ACCTG 022 Strategic Business Analysis

Module 1: Overview, Financial Statements (FS), and FS analysis

1.1 Overview 3. Current liabilities - generally, the entity expects to settle the
liabilities within twelve (12) months after the reporting period or
This course provides an advanced study of the interface between within the entity's normal operating cycle.
modern managerial accounting and the business functions of strategic 4. Noncurrent liabilities - all liabilities not classified as current.
planning, marketing, manufacturing, and human resource 5. Equity - the residual interest in the assets of the entity after
management. The accountant’s role in the marketing decision areas is deducting all of the liabilities. Also called as Net assets (Total
specifically considered. Assets - Total liabilities).
This course aims to identify the basic conventions and doctrines of
managerial and cost accounting and other generally accepted
principles which may be strategically applied across the various
functions of a business organization; discuss several cost and
management accounting issues relating to the design and
implementation of strategic, marketing, value analysis and other
marketing models in the modern firms, and identify major
contemporary issues that have emerged in business accounting.
1.2 Components of Financial statement
This topic is a recall of financial accounting's end product, which is the
financial statements.
But under this module, we will go beyond the preparation of financial
statements, rather this time, we will analyze and interpret it.
But how can we analyze the financial statements, if we do not know it?
So let's take a journey back to the memory lane and revisit financial
statements.
Financial statements provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a
wide range of users in making economic decisions.
Components of financial statements:
1. Statement of financial position
• It comprises permanent accounts such as assets, liabilities, and Get familiar with it, as stated earlier, this is one of our data in doing
equity. financial analysis.
• It analyzes the entity's liquidity, solvency, and financial leverage.
1.2.2 Income Statement
• pertains to the company's ability to pay
Liquidity The Income statement reports the entity's profitability or performance
its short-term obligations.
during the year.
• pertains to the company's ability to pay
Solvency its obligations including long-term Under this statement, we will compute for the entity's net income or
obligations. net loss for a certain period.
• pertains to the company's ability to
Financial leverage uplift its company's position through
financing.
2. Income statement / Statement of profit or loss
• It comprises temporary accounts such as revenue, expenses,
and the computed net income or a net loss. It analyzes the
entity's profitability or performance during the year.
3. The statement of comprehensive income comprises of net
income and other comprehensive income.
4. Statement of changes in equity - summarizes the changes in
owner's equity.
5. The cash flow statement is divided into operating, investing, and Additional data is provided to show other details of the Income
financing activities of cash inflows and cash outflows. statement
6. Notes to the financial statement - It provides a narrative
description or disaggregation of items presented in the financial
statements and information about items that do not qualify for
recognition.
We will be using the financial statements in performing analyses such
as horizontal analysis, vertical analysis, trend analysis, and ratio
analysis.
1.2.1 Statement of Financial position Other companies would have other comprehensive income (OCI) in
The related accounts of Statement of financial position: their transaction. Whenever a company has OCI, they need to prepare
1. Current assets - generally, the entity expects to realize these a Statement of Comprehensive Income.
assets within twelve (12) months after the reporting period or within The Statement of Comprehensive income composes of net income
the entity's normal operating cycle. and other comprehensive income to come up with a total
2. Noncurrent assets - all assets not classified as current. comprehensive income of the entity.
ACCTG 022 Strategic Business Analysis
Module 1: Overview, Financial Statements (FS), and FS analysis
1.2.3 Statement of changes in equity 2. What could have been the reason why there is such an increase
in Accounts receivable?
Statement of changes in shareholders' equity for Corporation shows 3. Why inventory increases from the prior year?
changes on each shareholders' equity accounts such as common 4. What could have been the reason why Property, plant and
stock, preferred stock, and retained earnings. equipment decrease from the prior year?
1.4 Trend analysis
Trend Analysis states several years’ financial data in terms of a base
year. The base year or the most previous year is equal to 100 percent.
Under trend analysis, financial statements are presented on a
percentage basis.

After revisiting the components of financial statements, let us now start

with the analysis portion.
1.3 Horizontal analysis
The horizontal analysis shows the changes between years in the
financial data in both peso and percentage form.
This analysis focus on increase or decrease from last year's data.

1.5 Vertical analysis

The vertical analysis focuses on the relationships among financial
statement items at a given point in time.
It is also known as a "common-size financial statement".
In an income statement, the base amount is Net sales, in the absence
of which, we use Sales.
We solve using the income statement of One Sweet Day Corporation:

We then draft the 60% in the table below.

Can you continue answering and find out which asset account had the
most significant increase?
Much better we to prepare it in an MS Excel sheet, compute and
analyze it. This will serve as your practice note.

That's it, we are determining to perform certain analysis. Now we are

ready to have our 1st critical thinking activities.
We now compute for the profitability of One Sweet Day Corporation:

Overall, the biggest percentage increase is cash which had a 60%

increase from last year.
But more so of percentage computation, a CPA should also analyze
the reason behind the increase or decrease in a certain account.
I have questions below and give me a logical reason why a certain
account increases or decreases from last year.
Questions:
1. Is it okay to have a decrease in accounts receivable and why?