Scribd Logo
Upload

Welcome to Scribd!

  • 250 views

    MAS 12 FS Analysis PDF

    Uploaded by

    Kimberly Ann Lumanog Amar

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content

    You might also like

    MAS 12 FS Analysis PDF

    Uploaded by

    Kimberly Ann Lumanog Amar
    250 views8 pages

    Original Title

    MAS-12-FS-Analysis.pdf

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    250 views8 pages

    MAS 12 FS Analysis PDF

    Uploaded by

    Kimberly Ann Lumanog Amar

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    of 8
    RSA -The Review School of ecowwHtancg, Momagerart lidrisorg Services MAS-12: FINANCIAL STATEMENT ANALYSIS FS ANALYSIS involves the evaluation of an entity's past performance, present condition, and business potentials by way of analyzing the financial statements to obtain information about (among others) ‘+ Profitability of the business firm + Ability to meet company obligations + Safety of investment in the business + Effectiveness of management in running the firm VARIOUS MODES of FINANCIAL STATEMENT ANALYSIS 1. Horizontal analysis 2. Vertical analysis 3. Gross profit variation analysis 4. Cash flow analysis 5. Financial ratios HORIZONTAL ANALYSIS Horizontal analysis (also called ‘trend! or ‘index’ analysis) involves comparison of amounts shown in the FS of two or more consecutive periods. The difference and percentage change of the amounts are calculated using the earlier period as the base period. Consider the following formula Percentage Change (A%) - Most Recent Value ~ Base Period Value ge Change (A%) = Base Period Value Comparisons can be made between an actual amount compared against a budgeted amount, with the budget’ serving as the basis or pattern of performance. LIMITATION: if @ negative or a zero amount appears in the base year, percentage change cannot be computed, VERTICAL ANALYSIS Vertical analysis is the process of comparing figures in the FS of a single period. It involves conversion of amounts in the FS to a common base. This is accomplished by expressing all figures in the FS as percentages of an important item such as total assets (in the balance sheet) or net sales (in the income Statement), These converted statements are callea common-size statements or percentage composition statements. Percentage composition statements are used for comparing: 1. Multiple years of data from the same firm 2. Companies that are different in size 3. Company to industry averages FINANCIAL RATIOS Financial ratios involve development of mathematica! relationships among accounts found in the FS. Financial ratios provide relevant information aizcut the firm's liquidity, solvency, stability, profitability and other aspects of an entity’s financial situation and eotential BASIC RULES IN COMPUTING FINANCIAL RATIOS hen calculating a ratio using balance sheet amounts only, the numerator and denominator should be based on amounts as of the same balance sheet date. The same is true for ratios using only income statement numbers. Exception: calculation of growth ratios. «If anincome statement amount and > balance sheet amount are used at the same time to calculate fa ratio, the balance sheet amount should be expressed as an average for the time period represented by the income statement amount. «Ir the beginning balance of a balance sheet account is not available and cannot be computed from the given data, the ending balance of the account is used to represent the average balance. + IPgsles and/or purchases are given without making distinction as to whether made in cash or on credit, assumptions are made depending on the ratio being calculated: Turnover ratios: Sales and purchases are made on credit. > Cash flow ratios: Sales and purchases are made in cash. + Asavrule, an operating year is assumed to have 360 days, unless specified otherwise. > A 360-day year Is generally preferred as this is consistent with a 12-month year and a 30-dey month; > Alternatively, @ year may be compi sed of 365 calendar days, 300 working days or any appropnate number of days, Page 1 of 8 pages ReSQ- The Review School of lccorrtencn, MAS-12 FINANCIAL STATEMENT ANALYSIS FINANCIAL RATIOS ‘STS OF LIQUIDITY (Liquidity refers. wih abilities as they fall due.) —_ Te yeasure of adequacy of working (Garters tate) Current Assets capital. Its the primary test of liquidity (Working Capital Ratio) Current Liabiities, | {© meet current obligations from current | - ___ assets. a _| {| [Tt measures the number of times that the | current liabilities could be paid with the | available cash and near-cash assets (1.