.
4. Prepare a horizontal analysis for the three-year data.

Income Statement
2019 2020
2018 2019 2020 change change
Revenue peso % peso %
Cakes and
Pastries Income ₱ 145,760 ₱ 124,481 ₱ 207,707 __________ ______ __________ ______
Total Income 145,760 124,481 207,707 __________ ______ __________ ______
Expenses
Salaries and 26,755 13,834 37,040

Wages __________ ______ __________ ______
Utilities Expense 13,777 19,701 18,558 __________ ______ __________ ______
Supplies Expense 33,890 30,836 53,557 __________ ______ __________ ______
Internet Expense 4,900 5,254 4,382 __________ ______ __________ ______
Rent Expense 13,500 20,508 20,350 __________ ______ __________ ______
Depreciation 9,580 9,580 12,580

Expense __________ ______ __________ ______
Total Expenses 102,402 99,713 146,467 __________ ______ __________ ______
Net Income ₱ 43,358 ₱ 24,768 ₱ 61,240 __________ ______ __________ ______

5. Prepare a vertical analysis for the year 2020 with Total Income as the base figure.

Vertical Analysis
2020 %
Revenue
Cakes and Pastries

Income ₱ 207,707 ____________
Total Income 207,707 ____________
Expenses
Salaries and Wages 37,040 ____________
Utilities Expense 18,558 ____________
Supplies Expense 53,557 ____________
Internet Expense 4,382 ____________
Rent Expense 20,350 ____________
Depreciation Expense 12,580 ____________
Total Expenses 146,467 ____________
Net Income ₱ 61,240 ____________
Challenge Yourself
Answer the following questions.

1. The following comprises the total assets of XYZ Company as of December 31, 2021:
Cash: ₱14,000
Accounts Receivable: ₱23,000
Prepaid Expenses: ₱9,500
Inventory: ₱62,300
Property and Equipment: ₱75,400

How much of the Total Assets of XYZ Company does Prepaid Expenses take up? What
interpretation can you make from the result?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
2. The following comprises the total assets of EFG Company as of December 31, 2020:
Cash: ₱45,050
On December 31, 2021 the account balances of DEF Company are as follows:
Cash: ₱58,760
What are the monetary and percentage changes in Total Assets in 2021 as compared
to 2020? What interpretations can you make from the results?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

3. The following are the account balances for ABC Company on December 31, 2018 to
December 31, 2020:
2018 2019 2020
Service Income ₱36,500 ₱44,560 ₱42,705
Administrative ₱12,650 ₱21,658 ₱9,820

Expenses
Miscellaneous ₱8,700 ₱12,080 ₱7,940

Expenses
ABC Company wants to conduct a horizontal analysis and identify how the company
managed its expenses from 2018 to 2020. The staff who performed the analysis
provided the following report:
Service Income: -4.16%
Administrative Expenses: -54.66%
Miscellaneous Expenses: -34.27%
Identify what is wrong with the staff’s report.

__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

Bibliography
Dauderis, Henry, and Annand David. Introduction to Financial Accounting (Version

2017-Revision C). Athabasca, Canada: Valley Educational Services Ltd., 2017.
Gilbertson, Claudia, Mark Lehman, and Debra Gentene. Century 21 Accounting. Ohio:
South-Western Cengage Learning, 2016.
Jonick, Christine. Principles of Financial Accounting. Dahlonega, Georgia: University of North

Georgia Press, 2018.
Hermanson, Roger H., James Don Edwards, and R. F. Salmonson. Accounting Principles.
Homewood, IL: BPI-Irwin, 1989.

Financial Statement Analysis: Lesson 5.2

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Unit 5: Interpreting and Analyzing Financial Statements

Learn the Basics 6

Practice Your Skills 22

Financial Statement Analysis

5.2. Financial Statement Analysis 1

Learning Objectives DepEd Competency

● Perform the steps required in vertical

● Explain the importance of vertical and

5.2. Financial Statement Analysis 2

How much did my allowance change?

Table 1. Comparison of expenses for Months 1 and 2

Allowance for the month

Particulars Month 1 Month 2

Allowance for the month ₱2,000 ₱2,500

Transportation for errands ₱ 300 ₱ 250

5.2. Financial Statement Analysis 3

Allowance for the month

Particulars Month 1 Month 2 Change

Allowance for the month ₱2,000 ₱2,500 ₱500

Transportation for errands ₱ 300 ₱ 250 (₱ 50)

5.2. Financial Statement Analysis 4

Allowance for the month

Particulars Month 2 Formula Percentage

Allowance for the month ₱2,500 2,500/2,500 100%

Transportation for errands ₱ 250 250/2,500 10%

5.2. Financial Statement Analysis 5

Learn the Basics

5.2. Financial Statement Analysis 6

Financial analysts typically compare multiple periods of data to facilitate horizontal

Horizontal analysis is an approach for analyzing ﬁnancial statements by comparing speciﬁc

5.2. Financial Statement Analysis 7

The formula for horizontal analysis in absolute values is as follows.

Performing a Horizontal Analysis

To compute the change in terms of monetary value,

To compute the change in terms of percentage,

5.2. Financial Statement Analysis 8

Check Your Progress

Explain why horizontal analysis is also called trend analysis.

The formula for vertical analysis is as follows.

5.2. Financial Statement Analysis 9

Performing a Vertical Analysis

To perform a vertical analysis of total expenses compared to the total

To perform a vertical analysis of the net operating income compared to

Examine how these values are presented in the following ﬁgure.

5.2. Financial Statement Analysis 10

D. Rodriguez Furniture Repair Services

Total Income ₱35,000 100%

Total Expenses 23,000 65.71%

Net Income ₱12,000 34.29%

5.2. Financial Statement Analysis 11

Vertical Analysis of a Single Proprietorship

E. Santos Car Rental Services

Net Income ₱42,992

5.2. Financial Statement Analysis 12

E. Santos Car Rental Services

Net Income ₱42,992 44%

Check Your Progress

Based on the horizontal analysis performed, give an example of what

5.2. Financial Statement Analysis 13

E. Santos Car Rental Services

2019 2020 2021

Total Income 87,115 91,811 98,000

Electricity and Water Expense 6,238 7,280 5,760

Total Income 145,760 124,481 207,707 ____

Utilities Expense 13,777 19,701 18,558 ____

Supplies Expense 33,890 30,836 53,557 ____

Internet Expense 4,900 5,254 4,382 ____

Rent Expense 13,500 20,508 20,350 ____