SPECIAL TOPICS IN FINANCIAL MANAGEMENT

Noel M. Salazar Jr., MBA, LPT

Prepare financial statements

Define the measurement levels, namely, liquidity, solvency, and

profitability

Perform vertical and horizontal analyses of financial statements

Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover,
debt-to-equity ratio, and the like
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
4. ______________________________________________________
5. ______________________________________________________
6. ______________________________________________________
7. ______________________________________________________
8. ______________________________________________________
9. ______________________________________________________
1. Analyze Business Transaction
2. Journalize Transaction
3. Posting To Ledger Account
4. Preparing Trial Balance
5. Journalize & Post Adjustments
6. Prepare Adjusted Trial Balance
7. Prepare Financial Statements
8. Journalize & Post Closing Entries
9. Preparing Post-Closing Trial Balance
1. STATEMENT OF FINANCIAL POSITION
OR BALANCE SHEET
2. STATEMENT OF PROFIT OR LOSS OR
INCOME STATEMENT (Statement of
Comprehensive Income)
3. STATEMENT OF CASHFLOWS
4. THE STATEMENT OF CHANGES IN
EQUITY or STATEMENT OF EQUITY
▪ Also known as the balance sheet is a
financial snapshot of your business at a
given date in time.
▪ Provides information about the financial
condition, position, and structure of the
company in terms of its assets, liabilities,
and the difference between the two,
which is the equity or net worth.
▪ The accounting equation
(assets = liabilities + owner’s equity) is
the basis for the financial position or
balance sheet.
REPORT FORM
▪ the statement of financial
position can be presented
in vertical format known as
the report form, with the
Assets Section above the
Equities sections that,
together, balance it.
ACCOUNT FORM
▪ the entire statement of
financial position is
normally presented in a
horizontal layout, with an
Assets page on the left,
and a page for Liabilities
and Equity.
▪ Summarizes a company’s revenue (sales) and
expenses quarterly and annually for its fiscal year.
▪ The final net figure, as well as various others in this
statement, is of major interest to the investment
community as it represents the company’s financial
performance for the current year.
▪ Also called as “statement of income”, “statement of
earnings”, “statement of operations”, and
“statement of operating results”. Some
professionals call it “P & L” which stands for profit
and loss statement.
MULTI-STEP APPROACH SINGLE STEP APPROACH
MULTI-STEP APPROACH
▪ the statement of
comprehensive income using
the multi-step approach shows
the various profitability stages
from gross profit, operating
profit up to the net profit which
is essential in terms of cost
control and management.
SINGLE STEP APPROACH
▪ the service type of statement of
comprehensive income was
shown using a single step
approach as it simply identifies
the income that comes from
professional fee and all
expenses grouped together to
arrive at net profit.
3. STATEMENT OF CASH FLOWS
▪ - Provides an explanation regarding the change in the cash balance from one
accounting period to another. The cash flows are also classified into three
main categories: operating, investing, and financing.

4. THE STATEMENT OF CHANGES IN EQUITY or STATEMENT

OF EQUITY
▪ -Shows the changes in the Capital as a result of additional investment or
withdrawals by the owner/s, plus or minus the net income or net loss for the
year.
▪ Sole Proprietorship – “Owner’s Equity”
▪ Partnership – “Partner’s Equity”
▪ Corporation – “Stockholder’s Equity”
 A company’s financial statements
provide important information about a business
enterprise. The analysis helps the user make
an informed decision or judgment rather than
rely on guesses and intuition in the process of
decision making by effectively and
systematically using the financial data. It
lessens the uncertainty of outcomes with every
decision made because of the analytical tools.
Financial statement are analyzed to
evaluate a company’s present financial position
and operating performance in relation to its
past.
▪ One of the qualitative
characteristics of a good
financial statement is
comparability.

This is the ability of the

financial statement to create
a basis and allow the
identifications of similarities
and differences between the
statements being compared.
Intracomparability
In this kind of comparison, the
company’s financial statement for
the current period are being
compared with the financial
statements of prior or earlier
periods.

