Report on

Financial Statement
Analysis
What is a Financial Statement Analysis
Report?

It is a basic tools in evaluating the

performance and financial condition of a
company or an organization.

It communicates to the users, the

company's strengths and weaknesses in a
way that is useful and easy to understand.
 What is a financial statement?
Financial statements or financial reports are
structured presentation of the financial activities and
financial position of a company or an entity.
It furnishes a general answers to the following
questions.
• Does the company earns adequate profit?
• Can a company pay its bills promptly?
• Is an investment in the company a safe
investment?
Who are the primary users of Financial
Statements?
• Stockholders
• Creditors : Banks / suppliers / other
financial institutions
• Investors
• Government Entities : BIR / SEC
Primary or Basic Financial
Statements
1. Balance sheet: This is referred to as a
statement of financial position.

It contains a report on a company's assets,

liabilities, and owners equity at a given point
in time.
 ABC and COMPANY
Balance Sheet
December 31, 2015 and 2014
(In Millions)

Year 2015 Year 2014

ASSETS
Current Assets
Cash 488 523
Accounts Receivable (net of uncollectibles) 2,130 1,145
Inventories 2,190 1,355
Prepaid Expenses 14 37
Total current Assets 4,822 3,060
Plant Assets, net of accumulated Depreciation 8,418 6,748
TOTAL ASSETS 13,240 9,808

LIABILITIES AND STOCHOLDERS EQUITY

Current Liabilities
Accounts Payable 1,951 637
Notes payable 100 80
Other current Liabilities 1,044 523
Total Current Liabilities 3,095 1,240
Long Term Liabilities 4,000 3,500
TOTAL LIABILITIES 7,095 4,740
Stockholders Equity
Paid In Capital Stock 1,550 1,550
Retained Earnings 4,595 3,518
Total Stockholders' Equity 6,145 5,068
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 13,240 9,808
2. Income Statement: This
provides information on the
results of operation of a company,
entity or an enterprise.

These include sales, cost of sales

and various expenses incurred
during the stated period.
 ABC and COMPANY
Income Statement
For the years ended December 31, 2015 and 2014

Change in % Change
2015 % to NS 2014 % to NS Value Y15vsY14

Net Sales 15,240 100.00% 5,811 100.00% 9,429 162.3%

Cost of Goods Sold 11,787 77.34% 3,933 67.68% 7,854 199.7%

Gross Margin 3,453 22.66% 1,878 32.32% 1,575 83.9%

Operating Expenses 1,127 7.40% 915 15.75% 212 23.2%

Operating Income 2,326 15.26% 963 16.57% 1,363 141.5%

Interest Expense 430 2.82% 148 2.55% 282 190.5%

Income Before Income Tax 1,896 12.44% 815 14.03% 1,081 132.6%

Provision for Income Tax 759 4.98% 326 5.61% 433 132.8%

Net Income 1,137 7.46% 489 8.42% 648 132.5%

3. Equity Statement or Statement
of Retained Earnings: It reports
on the changes in equity of the
company during the stated period.

These changes comprise capital,
drawings and the profit for the
period.
 ABC and COMPANY
Statement of changes in Owner's Equity
For the year ended December 31, 2016
(In Millions)

Paid In Capital Stock 23,250

Retained Earnings:

RE January 01, 2016 65,380

Net Income for the year 6,636

Prior period adjustment 512

Dividend (3,603)

RE December 31, 2016 68,925

Total Stockholders' Equity 92,175

Methods of Analyzing a Financial
Statement.

1.Vertical
2.Horizontal
3.Trend Analysis
4.Ratio Analysis
1. Vertical Analysis: This is the method being
used in analyzing a single period financial statement.

On the Income Statement, percentages (%) represent

the correlation of each separate account to net sales.

On Balance Sheets, uses total assets and total

liabilities for comparison of individual balance sheet
accounts.
 ABC and COMPANY
Income Statement
For the years ended December 31, 2016
Year 2016 % to NS

Net Sales 16,000 100.0%

Cost of Goods Sold 12,000 75.0%

Gross Margin 4,000 25.0%

Operating Expenses:

