Analysis and Interpretation of

Financial Statements
Module 6
From this module, you will find the following lessons:

Lesson 1: Measurement Levels

Lesson 2: Financial Statement Analysis - Horizontal and Vertical
Analysis

LEARNING OBJECTIVES
Upon successful completion of this module, you will be able to:
• define the measurement levels, namely, liquidity, solvency, stability, and profitability;
(DepEdMELC, DICES) and
• perform vertical and horizontal analyses of financial statements of a single
proprietorship; (DepEdMELC, DICES
 TABLE OF CONTENTS

MEASUREMENT Financial Statement Analysis

- Horizontal and Vertical
01 LEVELS
Liquidity, Solvency, 02 Analysis
Horizontal and Vertical Analysis
Profitability and Efficiency

Exercises
03
01
Measurement
Levels
 Financial Statement Analysis

- refers to evaluating risks, performance, financial

health, and prospects of a business using
computational and analytical techniques used in
making economic decisions. 3 There are four
measurement levels, namely: liquidity, solvency,
profitability, and efficiency.
 Financial Statement Analysis
LIQUIDITY
- is the ability to convert the asset into cash. It is the
ability of the business to pay current liabilities as they fall
on its due date.
SOLVENCY
- is the term used to refer to the current level of
financial stability associated with a company or individual.
It is the ability to pay long-term debts.
 Financial Statement Analysis
PROFITABILITY
- refers to the company’s ability to generate income
from the use of its assets and invested capital as well as
control its cost

Efficiency
- is the ability of the business to utilize assets to
generate sales.
02
Financial Statement Analysis
- Horizontal and Vertical
Analysis
 HORIZONTAL ANALYSIS

- also known as trend analysis, is a technique for

evaluating a series of financial statement data over
time to determine the increase or decrease in place.
It involves the comparison of a line item (account)
over a number of periods. It uses two or more
financial statements and may be performed on all
financial statements like SFP and SCI
 HORIZONTAL ANALYSIS
Example:
  2015 2014 Peso change Percentage Change
Sales P 250,000 P 175,000 P 75,000 42.86%
“Sales” was used as a line item which can be found in SCI..

= 2015 sales – 2014 sales

= 250,000 – 175,000
= P 75,000

x 100 %
 HORIZONTAL ANALYSIS
Directions: Perform horizontal analysis for JC Trading Company. Use a separate paper for your answers. JC Trading
Company Statement of Comprehensive Income
For the year ended December 31, 2015 and 2016
2016 2015 Peso Change Percentage
Change
Net Sales P 5,385,860 P 4,921,850
Less: Cost of 1,374,790 1,254,860
Goods Sold
Gross Profit 4,011,070 3,666,990
Less: Other 3,406,460 3,127,150
expenses
Operating Income 604,610 539,840
Less: Interest 11,820 23,040
Expense
Net Income P 592,790 P 516,800
 VERTICAL ANALYSIS

Vertical Analysis is the preparation of

common-size financial statements. It is a
technique that expresses each financial
statement line item as a percentage of a base
amount. In SFP, the base amount used is total
assets while in SCI, sales or net sales is used
as the base amount. 
 VERTICAL ANALYSIS

XYZ Company
Statement of Comprehensive Income
December 31, 2013 and December 31, 2014
  2014 2013
  Amount Percentage Amount Percentage
Net Sales P 7,457,736 100% P 6,396,040 100%
Less: Cost of Goods Sold 6,228,552 84% 5,859,680 92%
Gross Profit
Less: Other Expenses 1,229,184 16% 536,360 8%
Operating 886,177 12% 561,974 9%

Income 343,008 5% -25,614 0%

Less: Interest Expenses 74,208 1% 144,173 2%
Net Income P 268,799 4% P -169,787 -3%
Net Sales is the base amount and is set as 100%. Each item is then divided
by net sales to convert it in the percentage of net sales.
 VERTICAL ANALYSIS

Computation for 2014 COGS =

;then do the same with the other line item (gross profit until net income of year 2014) to
get its percentage of net sales. The same computation will be applied for the year 2013.
03

EXERCISES
POST - ASSESSMENT 
1.Directions: The Statement of Comprehensive Income of Alexis Company is reproduced below. 

12/31/2014 12/31/2013

Net Sales ₱ 3, 375,000.00 ₱ 2,700,000.00

Cost of Goods Sold     2,092,500.00   1,755,000.00
Selling expenses       540,000.00       324,000.00
Administrative expenses       270,000.00       243,000.00
Interest expense       148,500.00       108,000.00
Net Income ₱     324,000.00 ₱    270,000.00
POST - ASSESSMENT  

Perform the following financial statement

analysis:

1. horizontal analysis for 2014 using 2013 as

the base year.
2. vertical analysis for 2014 and 2013.
THANK YOU!