Ex. The total net income of

Starbucks Company for the current
year 2016 are being compared with
the total net income of Starbucks
Company for the year 2015
Intercomparability
Deals with comparative
analysis of the
company’s financial
statement against a
direct competitor.

Ex. Comparison on the

Financial Statement of
Jollibee Restaurants
against McDonalds
Restaurant
Smart Telecom and
Globe Telecom.
Industry Standard
By looking at the industry average
as a whole instead on a per
competitor basis.

Ex.
The financial statements of Smart
Telecom are being compared with
the industry standard for the
telecom industry.
The financial statements of
McDonalds Restaurant are being
compared with the industry
standard for the food and beverage
industry.
 2. 3. Financial
1. Vertical
Horizontal Ratio
Analysis
analysis Analysis
Horizontal Analysis
The company will compare their own financial
statements for the current period (2016) with their
financial statements from the prior period (2015). The
prior period amount normally serves as the basis or the
starting point of the comparison. Increase and decrease
are being taken and such will be measured in
percentages.
 Prepare comparative financial statements of two
consecutive years.

STEPS IN
PERFORMING Add a third column for the increase or decrease
in amount and a fourth column for the percentage
HORIZONTAL of the increase or decrease.

ANALYSIS

Get the percentage of increase or decrease for

each account.
Choose a base year
Deduct the amount of Divide the difference Multiply the quotient
which is the prior
the current year from above by the amount by 100 to get the
period or the initial
the base year. of the base year percentage of change
year of analysis
 Fidas Merchandiding
Statement of Financial Position
As of December 31

ASSETS 2016 2015

Current Assets
Cash 500,000.00 420,000.00
Accounts Receivable (net) 80,000.00 100,000.00
Inventory 60,000.00 35,000.00
Total Current Assets 640,000.00 555,000.00
Non Current Assets
Land 700,000.00 625,000.00
Patent 90,000.00 50,000.00
Total Non-Current Assets 790,000.00 675,000.00
TOTAL ASSETS 1,430,000.00 1,230,000.00

LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Accounts Payable 400,000.00 330,000.00
Notes Payable 250,000.00 200,000.00
Total Liabilities 650,000.00 530,000.00
Owner's Equity
Fidas, Capital 780,000.00 700,000.00

TOTAL LIABILITIES & OWNERS EQUITY 1,430,000.00 1,230,000.00

 Fidas Merchandising
Statement of Financial Position
As of December 31

ASSETS 2016 2015 Amount Percent

Current Assets
Cash 500,000.00 420,000.00 80,000.00 19.05%
Accounts Receivable (net) 80,000.00 100,000.00 (20,000.00) -20.00%
Inventory 60,000.00 35,000.00 25,000.00 71.43%
Total Current Assets 640,000.00 555,000.00 85,000.00 15.32%
Non Current Assets
Land 700,000.00 625,000.00 75,000.00 12.00%
Patent 90,000.00 50,000.00 40,000.00 80.00%
Total Non-Current Assets 790,000.00 675,000.00 115,000.00 17.04%
TOTAL ASSETS 1,430,000.00 1,230,000.00 200,000.00 16.26%

LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Accounts Payable 400,000.00 330,000.00 70,000.00 21.21%
Notes Payable 250,000.00 200,000.00 50,000.00 25.00%
Total Liabilities 650,000.00 530,000.00 120,000.00 22.64%
Owner's Equity
Fidas, Capital 780,000.00 700,000.00 80,000.00 11.43%

TOTAL LIABILITIES & OWNERS EQUITY 1,430,000.00 1,230,000.00 200,000.00 16.26%

 Fidas Merchandising
Statement of Comprehensive Income
For the Year Ended December 31