Advertising and Promo 300 1.9%

Compensation and Benefits 385 2.4%

Commissions 56 0.4%

Freight and Delivery 200 1.3%

Gasoline and Oil 58 0.4%

Power and water 46 0.3%

Supplies 30 0.2%

Telephone, tel and Postages 25 0.2%

Other opex 117 0.7%

Total operating expenses 1,217 7.6%

Operating Income 2,783 17.4%

Interest Expense 430 2.7%

Income Before Income Tax 2,353 14.7%

Provision for Income Tax 706 4.4%

Net Income 1,647 10.3%

 December 31, 2016
(In Millions)
Year 2016
ASSETS
Current Assets
Cash 7,320
Accounts Receivable (net of uncollectibles) 31,950
Inventories 32,850
Prepaid Expenses 210
Total current Assets 72,330
Plant Assets, net of accumulated Depreciation 126,270
TOTAL ASSETS 198,600
LIABILITIES AND STOCHOLDERS EQUITY
Current Liabilities
Accounts Payable 29,265
Notes payable 1,500
Other current Liabilities 15,660
Total Current Liabilities 46,425
Long Term Liabilities 60,000
TOTAL LIABILITIES 106,425
Stockholders Equity
Paid In Capital Stock 23,250
Retained Earnings 68,925
Total Stockholders' Equity 92,175
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 198,600
2. Horizontal analysis is the comparison of data
sets for two periods. Financial statements users
review the change in data using prior year as an
indicator.
Items that the analysts look for are as follows:
- Growth in revenue, Net Income and assets
- Changes in the expenses in proportion to changes
in revenue.
- Changes in liabilities.

The changes maybe expressed in absolute value or

in percentages.
 ABC and COMPANY
Income Statement
For the years ended December 31, 2015 and 2014

Change in % Change
2015 % to NS 2014 % to NS Value Y15vsY14

Net Sales 15,240 100.00% 5,811 100.00% 9,429 162.3%

Cost of Goods Sold 11,787 77.34% 3,933 67.68% 7,854 199.7%

Gross Margin 3,453 22.66% 1,878 32.32% 1,575 83.9%

Operating Expenses 1,127 7.40% 915 15.75% 212 23.2%

Operating Income 2,326 15.26% 963 16.57% 1,363 141.5%

Interest Expense 430 2.82% 148 2.55% 282 190.5%

Income Before Income Tax 1,896 12.44% 815 14.03% 1,081 132.6%

Provision for Income Tax 759 4.98% 326 5.61% 433 132.8%

Net Income 1,137 7.46% 489 8.42% 648 132.5%

3. Trend analysis is a continuation of horizontal analysis. It is a
review of three or more financial statement periods.

The base year represents the earliest year in the data set. Although absolute
values can represent subsequent periods, analysts commonly use
percentages for comparability purposes.

Users review statements for patterns of incremental change representing

changes in the business in questions. Financial statement improvements
include increased income and decreased expenses.
4. Ratio analysis: Financial ratios
express relationships between financial statement
items. Aside from the historical data they provide,
management uses ratios in identifying internal
strengths and weaknesses as well as to estimate
future financial performance. Investors can use
ratios to compare companies in the same industry.
Ratios are more meaningful when compared to
historical data and industry averages.
Basic Types of Financial Ratios
Used to Measure a Company's
Performance.

1. Liquidity
2. Solvency
3. Profitability
4. Efficiency
Liquidity is a term used to describe a company's ability to raise cash in a
short period, usually 30 days and it indicates a company's ability to pay its short-term
bills.

The most common liquidity ratio is Current ratio. This is the ratio of current assets to
current liabilities.
• Minimum ratio is greater than one because anything less than one means the
company has more liabilities than assets.
• A high ratio indicates more of a safety cushion, which increases flexibility because
some of the inventory items and receivable balances may not be easily convertible
to cash.

How to improve companies current ratio:

- Pay short term debts
- Convert short-term debts into long-term debt
- Collect receivables faster
- Buy inventory only when necessary.
Liquidity Ratio :

CA 4,822
Current Ratio = = = 155.80%
CL 3,095
Solvency ratios indicate financial
stability. They measure a company's debt
relative to its assets and equity. A
company with too much debt may not
have the flexibility to manage its cash
flow if interest rates rise or if business
conditions deteriorate. The common
solvency ratios are:
Debt-to-asset ratio is the ratio of total debt to
total assets. This is used to determine how much
a company relies on its debt to finance its assets.
The lower the debt to asset ratio, the more likely a
business is to be granted a loan.

Total Debt 7,095

Debt to Asset Ratio = = = 53.59%

Total Assets 13,240

 Debt-to-equity ratio is the ratio of total debt to shareholders'
equity. This shows how much of the company is financed by debt
compared to the amount financed by equity. If the ratio is
increasing, the business could be at risk from taking on too much
debt. This is a good indicator of the solvency of the business or its
ability to continue operations long-term.
(Equity is the difference between total assets and total liabilities.)

