Chapter 4

Analysis of Financial Statements

Lesson 1-4 Tools and Techniques
Lesson Objective
* Be Familiar with the different tools in analyzing financial statements.

A company’s financial statement provide important information about a business enterprise. The analysis help the
user make an informed decision or judgment rather than rely on guesses and intuition in the process of decision making
by effectively and systematically using the financial data. It lessens the uncertain of outcome with every decision made
because of the use of analytical tools to financial statement and the related data.
In order to evaluate a company, one-year data or a one year’s financial statement is not sufficient. One needs at least
two periods to make an evaluation or even three to five years if one is to make a trend analysis. Financial statements are
analyzed to evaluate a company’s present financial position and operating performance in relation to its past. Using
these figures, the company can predict or forecast future operations.
 FINANCIAL STATEMENT ANALYSIS
Different methods and techniques are used in analyzing financial statements. There are two
phases involved. Namely, the computation phase and the interpretation phase. In the first
place, we compute for differences, percentages, or ratios. In the second stage, we interpret the
results of the figures we got from the first place. The second phase, although 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.

Using the statement of financial position and the income statement, financial statements
can be analyzed using the following techniques. These are considered the 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.
• 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.
• Trend Analysis- compares not only two years but covers three, four, or five years’
financial statements. Ratios can be expressed either as a rate, percentage, or a
proportion.
• Financial Ratio Analysis- describes the significant relationship between the numbers
presented in the financial statements. Ratios can be expressed either as a rate,
percentage, or a proportion.
Test Your Understanding

1. What are the two phases involved in the analysis of

financial statements?
___________________________________________________________________
___________________________________________________________________

2. Enumerate and describe the tools used in analyzing

financial statements.
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___________________________________________________________________
___________________________________________________________________
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LESSON 4-2
HORIZONTAL ANALYSIS
LESSON OBJECTIVE
* USE HORIZONTAL ANALYSIS TO EVALUATE FINANCIAL STATEMENTS
HORIZONTAL ANALYSIS IN FINANCIAL
STATEMENTS
Horizontal analysis, otherwise known as comparative analysis, helps
management analyze increase and decreases in balance sheet and
income statement accounts. for example, in the balance sheet, a
significant increase in property, plant, and equipment will indicate
purchases of land, equipment, machinery or other plant assets necessary
for use in the business. on the other hand, a significant decrease will
reveal disposal of such assets as management may have deemed
necessary. comparing two consecutive years and nothing magnanimous
increases or decreases in other balance sheet items may also be used by
management for decision making purposes.
 For income statement accounts, horizontal analysis also helps management analyzes
significant increases of decrease in sales, cost of sales and expenses. For example, an
alarming decrease in net income may call management attention as the generation of net
income is the company’s main goal in doing business. This may lead management to
evaluate other income statement items such as sales, cost of sales, and expenses which are
crucial components in arriving at a company’s income.

In conclusion, getting the amount of increase and decrease and their percentages, is
just the first step of the analysis. The difficult part is the interpretation of the result . In the
real world, this is subjective as there are no strict and fast rule to follow. Experience and
Industry trend are considered in the pictures.
The following are the steps in performing a horizontal analysis:
1. Prepare comparative financial statements of two consecutive years.
FIDAS MERCHANDISING
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31
(IN MILLIONS)
ASSETS 2017 2016
CURRENT ASSETS
CASH P 222.9 P 330.2
ACCOUNT RECEIVABLE (NET) 282.5 172.1
INVENTORY 146.3 92.8
PREPAID EXPENSE 74.1 70.3
TOTAL CURRENT ASSETS P 725.8 P 665.4

PROPERTY, PLANT , AND EQUIPMENT (NET) 1,866.4 556.2

TOTAL ASSETS P 2,592.2 P 1,221.6
LIABILITY AND OWNER’S EQUITY

CURRENT LIABILITIES P 551.9 P 620.6

NON-CURRENT LIABILITIES 1,822.4 376.6
TOTAL LIABILITIES P 2,374.3 P 997.2
OWNER’S EQUITY 217.9 224.4
TOTAL LIABILITIES AND OWNER’S EQUITY P 2,592.2 1,221.6

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 AMOUNT.

