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STATEMENT ANALYSIS
Ma. Cristina P. Obeso, CPA, MBA
MODELS OF FINANCIAL STATEMENT
ANALYSIS
There are at least four traditional techniques of
interpreting financial statements namely:
1. Horizontal Analysis
2. Trend Analysis
3. Vertical Analysis
4. Ratio Analysis
HORIZONTAL ANALYSIS
Also known as Comparative Analysis
The
difference could either be an increase or decrease both in amount and in percentage
Percentage of change = amount of change/base
The base may either be last year’s data, budgeted data, average industry data, or chief
competitor’s data
HORIZONTAL ANALYSIS
2010 2009 Increase %
(decrease)
Sales 550,000 450,000 100,000 22%
Gross Profit 260,000 180,000 80,000 44%
Operating Expenses 85,000 64,000 21,000 33%
Net Income 175,000 116,000 59,000 51%
TREND ANALYSIS
Comparative analysis which extends beyond two years
Uses indexes and ratios to simplify the visible
complication of numbers contained in the financial
reports
1. PROFITABILITY RATIOS
2. GROWTH RATIOS
3. LIQUIDITY RATIOS
4. LEVERAGE RATIOS (Financing Ratios)
RATIOS
Profitability Ratios
- measures the ability of the business to generate profit in relation to sales,
investments, assets, equities or common shares outstanding
Growth ratios
- indicative of the organization’s potential and attractiveness as an
investment option
Liquidity ratios
- ability of the business to pay its obligations in cash as they mature
- ability of the management to convert its current assets into cash in a
quick,stable, and regular manner
Cash realization
= Cash generated by operations
Net income
LIQUIDITY RATIOS
Current ratio = Current assets
Current liabilities
measures the ability of the business to meet its currently
maturing obligations
Inventory turnover
= Cost of Goods Sold/Ave. inventory
indicates the number of times inventories were acquired and
sold during the period
Working capital
= Current assets – current liability
amount invested by business to operate its
normal business activities