ANALYSIS OF THE

FINANCIAL STATEMENTS
FINVA100 MODULE 2 PART 1
ANNABELLE A. ALOVA, MBA
COURSE OBJECTIVES:
u At the end of this module, students will have:
u Analyzed the basic components of the three accounting
statements: the balance sheet, the income statement,
and the statement of changes in financial position
u Defined financial tools as they are used in financial
decision-making.
u Evaluated the financial position and performance of the
firm by using various ratios such as liquidity ratios, asset
management ratios, debt management ratios, profitability
ratios and market value ratios.
 Purposes of the Financial Statements

Accounting information is needed:

uTo make intelligent decisions (bankers and
investors)
uTo operate their business efficiently
(managers)
uTo assess taxes in a reasonable way
(taxing authorities)
 The Annual Report

u The annual report is issued annually by a corporation

to its stockholders. It contains basic financial statements
as well as management’s analysis of the firm’s past
operations and future prospects.
u The financial statements report what has actually happened to
assets, earnings, and dividends over the past few years
u The verbal statements attempt to explain why things turned out
the way they did and what might happen in the future.

Both investors and general managers must have a working

knowledge of financial statements and what they reveal.
 THE BALANCE SHEET

Balance Sheet
A statement of the
firm’s financial
position at a
specific point in
time.

Potential stockholder:
• “Has the firm earned the
funds in its equity account?”
• Has the firm mainly sold
stocks?
Potential creditor:
• Interested in the total equity
provided by the firm’s
owners and not with its
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 THE INCOME STATEMENT

Income Statement
A report summarizing
the firm’s revenues
and expenses during
an accounting
period, generally a
quarter or a year.

Accounting Profit
A firm’s net income
as reported on its
income statement.

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 THE STATEMENT OF CASH FLOW
Statement of Cash Flows
A statement reporting the
impact of a firm’s
operating, investing, and
financing activities on cash
flows over an accounting
period.

u A business’s net cash flow

differs from its accounting
profit because some of the
revenues and expenses listed on
the income statement are not
paid in cash during the year.
 THREE CATEGORIES OF ACTIVITIES:
STATEMENT OF CASH FLOW
u 1. Operating activities, which include net income,
depreciation, and changes in working capital other than
cash and short-term debt.
u 2. Investing activities, which include purchases or sales
of fixed assets.
u 3. Financing activities, which include raising cash by
issuing short-term debt, long-term debt, or stock, or using
cash to pay dividends or to buy back out-standing stock or
bonds.
Financial Analysis: Tools and Techniques

u Financial Analysis refers to the examination of financial data of an

entity to determine its profitability, growth, solvency, stability and
effectiveness of its management.
u Relationships between financial data are interpreted and their
significance is used as guide in the decision-making process.
u Different tools and techniques are used in financial analysis depending
on whether it is undertaken for short-term or for long-term decisions
making.
u The methods for short-term decisions do not consider the time value
of money; for long-term decisions, the time value of money is
considered.
 For short-term Decision-Making:

u Horizontal Analysis: Two or more sets of financial

statements are used.
u Comparative statement

u Vertical Analysis: Only one set of financial statements is

used.
u Common size statement
u Financial ratios
 Lasalista Trading Corporation
Comparative Income Statement
FORMULA:
For the years ended December 31, 2015 and 2016
(Current Year-Previous Year)
Previous Year
2016 2015 Increase (Decrease)
Amount % FORMULA:
Sales 480,000 320,000 160,000 50 (480,000-320,000)
Less: Cost of Sales 200,000 160,000 40,000 25 320,000

Gross Profit on Sales 280,000 160,000 120,000 75

Less: Operating Expenses

Selling expenses 124,950 127,500 (2,550) 2

General & administrative 45,000 40,000 5,000 12.5
expenses
Total operating expenses 169,950 167,500 2,450 1.5
Operating income 110,050 (7,500) 117,550
Less: Provision for income 39,000 0 39,000
taxes
Net income 71,050 (7,500) 78,550
 Common Size Statements

u A common size statement is one wherein each item is expressed in

terms of a percentage of a common base number.
u It shows the component percentages or the relationship of each item
to the whole.
u For COMMON SIZE BALANCE SHEET, each account balance is divided by
total assets (or total liabilities and owner’s equity) so that they
become the base and considered as equal to 100% (or Php1).
u For COMMON SIZE INCOME STATEMENT, the base is net sales.

Done to compare the financial statements of different

companies without being misled by the differences in sizes of
the subject companies or by the differences in peso amounts
of the accounts being compared.
 Illustration of Common size
income statement
Malakas Corporation Maganda Corporation
Sales 1,600,000 120,000
Cost of sales/Sales = %
Cost of sales 960,000 48,000
960,000
Gross profit on sales 640,000 72,000 1,600,000 = 60%
Operating expenses 416,000 42,000
Net income 224,000 30,000
Malakas Corporation Maganda Corporation
Sales 100% 100%
Cost of sales 60 40
Gross profit on sales 40 60
Operating expenses 26 35
Net income 14 25
COURSE OBJECTIVES:
u At the end of this module, students will have:
u Analyzed the basic components of the three accounting
statements: the balance sheet, the income statement,
and the statement of changes in financial position
u Defined financial tools as they are used in financial
decision-making.
u Evaluated the financial position and performance of the
firm by using various ratios such as liquidity ratios, asset
management ratios, debt management ratios, profitability
ratios and market value ratios.