A. CHOOSE A BASE YEAR WHICH IS USUALLY THE INITIA YEAR OF ANALYSIS.
B. DEDUCT THE AMOUNT OF THE CURRENT YEAR FROM THE BASE YEAR.
C. DIVIDE THE DIFFERENCE ABOVE BY THE AMOUNT OF THE BASE YEAR.
D. MULTIPLY THE QUOTIENT BY 100 TO GET THE PERCENTAGE OF CHANGE .

……..
THIS IS REPRESENTED BY THE FOLLOWING FORMULA:

% CHANGE = CURRENT YEAR AMOUNT – BASE YEAR AMOUNT X 100%

BASE YEAR AMOUNT

% CHANGE IN CURRENT ASSSETS = P 665.4 – P 725.8

X 100 %
P 665.4
=9.1 %

NOTE: FOR ACCOUNTWS 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)
ASSETS 2017 2016 Increase amount (Decrease) Percent
CURRENT ASSETS
CASH P 222.9 P 330.2 P (107.3) (32.5)
ACCOUNT RECEIVABLE 282.5 172.1 110.4 64.1
INVENTORY 146.3 92.8 53.5 57.7
PREPAID EXPENSE 74.1 70.3 3.8 5.4
TOTAL CURRENT ASSETS P 725.8 P 665.4 P 60.4 9.1
PROPERTY, PLANT, AND
EQUIPMENT(NET) 1, 866.4 556.2 1,310.2 235.6
TOTAL ASSETS P 2,592.2 P 1,221.6 P 1,370.6 P 112.2
Liabilities and Owner’s Equity

Current Liabilities
Trade and Other Payable P 551.9 P 620.6 P ( 68.7) (11.1)
Non-Current Liabilities
Loan Payable 1,822.4 376.6 1,445.8 383.9
Total Liabilities P2,374.3 P 997.2 P1,377.1 138.1
Owner’s Equity 217.9 224.4 (6.5) (2.9)
Total Liabilities and Owner’s Equity P2,592.2 P1,221.6 P1,370.6 112.2
 Income Statement

For the Years Ended December 31

(in million)
Increase (Decrease)
2017 2016 Amount , Percent
Net Sales P 2,213.3 P 1, 738.7 P 474.6 27.3
Cost of Goods Sold 1,032.1 813.8
200.3 24.1 Gross Profit
P 1,181.2 P 906.9 P 274.3 30.2
Selling and Administrative Expenses 889.2 659.5 229.7
34.8 Operating Income
P 292.0 P 247.4 44.6 18.0
Interest Expense 90.9 30.5 60.4 198.0
Income Before Income Taxes
P 201.1 P 216.9 (P 15.8) (7.3)
Income Tax Expense 60.3 65.0 (4.7) (7.2)
Net Income P 140.8 P 151.9
(P 11.1) (7.3)
INTERPRETATION OF DATA
In interpreting the data, it is important to note that the materiality of increases of decreases depends
on the size of the company. A material amount in one company may not be material to another. For example, a
hundred-thousand increase in the receivable of a small grocery may be considered material to the small
grocery but not to SM’s Hyper mart considering their size capitalization, and volume of transaction. Hence,
there is no strict rule to follow in determining the materiality of an amount.

In analyzing the significance of a percent change in value, the analysis should not only center on internal
factors controllable by management An example is the drop in sales of plastic bags A 25% drop in the sales of
plastic bag company may be significant to the company but become of the plastic ban issued by Philippine
government in some areas in Metro manila, other company’s plastic bag sales may have dropped by 30% to
50% considering the trend in the industry. This is an outside factor over which management has no control.
hence internal factors are not the only factor over considered in data analysis and interpretation but external
factors as well Management should be well informed on the latest trends affecting their industry.
Analysis

1. Current assets increased by 9.1% increase is result of a 64.1% increase in accounts receivable and a 57.7% increase in inventory. This
increase in account receivable entails management to check their credit and collection policy for prompt collection of account 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.

