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Analysis of Financial Statements:

Traditional Approaches

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Financial statement analysis is the process of
selecting related data from financial statement
is to evaluate the entity’s past financial position
and operating performance and predict the
outcome of future operations

the process of evaluating the trend of a particular

accounting value in relation to that accounting
values.

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The type of information
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ial
statements focus primarily on
the following areas:
A. financial position

B. result of financial operation

C. cash flows

D. management stewardship of resources

The basic objective of financial statement analysis is to assist

the different users in the decision-making process.

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 The following
Click procedures
to edit Master titlemay be adopted in
style
analysing financial statements:

1. establish the objective of the financial

statement analysis

2. gather complete information about the

firm and study the industry in which the firm
operates

3. perform mathematical analysis using the

applicable tools

4.make conclusions relative to the

established objectives
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Click to section,
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the methods of
analysing the financial statements
include the following:

1.horizontal or comparative approach

2.vertical or common-size approach

3.trend approach

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 4.2 HORIZONTAL OR COMPARATIVE
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APPROACH

The horizontal or comparative analysis

approach is an analytical tool that evaluates
the present performance of an entity
compared to last year’s.

The primary objective of horizontal or

comparative analysis is to determine the present
status of the business particularly in terms of
financial position, result of operation, and cash
flows against last year's only.

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The findings and evaluations made on financial statements with
different dates as to day and month do not provide meaningful
information. Thus, horizontal of comparative analysis for
financial statement sending December 31,2018 with an inter
financial statements ending June 30, 2017 cannot be done. The
financial ended December 31, 2018 can be compared with and
evaluated against those December 31, 2017

there are two methods of performing horizontal or

comparative analysis:

1. Absolute amount comparison

2. Percentage comparison

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Closer attention should be paid to the significant

change in trade and other receivables.
say an increase of 350% over the last year's data
than other items comprising the current asset section
of the statement of financial position.
This may indicate the poor collection effort of the
business, or that the business may have relaxed its
credit policy.

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 The following simple guidelines may be observed in
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1. Present the current and previous year’s financial statements in

comparative format.

2. Compute the absolute amount of change or difference. The difference

could be either an increase or a decrease.

3. express the difference in percentage by dividing the amount of change by

the base.

4. the computation of percentage of change will not apply if the base amount
is negative or zero.

5. internet the change of an item by relating it with the change or movement

of other related items
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TheClick
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or common-size title
approach style
measures the size of an item in the
financial statements. The mathematical process involves determining the
proportional component of each item in the financial statements in relation to
the base accounting period, which is one or single period.

No other reference accounting period shall be used in the evaluation

process except that of year 2018 only This method of analysing financial
statements is useful for determining the proportion of each item in
different sections and providing a guide for resource allocation policy.

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The following guidelines may be observed in the preparation of common-
size financial statements.

1. Convert the absolute peso amount of the items in the financial

statements into percentage by dividing each item by the base. The
base shall be equal to 100%

2. Use following as a base: a. total assets for statement of financial

position;

a. Total assets for statements of financial position;

b. total or net sales for statement of comprehending income; and
c. total cash available for the statement of cash flows.

3. Make a conclusion on the allocation and indications of possibilities

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The following Mastermaytitle
be style
observed
in the preparation of common-size financial
statements;

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The common-size financial positions shows that the total resources of the
company have been allocated as follow: 44.20% for current assets and 55.80%
for non-current assets.

The trend percentage approach is used to analyze the financial statements

that extend beyond two years through the use of index numbers or
percentages.

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The operating performance of an entity can be evaluated better if the

analysis is limited within the last two years since there are temporary
items that may not be significant to the long term operations of the
company.

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Merchandising
Trend Analysis of the Comprehensive Income
December 31, 2014 to 2018

Sale 2014 2015 2016 2017 2018

Cost of sale 100 101 140 178 193
Gross profit 100 101 138 159 169
Operating expenses 100 104 145 228 257
Selling expenses. 100 101 159 183 220
Administrative 100 109 160 164 187
Total. 100 103 159 181 210
Operating Income. 100 105 111 356 377
Interest expense. 100 160 145 140 120
Income before tax. 100 98 107 381 406
Income tax. 100 98 108 382 400
Net income 100 98 107 380 406

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Liquidity status of the business or company
1. The trend on the current assets, especially for the
last two years, is upward while the trend on current
liabilities is moving inversely. This favourable trend
may indicate that the business has sufficient current
assets to settle its current maturing obligations.

2. The trend in trade receivables and inventory

appears to be increasing but not as high as the
trend in sales. This favourable upward movement
may indicate that the company has instituted more
effective credit and collection policy.

3. The increasing movement in cash and decline in

trading securities may indicate that the company is
giving priority to safety and liquidity.
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