Financial Statement Analysis

Prepared by:

Shahria k. mautante, ms fs, MBM

Users of Accounting Information
Users of Accounting Information
Profitability

Liquidity

Solvency
Factors for Business Survival
 Financial Statement Analysis (FSA)

• Financial Statement Analysis will help business owners and other interested people
to analyze the data in financial statements to provide them with better information
about such key factors for decision-making and ultimate business survival.

Financial Statement Analysis is the collective name for the tools and techniques
that are intended to provide relevant information to the decision-makers. The
purpose of the FSA is to assess the financial health and performance of the
company.

• FSA consists of the comparisons for the same company over a period of time and
comparisons of different companies either in the same industry or in different
industries.
The Purpose of FSA
5 Insights from Ratio Analysis
1. Does the business earn adequate profits? That is, does it earn as much as other
firms in the same type of business and have the same financial resources?
These are tests of profitability.
2. Are funds available to the business and its management being used
wisely?
• In this context, funds include debt and equity.
3. Can the firm pay its short-term debts as they come due? This is
referred to as liquidity.
4. Can the firm pay its long-term debts as they come due?
• This is referred to as solvency.
5. How efficiently are the firm’s assets being managed?
• An efficiently run pharmacy will minimize the assets, such as
inventory and accounts receivable, which it needs to generate a given
level of sales and income
Tests of Profitability
Tests of Overall Performance
Tests of Liquidity
Measures the firm’s ability to pay its current debt
as it comes due

1. Current ratio
2. Quick ratio
3. Accounts payable
period
• Current ratio - • Quick ratio or acid ratio is • Accounts payable
compares the current similar to the current period - indicates
assets which supply the ratio but is a more how long it takes the
cash to pay current stringent test of the pharmacy to pay for
debts. firm’s liquidity its credit
• Creditors such as • QR= (current asset- purchases.
bankers or wholesalers inventory)/current • It is the average
liability
(who supply the number of days
pharmacy with
• The ratio measures the between when a
merchandise on credit) excess of very liquid pharmacy makes a
are interested in this current assets-cash and purchase and when
ratio because it accounts receivable to it pays for the
measures the current liabilities. purchase
pharmacy’s ability to • The ratio takes the • APP= accounts
repay them on time. perspective of whether payable/purchases
• CR= current the firm could pay its per day
assets/current current debts if it were
liabilities not able to sell its
inventories.
Solvency tests
➢ Solvency ratios measure the business’s ability to meet long-term debt payments.
➢ They are also called debt-to-equity ratios because they compare the amount the
business has borrowed to the amount its owners have invested.
➢ Debt-equity ratio = total liabilities / equity
➢ Debt refers to funds that have been lent to the business which must be paid
accordingly according to a set schedule regardless of whether or not the firm is
profitable
➢ Equity refers to funds that have been invested in the business. It does not have
to be repaid. It gives the investor ownership of part of the business.
➢ Lenders, such as bankers prefer that business have low debt-to-equity ratios.
This indicates that the owners have more invested capital in the business than
the lender, so the owners should have a strong incentive to do well
Tests of Efficiency
• These ratios measure how efficiently the business’s assets are used.
• Efficient use involves generating a given level of activity as sales,
medication orders dispensed, or consultations with the smallest
possible investment in assets
• Efficient use also means making maximum use of available assets.

1. Accounts receivable collection

period
2. Inventory turnover
3. Asset turnover
 Tests of Efficiency
❖ Average collection period (ACV) - is
an estimate of the average number of
days it takes the business to collect an
account receivable.
❖ It estimates the average number of
days between when a charge sale is
made and when payment for the sale
is collected.
❖ ARCP= AR / Average sales per day
(Annual sales/365 days)
❖ Inventory Turnover measures the
movement of inventory. It indicates how
quickly inventory is purchased, sold, and
replaced.
❖ Inventory Turnover = Cost of goods sold /
Inventory
❖ Asset Turnover Measures how efficiently
the pharmacy’s total assets are used.
ATO is calculated by dividing the
pharmacy’s sales for the year by its total
assets.
❖ ATO= Sales/Total assets
Interpreting Ratios
➢ Ratios are meaningful only when compared to some standard.
There are two commonly used standards.

Cautions
➢ Ratio analysis is a diagnostic technique.
➢ A thorough ratio analysis will identify a business’s problems and
their probable causes but give little information about how to
solve the problems.
 Activity
➢ Annual sales = 1,250,000
Kwon Minju Balance Sheet
For the Year-ended 2021 & 2022
➢ Annual purchases = 475,000
2021 2022 ➢ COGS = 60% of the annual sales
Assets 28,000.00 36,000.00
Cash 35,000.00 28,000.00
Marketable Securities 57,000.00 62,000.00 a. TCA for 2021 & 2022
Accounts Receivable 102,000.00 75,000.00 b. TA for 2021 & 2022
Inventories 35,000.00 38,000.00
Land & Building 1,200,000.00 1,800,000.00
c. TL and SHE for 2021& 2022
Machinery & Equipment 1,800,000.00 1,500,000.00 d. Current Ratio for 2021 & 2022
Furniture and Fixtures 74,000.00 80,000.00
e. Inventory Turnover for 2021 & 2022
Other non-current assets 21,000.00 20,000.00
Accounts Payable 225,000.00 300,000.00 f. Average collection period for 2021 & 2022
Notes payable 273,000.00 380,000.00
Accruals 207,000.00 325,000.00 g. Average payment period for 2021 & 2022
Long-term debt 1,400,000.00 1,200,000.00
Stockholder’s Equity 1,247,000.00 1,434,000.00
Total OE 1,247,000.00 1,434,000.00
 References:
➢ Introduction to Corporate Finance by Laurence Booth & W. Sean Cleary taken
from PPT prepared by Mr. Ken Hartviksen
➢ Principles of Managerial Finance by Lawrence J. Gitman and Chad J. Zutter
➢ Chapter 5. Financial Statement Analysis from UP Manila Virtual Learning
Environment, Accessed on October 26, 2023.
https://vle.upm.edu.ph/pluginfile.php/89613/mod_folder/content/0/Financial%2
0Statement%20Analysis.ppt?forcedownload=1
➢ https://www.youtube.com/watch?v=h9sSFTV6MtQ
THANK YOU!