2016 2015

Net Sales 950,000.00 880,000.00

Less Cost of Goods Sold 180,000.00 260,000.00
Gross Profit 770,000.00 620,000.00
Less Operating Expenses 180,000.00 140,000.00
Operating Income 590,000.00 480,000.00
Less Interest Expense 25,000.00 65,000.00
Net Income before tax 565,000.00 415,000.00
Income Tax Expense 180,000.00 124,500.00
Net Income after Tax 385,000.00 290,500.00
 Fidas Merchandising
Statement of Comprehensive Income
For the Year Ended December 31

2016 2015 Amount Percent

Net Sales 950,000.00 880,000.00 70,000 7.95%

Less Cost of Goods Sold 180,000.00 260,000.00 (80,000) -30.77%
Gross Profit 770,000.00 620,000.00 150,000 24.19%
Less Operating Expenses 180,000.00 140,000.00 40,000 28.57%
Operating Income 590,000.00 480,000.00 110,000 22.92%
Less Interest Expense 25,000.00 65,000.00 (40,000) -61.54%
Net Income before tax 565,000.00 415,000.00 150,000 36.14%
Income Tax Expense 180,000.00 124,500.00 55,500 44.58%
Net Income after Tax 385,000.00 290,500.00 94,500 32.53%
 Krisha Laundry Shop
Statement of Financial Position
As of December 31

2016 2015

Cash 11,250.00 7,875.00

Accounts Receivable (net) 16,500.00 12,375.00
Inventory 30,750.00 28,500.00
Property, plant and equipment (Net) 51,615.00 56,250.00
TOTAL ASSETS 110,115.00 105,000.00

Accounts Payable 17,250.00 18,750.00

Notes Payable 37,500.00 33,750.00
Krisha, Capital 55,365.00 52,500.00
TOTAL LIABILITIES & EQUITY 110,115.00 105,000.00
 Krisha Laundry Shop
Statement of Comprehensive Income
For the Year Ended December 31

2016 2015

Net Sales 150,000.00 146,250.00

Less Cost of Goods Sold 91,875.00 82,500.00
Gross Profit 58,125.00 63,750.00
Less Operating Expenses 48,135.00 50,100.00
Net Income 9,990.00 13,650.00
 ▪Also known as Common
Ratio Analysis.

VERTICAL ▪It helps the management

ANALYSIS analyze the components of
the total assets as well as
the component of the total
liabilities and owner’s
equity.
 Of the total assets, what
Of the total assets, what
percent is accounts
percent is classified as
receivable? Merchandise
current? Non-current?
Inventory?

Of the total liabilities and

Of the total liabilities, what owner’s equity, what
percent is classified as percent is liabilities? What
current? Non-Current? percent is owner’s equity?
What percentage of net sales is cost of
good sold? Gross Profit? Operating
Expenses?

If Operating expenses were divided

between selling and administrative
expenses, What percentage of net sales is
absorbed by selling expenses?
Administrative expenses?

What is the percentage of net income to

sales?
 Prepare Add Express Express
Prepare Add one For the For the
comparative additional comparative comparative
financial column on the statement of statement of
statements of right side of financial comprehensive
two each year position, income,
consecutive express each express each
years account as a account as a
percentage of percentage of
the total assets net sales. Net
automatically sales is
100% and total automatically
liabilities and 100%
owner’s equity
automatically
100%
 Fidas Merchandiding
Statement of Financial Position
As of December 31

ASSETS
2016 Percent 2015 Percent
Current Assets
Cash 500,000.00 34.97% 420,000.00 34.15%
Accounts Receivable (net) 80,000.00 5.59% 100,000.00 8.13%
I nventory 60,000.00 4.20% 35,000.00 2.85%
Total Current Assets 640,000.00 44.76% 555,000.00 45.12%
Non Current Assets
Land 700,000.00 48.95% 625,000.00 50.81%
Patent 90,000.00 6.29% 50,000.00 4.07%
Total Non-Current Assets 790,000.00 55.24% 675,000.00 54.88%
TOTAL ASSETS 1,430,000.00 100.00 1,230,000.00 100.00

LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Accounts Payable 400,000.00 27.97% 330,000.00 26.83%
Notes Payable 250,000.00 17.48% 200,000.00 16.26%
Total Liabilities 650,000.00 45.45% 530,000.00 43.09%
Owner's Equity
Fidas, Capital 780,000.00 54.55% 700,000.00 56.91%

TOTAL LIABILITIES & OWNERS EQUITY 1,430,000.00 100.00% 1,230,000.00 100%

 Fidas Merchandising
Statement of Comprehensive Income
For the Year Ended December 31

2016 2015

Net Sales 950,000.00 880,000.00

Less Cost of Goods Sold 180,000.00 260,000.00
Gross Profit 770,000.00 620,000.00
Less Operating Expenses 180,000.00 140,000.00
Operating Income 590,000.00 480,000.00
Less Interest Expense 25,000.00 65,000.00
Net Income before tax 565,000.00 415,000.00
Income Tax Expense 180,000.00 124,500.00
Net Income after Tax 385,000.00 290,500.00
 Fidas Merchandising
Statement of Comprehensive Income
For the Year Ended December 31

2016 Percent 2015 Percent

Net Sales 950,000.00 100.00% 880,000.00 100.00%

Less Cost of Goods Sold 180,000.00 18.95% 260,000.00 29.55%
Gross Profit 770,000.00 81.05% 620,000.00 70.45%
Less Operating Expenses 180,000.00 18.95% 140,000.00 15.91%
Operating Income 590,000.00 62.11% 480,000.00 54.55%
Less Interest Expense 25,000.00 2.63% 65,000.00 7.39%
Net Income before tax 565,000.00 59.47% 415,000.00 47.16%
Income Tax Expense 180,000.00 18.95% 124,500.00 14.15%
Net Income after Tax 385,000.00 40.53% 290,500.00 33.01%
 Krisha Laundry Shop
Statement of Financial Position
As of December 31

2016 2015

Cash 11,250.00 7,875.00

Accounts Receivable (net) 16,500.00 12,375.00
Inventory 30,750.00 28,500.00
Property, plant and equipment (Net) 51,615.00 56,250.00
TOTAL ASSETS 110,115.00 105,000.00

Accounts Payable 17,250.00 18,750.00

Notes Payable 37,500.00 33,750.00
Krisha, Capital 55,365.00 52,500.00
TOTAL LIABILITIES & EQUITY 110,115.00 105,000.00
 Krisha Laundry Shop
Statement of Comprehensive Income
For the Year Ended December 31

2016 2015

Net Sales 150,000.00 146,250.00

Less Cost of Goods Sold 91,875.00 82,500.00
Gross Profit 58,125.00 63,750.00
Less Operating Expenses 48,135.00 50,100.00
Net Income 9,990.00 13,650.00
Can be used to
compare a company’s
current financial
position and
performance with those
of past years and
identify strengths and
weaknesses. It also
allows comparison of
different companies in
different industries.
Liquidity – is the ability of the
company to settle its current
obligations as they fall due.

Solvency – is the ability of the

company to settle its non-current or
long-term obligations and the
interest related to these obligations.