2. Property, plant and Equipment showed a 235.6%. Increase. This may be due to purchases made by the company to invest in plant assets. It
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 bot be possible unless the owner invested non-current assets then afterwards made large amounts of
withdrawals during the year.

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 years. 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 acquisitions of the property, plant, and equipment.

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 cost of goods sold, gross margin
registered 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 if 198% 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.
Test Your Understanding
1. What is horizontal analysis?

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___________
DRILL 1
Presented below are the comparative statements of financial position and comparative income statement of On The Dot Trading. Perform a
horizontal analysis showing the increase or decrease for the year 2017 in comparison to the year 2016.
On The Dot Trading
Statement of Financial Position
As of December 31

Assets 2017 2016 Increase ( December)

Amount Percent

Current Assets
Cash P 158,000 P 84,000
Short-term Investments 130,000 192,000
Accounts Receivable , Net 240,000 200,000
Merchandise Inventory 500,000 530,000
Total Current Assets P 1,028,000 P 1,006,000
Property, Plant, and Equipment (Net) 2,340,000 2,350,000
Total Assets P 3,368,000 P 3,356,000
Liabilities and Owner’s Equity

Current Liabilities P 530,000 P 584,000

Non-Current Liabilities 800,000 840,000
Total Liabilities P 1,330,000 P 1,424,000
Owner’s Equity 2,038,000 1,932,000
Total Liabilities and Owner’s Equity P 3,368,000 P 3,356,000
 On the Dot Trading
Income Statement
For the Years Ended December 31
(In millions)

Increase (Decrease)
2017 2016 Amount Percent
Net Sales P 4,972 P 4,150
Cost of Goods Sold 3,046 2,444
Gross Profit P 1,926 P 1,706
Selling and Administrative Expenses 1,556 1,500
Operating Income P 370 P 206
Interest Expense 88 92
Income Before Income Taxes P 282 P 114
Income Tax Expense 94 42
Net Income P 188 P 72
Lesson 4-3
VERTICAL ANALYSIS
Lesson Objective
* Use vertical analysis to evaluate financial statements.

VERTICAL ANALYSIS IN THE STATEMENT OF FINANCIAL POSITON

In the statement of financial position, vertical analysis, otherwise known as common size analysis, helps management
analyze the components of the total asset as well as the components of the total liabilities and owner’s equity. It helps
management answer certain question as follow:
1. Of the total asset, what percent is classified as current? Non current?
2. Of the total asset, what percent is account receivable ? Merchandise Inventory?
3. Of the total Liabilities, what percent is classified as current ? Non current?
4. Of the total liabilities and owner’s equity, what percent is liabilities ? What percent is owner’s equity?
The answer to the above question may lead to another question such as when accounts receivable occupy a big
percentage of current assets, are these receivable collectable? This may reflect on the company’s credit and collection policy.
This indicates the leniency of a company extending credit to its costumers and the terms and policies of collection. If a big
percentage of the total assets is allotted to merchandise inventory , this raises a question as to the whether the inventory
saleable or obsolete. For the percentage of total liabilities versus owner’s equity this indicates the part of the company
financed by the creditors and the part of the company financed by the owner. In short, what part of total assets is financed
by the creditors and what part of the total assets is financed by the owner?
VERTICAL ANALYSIS IN THE INCOME STATEMENT
In the income statement, vertical analysis help management analyze the components of the income statement in
relation to its revenue account which is sales. It help management answer certain question as follows:
1. What percentage of net sale is cost of sales or cost of good sold? Gross Profit ? Operating Expense?
2. If operating expenses were divided between selling and administrative expenses, what percent of net sale is
absorbed
by selling expenses ? Administrative expenses?
3. What is the percentage of net income to sales?
the following are the steps in performing vertical analysis
1. Prepare comparative financial statement 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 asset. The
total assets is automatically 100% likewise, total liabilities and owner’s equity is automatically 100%
Example
P 725.8
% of current assets = X 100% = 28%
2,592.2
 P 1,822.4
% of non-current liabilities= X 100% = 70.3%
P 2,592.2
4. For the comparative income statement, express each account as a percentage of net sales. Net sales automatically
100%
Example