Total Debt 7,095

Debt to Equity Ratio = = = 115.46%

Total
6,145
Equity
Profitability ratios indicate
management's ability to
convert sales into profits and
cash flow.
The common ratios are:
- Gross margin is the ratio of gross profits to sales. The gross profit is
equal to sales minus cost of goods sold.
- Operating margin is the ratio of operating profits to sales. The
operating profit is equal to the gross profit minus operating expenses.
- Net income margin is the ratio of net income to sales. Net income is
equal to the operating profit minus interest and taxes.
( Use Income Statement Slide on Vertical Analysis as illustrative figure)
 The return-on-asset ratio, which is the ratio of net
income to total assets, measures a company's
effectiveness in deploying its assets to generate
profits.

Net
Income 1,137
Return on Asset = = = 8.59%
Total
Asset 13,240
The return-on-investment ratio is the ratio of net
income to shareholders' equity, indicates a
company's ability to generate a return for its owners.

Net
Income 1,137
Return on Equity
= = = 18.50%
Ratio
Total
Equity 6,145
 Efficiency Ratios
.. Also called activity ratios, measure how
well companies utilize their assets to
generate income.

These ratios are used by management to

help improve the company as well as
outside investors and creditors looking at
the operations of profitability of the
company.
Inventory turnover: This ratio measures how many
times in an accounting period the inventory balance is sold out. A high
inventory turnover ratio means that the company is successful in
converting its inventory into sales. A low inventory Turn-over implies
poor sales performance. The best way to gauge efficiency in selling
inventory is to compare your inventory turnover ratio against previous
records, against competitor’s ratio or against industry-average figures.

COGS 11,787
Inventory T.O. = = = 6.65
Ave. Invty 1,773

365 days 365

Days Inventory
= = = 54.89 days
Outstanding
ITO 6.65
Accounts Receivables turnover : This ratio
measures how quickly a company is able to collect money
that is owed by its customers. It is the ratio of credit sales to
accounts receivable, which tracks outstanding credit sales. A
high accounts receivable turnover means that the company is
successful in collecting its outstanding credit balances. . A
low ratio implies poor credit and collection performance.
Net Sales 15,240
AR T.O. = = = 9.31
Ave. AR 1,638

365 days 365

DSO = = = 39.22 days
ARTO 9.31
 Variance Analysis on Income Statement.

ABC and COMPANY

Income Statement
For the year ended December 31, 2015

Favorable
2015 (unfavorable) Performance
Actual % to NS 2015 Budget % to NS Variance rate %

Net Sales 15,240 100.00% 16,000 100.00% (760.00) 95.25%

Cost of Goods Sold 11,787 77.34% 12,400 77.50% 613.00 95.06%

Gross Margin 3,453 22.66% 3,600 22.50% (147.00) 95.92%

Operating Expenses 1,127 7.40% 1,300 8.13% 173.00 86.69%

Operating Income 2,326 15.26% 2,300 14.38% 26.00 101.13%

Interest Expense 430 2.82% 420 2.63% (10.00) 102.38%

Income Before Income Tax 1,896 12.44% 1,880 11.75% 16.00 100.85%

Provision for Income Tax 759 4.98% 752 4.70% (7.00) 100.93%

Net Income 1,137 7.46% 1,128 7.05% 9.00 100.80%

 XYZ and COMPANY
Balance Sheet
December 31, 2015 and 2014
(In Millions) ABC and COMPANY
Income Statement
Year 2015 Year 2014 For the years ended December 31, 2015 and 2014
ASSETS
Current Assets 2015 2014

Cash 2,440 2,615 Net Sales 76,200 27,602

Accounts Receivable (net of uncollectibles) 10,050 5,725 Cost of Goods Sold 58,935 18,682

Inventories 10,950 6,775 Gross Margin 17,265 8,921

Prepaid Expenses 370 185 Operating Expenses 5,635 4,346

Total current Assets 23,810 15,300 Operating Income 11,630 4,574

Plant Assets, net of accumulated Depreciation 41790 33740 Interest Expense 2,150 703

TOTAL ASSETS 65,600 49,040 Income Before Income Tax 9,480 3,871

Provision for Income Tax 2,844 1,161

Net
Income
LIABILITIES AND STOCHOLDERS EQUITY After Tax 6,636 2,710
Current Liabilities

Accounts Payable 9,755 3,185

Notes payable 500 400 Compute For the following:

Other current Liabilities 5,220 2,615

Current Ratio
Total Current Liabilities 15,475 6,200 1

Long Term Liabilities 20,000 17,500 2 Accts Receivable T.O.

TOTAL LIABILITIES 35,475 23,700 3 Inventory T.O.

Stockholders Equity 4 Debt to Equity Ratio

Paid In Capital Stock 8,000 8,000 5 Debts to Assets Ratio

Retained Earnings 22,125 17,340 6 GP Margin

Total Stockholders' Equity 30,125 25,340 7 Return on Equity

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 65,600 49,040 8 Return on Assets