Profitability – measures the

company’s operating performance as
a return on its investment.
1. Liquidity Ratios 2. Solvency Ratios 3. Profitability Ratios
a. Working Capital a. Debt to Total Assets Ratio
a. Gross Profit Ratio
b. Current Ratio b. Debt to Equity Ratio
b. Net Profit Ratio
c. Acid Test/Quick Ratio c. Equity Ratio
d. Receivable Turnover d. Times Interest Earned c. Operating Expenses
Ratio Ratio to Sales Ratio
e. Average Collection d. Return on Investments
Period
f. Inventory turnover ratio I. Return on Assets
g. Average Days in II. Return on Equity
inventory
h. Number of Days in e. Asset Turnover Ratio
operating cycle
 Equal Company
Statement of Financial Position
As of December 31, 2016
Equal Company
Current Assets Statement of Comprehensive Income
Cash 190,000.00
Accounts Receivable (net) 102,000.00
For the yeat Ended December 31,2 016
Short Term Investment 20,000.00
Inventory 55,000.00
Prepaid Expenses 8,000.00
Total Current Assets 375,000.00 Sales 120,000.00
Non Current Assets
Land 800,000.00 Less Cost of Goods Sold 60,000.00
Building 866,000.00 Gross profit 60,000.00
Long Term Investment 80,000.00
Total Non-Current Assets 1,746,000.00 Less Operating Expenses 16,000.00
TOTAL ASSETS 2,121,000.00
Earning Before Interest and Taxes 44,000.00
LIABILITIES AND OWNER'S EQUITY
Interest Expense 2,000.00
Current Liabilities Net income before tax 42,000.00
Accounts Payable 55,000.00
Notes Payable 50,000.00 Income Tax 5,000.00
Total Current Liabilities 105,000.00
Non Current Liabilities Net Income 37,000.00
Long-term debt 100,000.00
Bonds payable 90,000.00
Total Non-Current Liabilities 190,000.00
Total Liabilities 295,000.00
Owner's Equity
Eli, Capital 1,826,000.00

TOTAL LIABILITIES & OWNERS EQUITY 2,121,000.00

WORKING CAPITAL

COMPUTATION
FORMULA 375,000 – 105,000

Current Asset Working Capital = 270,000

Less: Current Liabilities

Interpretation:
Working Capital This means that the company has
270,000 pesos free current assets that
they can use for the operation of the
business
 CURRENT RATIO

COMPUTATION
FORMULA 375,000 /105,000
Current Ratio = Current Ratio = 3.57:1

Interpretation:

Current Asset This means that every 1 peso current

liabilities of the company, they have
approximately 3.57 current assets to pay
Current Liabilities for it.
 ACID TEST RATIO OR QUICK RATIO

COMPUTATION
FORMULA 312,000 /105,000
Quick Ratio =
Quick Ratio= 2.97:1
Current Asset - prepaid - inventory
Interpretation:
Current Liabilities
This means that even if the inventory
and prepaid assets are removed.
The company is still able to meet
their current obligations. For every 1
peso current liabilities of the
company, they have an estimated
amount of 2.97 pesos to cover for it.
RECEIVABLE TURNOVER RATIO

FORMULA COMPUTATION
120,000/102,000
Receivable Turnover = 1.18 times
Net Sales
Average Accounts Receivable (net) Interpretation:
The low receivable turnover indicates that
inefficiency of the company in collecting
their receivables. This maybe because of
poor credit and collection policy. A higher
ratio would be more favorable.
AVERAGE COLLECTION PERIOD

FORMULA COMPUTATION
365/1.18
Average Collection Period = 309 days
365 or 360 days
AR Turnover Ratio Interpretation:
This means that it takes an average of 309 days
before accounts receivables are collected.
A shorter average collection period ratio
would be more favorable.
INVENTORY TURNOVER RATIO

FORMULA COMPUTATION
60,000/55,000
Inventory Turnover = 1.09 times
Cost of goods sold
average inventory Interpretation:
The low inventory turnover indicates the
inefficiency of the management in managing
inventory. This could indicate that the company
is storing too much inventory. Takes about 1.09
times replenishment of inventory in order to
satisfy sales.
 AVERAGE DAYS IN INVENTORY -

COMPUTATION
FORMULA 365/1.09
365 or 360 days Inventory Turnover = 334. 86 or
335 days
Inventory Turnover Ratio Interpretation:
This means that it takes an average of 335 days
before the commodities are sold to the customers.
A shorter average days in inventory would be
more favorable.
 NUMBER OF DAYS IN OPERATING CYCLE