P 1,032.1
% of cost of goods sold= X 100% = 46.6%
P 2,213.3
 Fidas Merchandising
Statement of Financial Position
as of December 31
(in millions)
Assets 2017 Percent 2016 Percent
Current asset
Cash P 222.9 8.6 P 330.2 27.0
Accounts Receivable (net) 282.5 10.9 172.1 14.1
Inventory 146.3 5.6 92.8 7.6 Prepaid
Expenses 74.1 2.9 70.3 5.8 total assets
P 725.8 28.0 P 665.4 54.5

Property, Plant, and Equipment (net) 1,866.4 72.0 556.2 45.5

Total Assets P 2,592.2 100 P 1,221.6 100

 Liabilities and Owner’s Equity

Current Liabilities P 551.9 21.3 P 620.6 50.8

Non-Current Liabilities
Loan Payable 1,822.4 70.3 376.6 30.8
Total Liabilities P 2,374.3 91.6 P 997.2 81.6
Owner’s Equity 217.9 8.4 224.4 18.4
Total Liabilities and Owner’s Equity P 2,592.2 100 P 1,221.6 100

Note: Notice that assets, each asset type is expressed as percentage of the total assets while the liabilities and the owner’s
equity are expressed as a percentage of the total liabilities and owner’s equity.
 Fidas Merchandising
Income Statement
For the years ended December 31
(in million)
2017 percent 2016 percent
Net Sales P 2,213.3 100 P 1,738.7 100
Cost of Goods Sold 1,032.1 46.6 831.8 47.8
Gross Profit P 1,181.2 53.4 P 906.9 52.2
Selling and Administrative Expenses 889.2 40.2 659.5 38.0
Operating Income P 292.0 13.2 P 247.4 14.2
Interest Expense 90.9 4.1 30.5 1.8
Income Before Income Taxes P 201.1 9.1 P 216.9 12.4
Income Tax Expense 60.3 2.7 65.0 3.7
Net Income P 140.8 6.4 P 151.9 8.7

Note: Notice that each component of the income statement is expressed as a percentage of net sales.
INTERPRETATION OF DATA
Analysis

1. Current assets was 54.5 of total assets in2016 However, this percentage decreased to 28% in 2017. this was due to the
significant increase in property, plant, and equipment. Hence, the dramatic change in total assets composition.

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 plant assets.

3. Current liabilities was 50.8 of total liabilities and owner’s equity in 2016 but significantly decreased to 21.3% 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 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

4. From the income statement, the percentage of net income to sales decrease 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 minima 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 that double from 1.8% to 6.4% despite the company’s acquisition of property , plant , and equipment.
Test Your Understanding
1. What is Vertical Analysis?
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DRILL 2
Base on the information given, perform a vertical analysis for On The Dot Trading .
On The Dot Trading
Statement of Financial Position
As of December 31
Assets 2017 Percent
2016 Percent current asset
cash
P 158,000 P 84,000
Short-term Investment 130,000
192,000 Accounts Receivable, net
240,000 200,000
Merchandise Inventory 500,000
530,000 Total Current Assets
P 1,028 ,000 P 1,006,000
Property, plant, and equipment (net) 2,340,000
2,350,000 Total Assets P 3,368,000
P 3,356,000
Liabilities and Owner’s Equity

Current Liabilities P 530,000

P 584,000 Non-
current Liabilities 800,000
840,000 Total Liabilities
P 1,330,000 P
1,424,000 Owner’s Equity
2,038,000
1,932,000 Total Liabilities and
Owner’s Equity P 3,368,000 P
3,356,000
 On The Dot Trading
Income Statement
for the years ended December 31
(in million)