€., | cash, current receivables and marketable company’s abi Quick Ratio Kk ASSeUs (Acid Test Ratio) nt ab : eae eons a man : ~~ orang isi Ai Ras (Shane ats) — \ Staternent Account: | No. of. of. days ina year Turnover cs ; | aveope bance Sree hecaurt || #¥6@86 206 | ‘tenor 7 T 7 credit Gales | R_Measures “the umber “of times Receivables Turnover Net Credit Sales receivables are recorded and Poet I Average Receivabies | | during the period ‘Average Age of Receivables Sal Tt indicates the average number of days | (Average Collection Period) Ree s Juring which the company must wait 7 Received | during which the company mus | _(Days’ Sales in Receivables} before receivables are collected. | Cost of Goods Sold | It measures the number of times that the | sve Terchanise ivory | ventory velaced during tre period | + | Inventory Turnover i “Average Age of Inventory Unventory Conversion Period) J It indicates the average number of days | during which the company must wait __| before the inventories are sold. Cost of Materials Used i Average Raw Material Inventory “360 anys tory Turnover ‘Cost of Goods Manufactured Average Work in Process Inventory Average Finished Goods Inventory | Normat Operating Cycle | Average Age of Inventury + Average Age of Receivables | Net Credit Purchases Average Trade Payables Trade Payabies Turnover | Average Age of Trade ea : ‘eo dere T — Te indicates. the length of time during (Payable Deterta ered) Payables Tornoe | which payables remain unpavd ss) snips | It measures the movement and utilization | of current assets to meet operating | | requirements. —s i some accounting and finance texts, average inventary age is also called as the average sales period. ** These exclude depreciation, amortization and other expenses related to long-term assets. st of Sales + Operating Expenses** | | Current Assets Turnover | Average Current Assets «TESTS OF SOLVENCY (Solvency refers to the ability of company to pay its debts) These ratios involve leverage ratios. “Leverege’ refers to how much of company’s resources are financed by debt and/or preferred equity, both of whuch cequure fxed payment of interests and dividends. [It determines the extent to which operations cover interest expense. Times Interest Earned | portion of assets provided by | | creditors compared to that provided Total Liabilities Debt-Equity Ratio Total equity ' _— | | by owner | Tota Liabities | proportion of total assets provided by | Total Assets | creators i — Total Cauity Proportion of total assets provided by | | Equity Ratio | Toten Assets. | owners. | Page 2448 pages @® wy RSA The Review School of lecvmtancy MAS-12 FINANCIAL STATEMENT ANALYSIS +__ TEST OF PROFITABILITY Return on Sales | Income Determines the portion of sales that | Net Sales went into company’s earnings. Return on assets | income Eftciency with which assets are used fa = operate the business | __verage assets __| Ro operate tne business, Issue: what INCOME figure should be used? + If the intention is to measure operational performance, income is expressed as before interest. and tax; alternatively, income before ‘after-tax’ interest may be used to exclude the effect of capital structure, + If the intention is to evaluate total managerial effort, income is expressed + The practice of expressing income after interest but before. tax is now rarely applied in business practice. + Income should include dividends and interest earned if the said investments are included in asset base. + If used in the context of “DuPont” technique, then income must be expressed after interests, taxes and preferred stock dividends. Return on Equity = Return on Sales x Assets Turnover x Equity Multiplier ‘| Measures the amount earned on the Owners’ or stockholders’ investment | Net income = Preferred Dividends _| Measures the amount of net income Wed. Ave. Common Shares Outstanding | earned by each common share Incoine Return on Equity Average Equity Earnings Per Share © MARKET TESTS sen Cornnge (06) a Price Per Share Tie inaicates the number of pesos | rs TT Dividen . ‘TMeasures the rate of return in the | | Dwidena views wae He Sha Investors. common stock | a _—_—_—{ lvestments._ sisi It indicates the proportion of earnings distributed as dividends Dividend Per Si Earnings Per Share [ Dividend Pay-Out OTHER MEANINGFUL RATIOS RATIOS USED TO EVALUATE LONG-TERM FINANCIAL POSITION OR STABILITY | Measures the prapanion ~ a dwners’ equity to. fixed assets Indicative of over or under investment by owners and Fixed Assets to Total Equity __ a ___| Weakness in trading on the equity* | Fixed Assets (Net) Indicates possible over-expansion fixed -Assals to’ Totey Asset Total Assets | of plant and equipment =n at [Tests roughly the efficiency of Soest Fed Assets | rat let | Tranagemeae’ wa “keeping plant (rant Turmover) | ets ee eee = t Measures recoverable amount by Book Value Per Share ~ Common Shareholders’ Equity | common stockholders in the event ‘Common Stock CEnvmon Shares Outstanding _| of liquidation if assets are realized — | Oo at their book values | ~ - —_ " Tt indicates ability to provide | income After Taxes | Times Preferred Dividend Earned Net income Ate Taxes |Guense to” oretered | — Pre . = __| stockholders. r_ ~~ ~ — | Measures efficiency of the firm to Total Assets | Capital Intensity Ratio ° generate sales throug! NetiSales | employment of ts resources Net Income before texes & fixed charges | Measures ability to meet tic Times Fired Cheraes Beene? (Fixed charges + sinking fund payment)** | charges. a | oe = = “Trading on the equity’ is another name for teverage. + Fined charges shall include rent, interests ard other relevant fixed expenses; sinking fund payment must be expressed before tax Page 3 of 8 pages ReBQ. The Kevrew School of lecowectanc MAS-12 FINANCIAL STATEMENT ANALYSIS ‘TESTS OF OVER-ALL SHORT-TERM SGLVENCY OR SHORT-TERM FINANCIAL POSITION _ m Average Working Capital support operation (sales) RT: ORT: Working Capital Turnover —__Net Sates _ Indicates adequacy of working capital to Current Vabauties Defensive Interval Ratio e Cash & Cash Equivalent | measures coverage of current liabilities | | Payable Turnover Net Purchases |! Measures efficiency of the company in | Average Accounts Payable | meeting the accounts payable | ~~) Refiects extent of the utilization “| | Fixed Assets to Long-term Fixed Assets Liabilities {L__ bong term Liabitities + _RATIOS INDICATIVE OF INCOME POSITION | resources from long-term debt. Indicative ___| of sources of additional funds. [Rate of Return on average “income —__ | measures the profitability of current assets | current Asset" | aver Carne Resets | vests | i 7 — ceslues — 7) | onl Operating Profit Margir | ‘Operating Profit | Measures profit generated —after | iperating! fargin | Net Sales | consideration of operating costs. | cash row margin | OPO Cast Flow | Measures the abity of the fim 10 | Net Sates | Nansiate sales to cash EXERCISE! 1. VERTICAL AND HORIZONTAL ANALYSIS Following are the financial statements of ANNE Company: ANNE COMPANY Condensed Statement of Financial Position December 31, 2019 {In thousands) NCIA STATEMENT ANALYSIS ASSETS LIABILITIES AND EQUITY cash $90 Current Liabilities P 500 Non-Cash Current 2,000 Long-term Debts 1,000 Fixed Assets 2,500 Capital Stock 1,500 _ Petained Earnings 21009 TOTALASSETS © P.S,000 TOTAL LIAB. RSHE 5,000 For 2018: Net sales, P 1,600; CGS, P 1,000, Operating Expenses, P 300; Interests and tax charges, P 200. For 2019: Net sales, P 2,000, CGS, # 1,30, Operating Fxpenses, P 300; Interests and tax charges, P 220. REQUIRED: 1. Prepare 2019 common-size balance sheet eno determine: ‘A) Current ratio 8} Debt ratio €) Equity ratio 2. Prepare 2019 common-size income statement aint determine: "A). Gross profit margin 8) Operating profit margin _C)_ Net profit margin 3. Compute trend percentages or prepare index analysis for the following: A) Net sales 8) BIT C) Net income 2, LIQUIDITY ANALYSIS Indicate the effects of each of the followin ‘ransactions on the company’s (A) current ratio and (B) acid-test ratio. There are three possible answers: (+) increase, (-) decrease, and (0) no effect. NOTE: Before each transaction takes place, both ratios are greater than 1 to 1. ‘Transactions: iA) Current Ratio (6) Acid-test Ratio Example: Sell merchandise for cash + + Buy inventory on account Pay an account payable Borrow cash on a short-term loan ae —— Issue long-term bonds payable a Collect an account receivable _ ee Sell @ plant asset for cash at a fess - Buy marketable secunties, for ces. Sell merchandise on credit @vauaune (Adapted: Managerial Accounting by Louderback) Page 4 of 8 pages ©) RSM. The Review School of lecouitancy FINANCIAL STATEMENT ANALYSIS 3 FINANCIAL RATIOS MAS-12 LYN Merchandising has 1,000,000 common shares outstanding, with each share priced at P 8.00. In 2019, the company declared dividends of P 0.10 per share. The balance sheet at the end of 2019 showed Approximately the same amounts as that at the end of 2018, The financial statements for Long Merchandising are as fellows: yn Merchandising, Income Statement for in Sales P 4,700 Cost of goods sold 2,300 Gross profit P 2,400 Operating expenses: Depreciation 320 Other 1230 4.550 Income before interest and taxes, P ’e50 Interest expense _ 150 Income before taxes > 700 Income taxes __280 Net income P_420 “ast ‘Accounts payable P 190 Accounts receivable ‘Accrued expenses 180 Inventory Total current liabilities P_ 370 Total current assets Long-term debt 1,960 Plant and equipment ‘Common stock 1,810 Accumulated depreciation Retained earnings __430 Total Assets Total liabilities and SHE P.4,570 REQUIRED: (round-off answers to two decimal claces) 1. Current ratio (2.89:1) 2. Acid-test ratio (1.78:1) 3. Accounts receivable turnover (10.68 times) 4. Inventory turnover (5.61 times) S. Gross profit margin (51.06%) &. Operating profit margin (18.09%) 7. Return on sales (RoS) (8.94%) 8. ROA - operational performance (18.60%) 9. ROA - total management effort (9.19%) 10. Return on equity (RoE) (18.75%) CONSTRUCTION OF FINANCIAL STATEMENTS 11. EPS (0.42) 12. P/E ratio (19.05) 13. Dividend yield (1.25%) 14. Payout ratio (23.81%) Debt ratio (50.98%) 16. Debt-equity ratio (1.04:1) 17. Times interest earned (5.67 times) 5: Defensive interval ratio (1.68:1) 19. Cash flow to total debt (31.76%) Cash flow margin (15.74%) (Adapted: Managerial Accounting by Louderback) The following information 15 available concerning Yam Company's expected results in 2019 (in thousands of pesos). Turnovers are based on year-end values. REQUIRED: Fill intthe blanks. Tj Return on sales 2) Gross profit percentage 53) Receivables turnover 4) Inventory turnover 5) Current ratio 6) Ratio of total deb 6% 40% Stimes 4 times 3:1 40% Condensed income Statement _ Sales Cost of sales Gross profit Operating expenses Net income Condens Inventory Plant and equipment Total Page 5 of 8 pages Long-term debt Shareholders’ equity Total 900 (a) (8) © (kK) (Adapted: Managerial Accounting by Louderbaci: &) RSQ - The Review School of GccormTancy MAS-12 FINANCIAL STATEMENT ANALYSIS 5. RELATIONSHIPS. Assume a 360-day year for each of the following independent cases. Case A: The current ratio 1s 2.5 to 1; the acid-test ratio is 0.9 to 1; cash and receivables are P 270,000. The current assets are composed of cash, rece'vabies, and inventory. Compute: 2) Current ‘abilities 2) Inventory Case 8: The age of receivables is 45 days. Annual sales of P 900,000 are spread evenly throughout the year. Inventory turnover is 4 times. Compute 1) Average accounts receivable 2). Operating cycle Case C: Net sales total P 100,009. Net profit margin is 12%. Interest charges are earned 6 times. 1) How much is the earnings before interests and taxes (tax rate: 40%)? 2) Assuming that inventory age is 30 days and average annual amount of inventory is P 5,000, how much is the company’s operatiag expenses? Case D: Given the following: Return on sales ts So + Return on assets is 10%, + Return on equity is 25%. + There is no preferred stock Using the Du Pont technique, determine the following: 1) Assets turnover 2) Equity ratio 3) Debt-equity ratio Case E: A company decided to go public. At that time, net income available to common shareholders amounted to P 300,000. The nuinber of com:inon shares issued and outstanding is 125,000. 