Chapter 5: Financial Statement Analysis 1

Financial Statement Analysis

 is the process of evaluating risks, performance, financial health and future prospects of a business
using computational and analytical techniques with the objective of making economic decisions.

Horizontal Analysis
 is also known as a trend analysis. it is a technique that involves the comparison of a line item
(account) over a number of periods.
Changes can be expressed in monetary value(peso) and percentages

Peso Change = Balance of Current Year – Balance of Prior year

Percentage change = Peso Change

Balance of Prior Year

Vertical analysis
 common-size financial statement. Is a technique that expresses each financial statement line item as a
percentage of a base amount
 a common-size SFP shows each line account as a percentage of total assets. It shows the composition of
assets and the company’s financing mix.
 a common-size financial statements shows standardized or relative amounts that enable the readers to
make comparison of companies of different sizes

HORIZONTAL ANALYSIS
What can we see from the horizontal analysis?
1. The net increase in current assets is about P88,000. The increase in current liabilities is P149,000. We infer
that some of the acquisitions of long-term assets are financed by current liabilities.
2. The 9.4% increase in sales revenue is consistent with the 9.6% increase in cost of goods sold. The increase
in sales may be a result of an increase in the number of goods sold and not an increase in the selling price.
An alternative explanation is that while DC’s cost increased, JC was able to fully pass the increase in cost to
his customers by increasing the price. This way, he was able to maintain a consistent gross profit margin of
75% (gross profit/sales)

VERTICAL ANALYSIS
What can we see from the vertical analysis?

A trading company is one that buys and sells inventory with minimal processing.

1. Total current assets composed 22.7% of total assets. Accounts receivable and inventory each
composed roughly 8% of total assets.
2. The largest assets is property, plant and equipment at 68.6% of total assets. To be consistent
with the nature of its trading operations, this could possibly be delivery equipment or store
facilities.
3. The company’s financing mix is 21% liability and 79% equity.
4. Recall that the trading operation is largely about selling activities. The largest expense is selling
and administrative expense at 63% to 64% of sales.
5. Cost of Goods Sold is only about 26% of total sales.
6. Net income is consistently 11% of sales.