2017 Percent
2016 Percent
t sales P 4,972 P 4,150
Cost of Good Sold 3,046
2,444 Gross Profit
P 1,926 P 1,706
ling and Administrative Expenses 1,556 1,500
Operating income P 370
P 206 Interest Expense
88 92
ome before income taxes P 282 P 114
income tax expense 94
42 Net Income
P 188 P 72
 Lesson Objective
* use trend analysis evaluate financial statement

In trend analysis a base year is established which is labeled as

the 100% thereby expressing figures of all other years as
percentage of the base year. The amount under each year is
divided by the amount in base year there by determining the
amount of the other years in relation in the base year.
STEPS IN PERFORMING TREND ANALYSIS
1. Prepare comparative financial
statement for three, four, 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%Trend % = x 100%
chosen year
Example
P 665.40
x 100% = 11.3%
597.60
 Fidas Merchandising
Statement of financial position
as of December 31
(in million)
ASSET 2017 2016
2015
current assets
Cash P 222.9
P 330.2 P 290.0 Account Receivable
(net) 282.5 172.1 156.0
Inventory 146.3 92.8
90.9 Prepaid expenses
74.1 70.3 60.7
Total current asset P 725.8 P 665.4
P 597.6 Property, plant, and equipment (net) 1,866.4
556.2 625.5 Total Assets
P 2,592.2 P 1,221.6 P 1,223.1
Liabilities and Owner’s Equity
Current Liabilities
P 551.9 P 620.6 P 580.7
Non-current Liabilities 1,822.4 376.6
400.0 Total Liabilities
P 2,374.3 P 997.2 P 980.7
Owner’s Equity 217.9 224.4
242.4 Total liabilities and owners equity
P 2,592.2 P 1,221.6 P 1,223.1
 Fidas Merchandising
Income Statement
For the Years Ended December 31
(in million s)

2017 2016 2015

Net Sales P 2,213.3 P 1,738.7 P 1,543.2
Cost of Goods Sold 1,032.1 831.8 700.1
Gross Profit P 1,181.2 P 906.9 P 843.1
Selling and Administrative 889.2 659.5 555.5
Operating Income Expenses P 292.0 P 247.4 P 287.6
Interest Expense 90.9 30.5 P 25.0
Income before income taxes P 201.1 P 216.9 P 262.6
Income Tax Expense (30%) 60.3 65.0 77.4
Net Income P 140.8 P 151.9 P 185.2
 Fidas Merchandising
Income Statement
For the Years Ended December 31
(in millions)

Assets 2017 2016 2015

% % %
Current Assets
Cash 76.9 113.9 100
Accounts Receivable (net) 181.1 110.3 100
Inventory 160.9 102.1 100
Prepaid Expenses 122.1 115.8 100
Total Current Assets 121.5 111.3 100
Property, Plants, and Equipment (net) 298.4 88.9 100
Total Assets 211.9 99.9 100
Liabilities and Owner’s Equity

Current Liabilities 95.0 106.9 100

Non-Current Liabilities
Loan Payable 455.6 94.2 100
Total Liabilities 242.1 101.7 100
Owner’s Equity 89.9 92.6 100
Total Liabilities and Owner’s Equity 211.9 99.9 100
 Fidas Merchandising
Income Statement
For the Years Ended December 31
(In millions)

2017 2016 2015

% % %
Net Sales 143.4 112.7 100
Cost of Goods Sold 147.4 118.8 100
Gross Profit 140.1 107.6 100
Selling and Administrative Expenses 160.0 118.7 100
Operating Income 101.5 86.0 100
Interest Expense 363.6 122.0 100
Income Before Income Taxes 76.6 82.6 100
Income Tax Expense 77.9 84.0 100
Net Income 76.0 82.0 100
Analysis
1. Cash increase in 2016 but significantly decrease in 2017. Account receivable and Inventory continued its upward trend
for 3 years . Although net sales has an upward trend, its increase is not on a par with the increase in accounts receivable
and inventory 4, 2017. The company’s credit and collection policy should be reviewed and inventory should be checked for
obsolete and slow moving items.