FORMULA COMPUTATION
Collection Period 309 + 335 days
Add: Average Days in inventory No. of days in operating
cycle = 644 days.
Number of days in Operating
Cycle
Interpretation:
This means that it takes an average 644 days
to realize its inventory into cash.
A shorter number would be more
favorable.
DEBT RATIO

FORMULA COMPUTATION
295,000/2,121,000
Debt Ratio =
Debt Ratio= .14
Total Liabilities Interpretation:
Total Assets This means .14 is provided by
the creditors for every 1 peso
total assets. Also, this can be
interpreted as 14% of the
company’s assets are being
financed by creditors.
DEBT TO EQUITY RATIO

COMPUTATION AND
FORMULA INTERPRETATION
Debt to Equity Ratio = 295,000/1,826,000

Total Liabilities Debt to Equity Ratio= .16

Total Equity
Interpretation:
This means .16 worth of liabilities
for every 1 peso worth of capital.
Also, this means that compared to
the total equity, the liabilities
represents only 16% of the
company’s capital.
EQUITY RATIO

COMPUTATION AND
FORMULA INTERPRETATION

Equity Ratio = 1,826,000/2,121,000

Total Owner’s Equity Equity Ratio= .86

Total Assets
Interpretation:
This means .86 is provided by the owner for
every 1 peso total assets. Also, this means
that 86% of the company’s assets are being
financed by the company’s own capital.
TIMES INTEREST EARNED RATIO

FORMULA COMPUTATION
44,000/ 2,000
Times interest earned ratio = 22 times
Interpretation:
This means that Equal interest is 22 times of its
Times Interest Earned Ratio = income before interest and taxes. The higher the
number of times the operating can cover interest
EBIT expense the more favorable it is for the creditors
because it means the company is not struggling to
pay its interests from loans.
Interest Expense
GROSS PROFIT RATIO

FORMULA COMPUTATION
60,000/120,000
Gross profit ratio = Gross Profit Ratio = .50
Gross Profit
Interpretation
Net Sales
This means that after deducting cost of goods
sold, 50% of the net sales is left and is available
for other expenses.
It only makes sense that higher ratios are more
favorable.
NET PROFIT RATIO

FORMULA COMPUTATION
37,000/120,000
Profit Margin = .31
Net Profit Ratio =
Interpretation:
Net Income This means 31% return for every peso sales
made.

Net Sales Higher ratios are more favorable. Higher ratios

mean the company is selling their inventory at a
higher profit percentage.
OPERATING EXPENSES TO SALES RATIO
FORMULA COMPUTATION
16,000/120,000 = .13
Interpretation:

Operating Expenses This means that 13% of operating expenses is

needed to generate sales for the period.

Net Sales This ratio should be minimized as much as

possible. The goal is to generate as much sales
with the minimum possible operating expenses.
RETURN ON ASSETS

COMPUTATION
FORMULA 37,000/2,121,000
Return on Assets = 1.74%
Interpretation:
Return on Assets = A higher ratio is more favorable because it
shows that the company is more effectively
Net Income managing its assets to produce greater amounts
of net income.
Average Total Assets
RETURN ON EQUITY

FORMULA COMPUTATION
37,000/1,826,000

Return On Equity = Return on Equity = 2.03%

Interpretation:
Net Income This means 2.03% return to the
owner’s investment in the
Average Owner’s Equity business.
A higher ratio is more favorable
to investors/owners because it
indicates how well the company
utilized the investment
contributed by its owners.
ASSET TURNOVER RATIO

COMPUTATION
120,000/2,121,000
FORMULA Asset Turnover Ratio = 5.66%
Interpretation:
Asset Turnover Ratio = This ratio measures how efficiently a firm uses
its assets to generate sales, so a higher ratio is
always more favorable. Higher turnover ratios
Net Sales mean the company is using its assets more
efficiently. Lower ratios mean that the company
isn't using its assets efficiently and most likely
Average Total Assets have management or production problems.