CONTENT

ANALYSIS AND INTERPRETATION OF

FINANCIAL STATEMENTS
Mabhel B. Catle
SHS T II
 COMPARISON STANDARD

One of the characterisitics of a good financial

statements is COMPARABILITY.

COMPARABILITY is the ability of the financial

statements to create a basis and allow the
identification of similarities and differences
between the statements being compared.
 Comparison Standard that can be used by
entities:
1. Intracomparability
- The company’s financial statement for the current year are
being compared with F/S of the prior or earlier periods.

2. Intercomparability
- deals with comparative analysis of the company’s financial
statement against a direct competitor

3. Industry standard
- compare the company’s financial statements with the
standard average for the certain industry.
Example: Smart Telecom FS compared with the industry
standard of the telecom company
 FINANCIAL STATEMENT ANALYSIS
➢ is the process of evaluating risks, performance,
financial health, and future prospects of a
business by subjecting financial statement data to
computational and analytical techniques with the
objective of making economic decisions (White
et.al 1998)
 KINDS OF FINANCIAL STATEMENT TECHNIQUE

1. Horizontal analysis
2. Vertical analysis
3. Financial ratios
 HORIZONTAL ANALYSIS

➢ It is also called trend analysis, is a technique for

evaluating a series of financial statement data
over a period of time with the purpose of
determining the increase or decrease that has
taken place (Weygandtet.al 2013)
 Relative changes in the balances of the account
over time
➢ Horizontal analysis uses financial statements of two or more periods.
➢ All line items on the FS may be subjected to horizontal analysis.
➢ Only the simple year-on-year (Y-o-Y)grow this covered in this lesson.
➢ Changes can be expressed in monetary value (peso) and percentages
computed by using the following formulas:

• Peso change=Balance of Current Year-Balance of Prior Year

• Percentage change= (Balance of Current Year-Balance of Prior

Year)/(Balance of Prior Year)
2013
 VERTICAL ANALYSIS

➢ also called common-size analysis

➢ It is a technique that expresses each financial
statement item as a percentage of a base amount
(Weygandt et.al. 2013).
 VERTICAL ANALYSIS
For the SFP, the base amount is Total Assets.

• Balance of Account / Total Assets.

• From the common-size SFP, the analyst can infer

the composition of assets and the company’s
financing mix.
 VERTICAL ANALYSIS
For the SCI, the base amount is Net Sales.

• Balance of Account / Total Sales.

• This will reveal how “Net Sales” is used up by the
various expenses.
• Net income as a percentage of sales is also known
as the net profit margin.
 RATIO ANALYSIS

➢ It expresses the relationship among selected

items of financial statement data. The
relationship is expressed in terms of a
percentage, a rate, or a simple proportion
(Weygandt et. al. 2013)
 GROUP CLASSIFICATION OF FINANCIAL
RATIO IN ACCOUNTING

1. Liquidity Ratio
2. Solvency Ratio
3. Profitability Ratio
 LIQUIDITY RATIOS
1. Working Capital
2. Current Ratio
3. Acid Test Ratio
4. Account Receivable Turnover Ratio
5. Average Collection Period
6. Inventory Turnover Ratio
7. Average Days in Inventory
8. Number of Days in Operating Cycle
 SOLVENCY RATIOS

1. Debt to Total Asset Ratio

2. Debt to Equity Ratio
3. Times Interest Earned Ratio
 PROFITABILITY RATIOS
1. Gross Profit Ratio
2. Profit Margin Ratio
3. Operating Expenses to Sales Ratio
4. Return on Investment
a. Return On Asset
b. Return On Equity
5. Asset Turnover Ratio
 LIQUIDITY RATIOS
➢ It is the capacity of the company to pay its currently
maturing obligations

➢ This will require a good amount of

-Cash
- Other liquid assets ( Account Receivable,
Inventory, Trading Securities and Prepaid Asset)
days

days
 SOLVENCY RATIOS

➢ It measures the capability of an entity to pay

long-term obligations as they fall due.
 PROFITABILITY RATIOS

➢ It measures the ability of the company to

generate income from the use of its assets and
invested capital as well as control its cost.
Thank You
For
Listening