2. Property, plant, and equipment decreased in 2016 but drastically increase in 2017 due to acquisitions 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.

3. Total liabilities has an upward trend while owner’s equity has a downward trend indicating that the company heavily
relied on outside funds from creditors.

4. Net sales had an upward trend for three years while property, plant, and equipment decreased in 2016 but significantly
increased in 2017. This may indicate that the company is benefitting from the use of the newly acquired non-current assets
as evidenced by the increase in sales.

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 UNDERSTANDABLY WENT ON A DOWNWARD
TREND DESPITE AN UPWARD TREND IN NET SALES.

TEST YOUR UNDERSTANDING

1. WHAT IS TREND ANALYSIS?

__________________________________________________________________________________
__________________________________________________________________________________
DRILL 3
On the Dot Trading
Statement of Financial Position
As of December 31

Assets 2017 2016 2015

Current Assets
Cash P 158,000 P 84,000 P 70,000
Short-term Investment 130,OO0 192,000 200,000
Accounts Receivable, Net 240,000 200,000 180,000
Merchandise Inventory 500,000 530,000 550,000
Total Current Assets P 1,028,000 P 1,006,OOO P 1,000,000
Property, Plant, and Equipment (net) 2,340,000 2,350,000 2,360,000
Total Assets P 3,368,000 P 3,356,000 3,360,000
Liabilities and Owner’s Equity

Current Liabilities P 530,000 P 584,000 P 600,000

Non-Current Liabilities 800,000 840,000 860,000
Total Liabilities P 1,330,000 P 1,424,000 P 1,460,000
Owner’s Equity 2,038,000 1,932,000 1,900,000
Total Liabilities and Owner’s Equity P 3,368,000 P 3,356,000 P 3,360,000
 On the Dot Trading
Income Statement
For the Years Ended December 31
(in million)

2017 2016 2015

Net Sales P 4,972 P 4,150 P 3,600.0
Cost of Good Sold 3,046 2,444 2,200.0
Gross Profit P 1,926 P 1,706 P 1,400.0
Selling and Administrative Expense 1,556 1,500 1,200.0
Operating Income P 370 P 206 200.0
Interest Expense 88 92 84.0
Income Before Income Taxes P 282 P 144 P 116.0
Income Tax Expense 94 42 37.2
Net Income P 188 P 72 P 78.8
• Financial Statement Analysis
The two phases involve in the analysis of financial statements are
1. computation phase and
2. Interpretation phase
• Tools used in the analysis of financial statements
a. 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 with zero or negative
balances, the computation of percentage of change will not apply.
b. 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.
C. Trend Analysis- analyze not only two years in comparison but covers three, four or five years financial statement. This
is to determine in the industry.
d. Financial Ratios- describes the significant relationship between the numbers presented in the financial statements.
Ratios can be expressed either as a rate percentage, or a proportion.
Let’s Have Exercise
Exercise 1
Multiple choice
________1. In horizontal analysis each account is expressed as a percentage of a
a. total asset
b. total liabilities and owner’s equity
c. both a and b
d. base year
e. none of the above
_________2. In vertical analysis the base amount for bad debts expense in
a. accounts receivable
b. bad debts expense of past year
c. non current asset
d. net sales
e. none of the above
_________3. Identify the type of analysis shown on the items below
amount percent
Total liabilities ₱300,000 60%
Owner’s Equity 200,000 40%
Total liabilities and owner’s equity ₱500,000
a. horizontal analysis
b. vertical analysis
c. trend analysis
d. ratio analysis
e none of the above
_________4. Table Co. reported net sales of ₱ 150,000, ₱200,000 for 2015, 2016 and 2017 respectively. Assuming the base
year to be 2015, what is the trend percentage for 2017
a. 100%
b. 125%
c. 133%
d.150%
e. 200%
Exercise 2
Compute the annual peso changes and the percent for each of the following
2017 2016
Trade and other receivables ₱ 220,000 ₱160,000
Prepaid Expense 25,000 0
Trade and other Payable 38,000 44,000

