SAN JOSE COMMUNITY COLLEGE

San Jose, Malilipot, Albay

LEARNING MATERIAL
for FINANCIAL
ANALYSIS AND
REPORTING

1ST Semester S.Y 2023-2024

Cash Flow from Operations Formula

While the exact formula will be different for every company (depending on the items they have on their
income statement and balance sheet), there is a generic cash flow from operations formula that can be
used:

Cash Flow from Operations = Net Income + Non-Cash Items + Changes in Working Capital

Prepared by:

CHRISTY S.

BASCO
Instructor

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 WEEK 3 - ANALYSIS OF PAST AND PRESENT PERFORMANCE

OBJECTIVES:
At the end of this lesson, the students are expected to:

1. Explain what we can learn by analyzing a firm’s financial statements.

2. Be able to conduct financial analysis using Vertical Analysis,

Horizontal analysis, and Trend Analysis

3. Identify the proper situations to use specific analysis techniques

LECTURE

HORIZONTAL ANALYSIS

This type of analysis is commonly used in analyzing and comparing historical

data such as financial ratios

or line items (accounts) over a number of accounting period.

Horizontal analysis can be appreciated by use of absolute comparison or

percentage comparison using the previous or historical period as baseline year.
This kind of analysis is also called base-year analysis.

 Horizontal analysis is used in the review of a company's financial

statements over multiple periods.

 It is usually depicted as a percentage growth over the same line item in

the base year.

 Horizontal analysis allows financial statement users to easily spot

trends and growth patterns.

 It can be manipulated to make the current period look better if specific

historical periods of poor performance are chosen as a comparison.

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 TREND ANALYSIS

This type of analysis is commonly used in drawing/ visualizing the current and
historical performance of a company to predict the future performance. Trend
analysis can either use $ change from previous year (base year) to current year
or absolute amount

Normally this analysis involves multiple period to be able to generate a sufficient

trend line.

Trend Analysis Sample 1 (Inventory Turnover of Dell and HP):

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VERTICAL ANALYSIS

Vertical analysis is also known as Common Size Financial Statement.

A common size financial statement is a standardized version of a financial statement in which all
entries are presented in percentages.
It helps to compare a firm’s financial statements with those of other firms, even if the other firms
are not of equal size.
How to prepare a common size financial statement?
– For a common size income statement, divide each entry in the income statement by sales.
– For a common size balance sheet, divide each entry in the balance sheet by total assets.

Sample below (Profit and Loss Common Size Statement):

– Cost of goods sold make up 75% of the firm’s sales resulting in a gross profit of 25%.
– Selling expenses account for about 3% of sales.
– Income taxes account for 4.1% of the firm’s sales.
– After all expenses, the firm generates net income of 7.6% of firm’s sales.

Sample below (Balance Sheet Common Size Statement):

– Total current assets increased by 5.6% in 2013 while total current liabilities declined by 2%.
– Long-term debt account for 39.2% of firm’s assets, showing a decline of 1.7%.
– Retained earnings increased by 5.8%

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