1) Assume that the pay-out ratios 60%, how much of the total dividends shall a shareholder owning 10,000 cornnon shares receive? 2) Assume that the pay-cut ratio is 60% 2nd the price per share is P 20, what is the dividend yield? 3) Assume that the price-earnings ratio will be set 12 times and 25,000 new shares will be issued: 3A) How much is the initia! public offering (IPO) per share of the 25,000 new shares? 3B) How much is the net proceeds from issuance if underwriter spread is 2%? oe GROSS PROFIT VARIANCE ANALYSIS The analysis of variation in gross profit is an indispensable tool in evaluating operational performance; the adequacy oF inadequacy of gross profit weterinines the final results of operations (net income). Gross profit must be adequate to cover operating and other expenses, along with a desired amount of profit Sales = Sales Volume x Unit Selling Price = Cost of Goods Sold_ = Sales volume x Unit Cost Gross Profit = Sales Volume x (Unit Selling Price - Unit Cost) GP variance may be analyzed though the following: + GP (Actual) vs. GP (Budget) + GP (Current Period) vs. GP (Last Period} Gross profit variance = GP (Actual) ~ GP (Budget) Favorable: If actual (current) GP is greater than budgeted (last year) GP. Unfavorable: If actual (current) GP is less chan budgeted (last year) GP. Analysis: Sales price variance = AQ x ASP Cost price variance = AQ x A Unit Co.t Volume variance = AQ x Budgeted Unit GP }-> Sales volume variance > A.Qx Sudgeted SP L, Cost volume variance = Qa Budgeted Unit Cost Legend: ‘AQ ~ Actual quantity Alternative analysis: Sales variance {_ Setes volume variance Cost price variance Cost volume variance = Selling price per unit current sales ~ current volume @ budgeted SP = current volume @ budgeted SP ~ budgeted sales current CGS ~ current volume @ budgeted unit cost ost variance —{7 Current volume @ budgeted unt cost budgeted COS Page 6 of 8 pages RSA. The Remiew School of Uccommtaney MAS-12 FINANCIAL STATEMENT ANALYSIS EXERCISES: GP VARIANCE ANALYSIS 1. GROSS PROFIT ANALYSIS WITH A SINGLE PRODUCT (FULL INFORMATION) ‘Spain Company prepared the foiloviing budgetary information for January 2019: Sales (12,090 units) P 432,000 Cost of Goods Sold 288,000 Gross Profit: P.144,000 In January, actual operations resulted in the production and sale of 13,000 units which were sold for 2 selling price of P 34 per unit. The unt cost of goods sold increased by P 3 REQUIRED: Overall GP variance Sales price variance Sales volume variance Cost price variance Cost volume variance waune (Adapted: AICPA) 2. GROSS PROFIT ANALYSIS WITH A SINGLE PRODUCT (INCOMPLETE INFORMATION) Rafa Company has requested you to determine the cause of the difference between its 2018 and 2019 gross profit based on the following data: 2018 2019 Sales P 200,000 Pp 252,000 Cost of Goods So's 120.000 180.000 Gross Profit P 30,000 P-72,000 No additional data was made available except that unit sales increased by 20% in 2018 REQUIRED: 1. Overall GP variance 2. Price factor 3. Cost factor 4. Volume factor (Adapted: AICPA) 3. GROSS PROFIT ANALYSIS EXERCISES 3A) Gavz Company had the following results in May: Budget Actual Sales P 160,000 162,500 Cost of goods sold (P'S per unit) 100,000. _102,500 Gross profit P.60,000 P_60,000 If actual sales were 500 units higher than the budgeted sales, then which is a FALSE statement? 'a. The sales price variance is P 1,560 unfavorable. b. The sales volume variance :s P 4,000 favorable. c. The cost price variance is zero (0) 4. The cost volume variance is P 2,500 favorable. rems 3B to 3F are based on the following information ‘The management of R-18 Company asked you to submit an analysis of the increase in the gross profit in 2019 based on the past two-year comparative income statements, which are shown below: 2019 2018 Net Sales 1,237,500 1,000,000 Cost of Saies 959,000 ‘800, Gross Profit, 287,500 _ P.200,000 The selling price increased by 12.5% beginning January 1, 2019. 3B) What is the increase in gross profit due to increase in volume? (VOLUME FACTOR) 2. 20,000

    You might also like