Exercise 3
Perform a horizontal analysis for Sunlight Sonata Trading
2017 2016
Net sales ₱450,000 ₱ 375,000
Cost of good sold 315,000 300,000
Gross Profit ₱135,000 ₱ 75,000
Operating expense 101,250 60,000
Net Income ₱ 33,750 ₱ 15,000
Exercise 4
The following are accounts taken from the books of sunlight sonata trading for the month of
April. Perform a vertical analysis for the company.
2017 2016
Net sales P 450,000 P
375,000 Cost of good sold 315,000
300,000 Gross profit
P 135,000 P 75,000 Operating Expense
101,250 60,000 Net income
P 33,750 P 15,000

Exercise 5
Perform a trend analysis for sunlight sonata trading

2017 2016
2015 Net sales P 450,000 P 375,000
P 320,000 Cost of good sold 315,000
300,000 280,000 Gross Profit P
135,000 P 75,000 P 40,000 Operating Expense
P 101,250 60,000 25,000
Net Income P 33,750 P 15,000 P
15,000
Exercise 6
the following are the financial statement of moonlight dream co.
moonlight dream company
statement of financial position
as December 31
2017 2016
current assets ₱210,000 ₱180,000
property, plant, and equipment 420,000
250,000 total asset
₱630,000 ₱430,000

Current Liabilities ₱ 90,000 ₱100,000

Non-current liabilities 250,000 150,000
Total Liabilities ₱ 340,000 ₱ 250,000
Owner’s Equity 290,000 180,000
Total Liabilities and owner’s equity P 630,000 P 430,000

Required 1. Perform a horizontal analysis for 2016 and 2017

2. Perform a vertical analysis for 2016 and 2017
Exercise 7
Given the data for three years for Moonlight Dream Company, perform a trend analysis
Moonlight Dream Company
Statement of Financial Position
As December 31
2017 2016 2015
Current Assets ₱ 210,000 ₱180,000 ₱150,000
Property, Plant, and Equipment 420,000 250,000 230,000
Total Asset ₱ 630,000 ₱430,000 ₱380,000

Current Liabilities ₱ 90,000 ₱ 100,000 ₱ 130,000

Non- current liabilities 250,000 150,000 100,000
Total Liabilities ₱ 340,000 ₱250,000 ₱230,000
Owner’s Equity 290,000 180,000 150,000
Total liabilities and owner’s equity ₱630,000 ₱ 430,000 ₱380,000
 CHAPTER TEST
I. Identify the type of financial statement analysis performed under each of the following.
______________ 1. Shows the relationship of each part to the whole in a single financial statement.
____________2. Describes the significant relationship between the numbers presented in the financial statements.
_____________3. 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.
___________4. Analyzes not only two years in comparison but covers three, four or five year’s financial statements to
determine the trends in the industry.
_____________5. In the income statement, each item is presented as a percentage of net sales .
_________6. This cam be expressed either as a rate, percentage or a proportion.
_____________7. this is to determine the trends in the industry.
_________8. In the statement of financial position, each item is expressed as percentage of total assets.
__________9. The amount under year is divided by the amount in base year thereby determining the amount of the other
years in relation to the base year.
_________10. Helps management analyze increase and decreases in balance sheet and income statement
accounts.
B. Given below is the income statement of food to Go
2017 2016 2015
Net sales ₱ 820,000 ₱850,000 ₱700,000
Cost of goods sold 450,000 600,000 500,000
Gross Profit ₱ 370,000 ₱250,000 ₱200,000
Operating expense 170,000 160,000 130,000
Net Income ₱200,000 ₱ 90,000 ₱ 70,000

Required : 1. Perform a horizontal analysis for 2016 and 2017

2. Perform a vertical analysis for 2016 and 2017
3. perform a trend analysis.