I.

Comparative Statements (increase-decrease method)

Comparing amounts for two or more successive periods often helps in analyzing financial
statements. Comparative financial statements facilitate this comparison by showing financial
amounts in side-by-side columns on a single statement, called a comparative format. Using
figures from Golden Garments financial statements, this section explains how to compute peso
changes and percent changes from comparative statements.
A good place to begin in financial statements analysis to put statements in comparative form.
Significant changes in financial data are easier to see when financial statements for two or more
years are placed side by side in adjacent columns. Year-to-year comparisons for the same
company are useful especially if reported changes are expressed in percentages.
Computing a percentage change in comparative statements requires two steps, namely:
1. Compute the peso amount of the change from the base (earlier) period to the later period,
and
2. Divide the peso amount of change by the base-period amount. This is not done however,
if the base year figure is negative or zero.
Illustrative Problem 7.1. Increase (Decrease) Method Analysis
Comparative statements of Financial position showing the Year-to-Year Changes in Peso
Amounts and Percentages of Golden Garments follow:
Comparative Income Statements showing Year-to-Year Changes in Peso Amounts and
Percentages of Golden Garments follow:
REQUIRED:
Evaluate the Golden Garments financial positions and results of operating using the comparative
statement analysis.
Solution: Financial Statements Analysis of Golden Garments
Short-term Solvency Analysis
As shown on the statement of financial position, the percentage of increase in total current assets (10.1%)
was lower than the percentage of increase in total current liabilities (15%). It can be observed that
accounts payable and bank loans increased significantly. Accounts receivable and inventory increased at a
much higher percentage than the percentage of increase in Sales revenue (11%). This indicates the slower
conversion of inventory and receivables to cash. The changes mentioned resulted to the deterioration in
the short-term solvency position of the company as the end of the year 20X2 compared with year 20X1
Long-term Solvency Analysis
The book value of property, plant and equipment declined because of the depreciation provision for the
year. Total liabilities increased by only 1%, whereas owners’ equity increased by 11.8%. Thus, the
company’s capital structure shifted slightly away from borrowing and toward capital provided by
profitable operations. These changes can be viewed favorably because they indicate strengthening of the
long-term financial position by the end of the year 20X2.
Operating Efficiency and Profitable Analysis
Sales revenues increased by 11% while cost of goods sold increased by 12.4%. This is unfavorable
because this could indicate that the company was unable to adjust the selling price of the goods
commensurate to the increase in cost of goods purchased or manufactured or it was unable to control the
price factor of its cost of sales. These changes resulted to the reduction in the gross profit rate which is
unfavorable. The 11% increase in sales was accompanied by a 7.8% and 2.8% increase in selling and
administrative expenses, respectively. This is favorable because this could indicate management’s
efficiency in keeping expenses within control.
On an overall basis, operating performance could be considered satisfactory or favorable because of the
lower increased in operating costs of 10.5% as compared with the increase in revenue of 11% which
resulted to an 18.4% increase in operating income. Interest expense increase by 11.2% which contributed
to the overall increase in net income of 25.9%.
II. Trend Analysis
Trend analysis, is also called trend percent analysis or index number trend analysis, is a form of
horizontal analysis that can reveal patterns in data across successive periods. It involves computing trend
percents for series of financial numbers and is a variation on the use of percent changes. The difference is
that trend analysis does not subtract the base period amount in the numerator. To compute trend percents,
we do following:
1. Select a base period and assign each item in the base period a weight of 100%.
2. Express financial numbers as a percent of their base period number.
Specially, a trend percent, also called an index number, is computed as follows:

Trend percent(%)= Analysis period amount X 100

Base period
amount
Illustrative Problem 7.2. Financial Analysis using Trend Percentages
The Comparative Statements of Financial Position and Income Statements of Gilbert Company are given
from 20X1 to 20X5.
Gilbert Company
Statement of Financial Position
December 31, 20X1 to 20X5
(P000’s)
Gilbert Company
Income Statement
For the Years Ended December 31, 20X1 to 20X5
(P000’s)
Required:
1. Compute the trend percentages for the Statements of Financial Position and Income Statements
from 20X1 to 20X5 using 20X1 as the base year.
2. Evaluate the company’s short-term solvency, long-term financial position and profitability using
the trend percentages obtained in No.1.
Solution: Financial Statements Analysis of Gilbert Company using Trend Percentages
Requirement 1: Computation of Trend Percentages
Gilbert Company
Statement of Financial Position and Income Statement Trend Percentages
20X1 to 20X5
Requirement 2: Analysis and Evaluation
I. Short-term Solvency
a. Current assets increased by 9% while current liabilities decreased by 27% by 20X5.
The current financial position of the Gilbert Company improved as reflected by the upward trend
in total current assets accompanied by the downward trend in current liabilities. The improvement
in the current financial position is also indicated by the fact that the current assets were 2.05 times
the current liabilities as of December 31, 20X1 and 3.05 times at the most recent date.
b. The trend data reveal that cash, receivables and inventory showed upward tendencies
over the years. The increase in receivables and inventory is favorable because net sales increased
at a faster rate. The favorable tendency indicates that more effective credit, collection and
merchandising policies, could have been established and made effective. The relatively smaller
amount of trade receivable reflects more rapid turnover of customer accounts and possibly a large
increase in cash sales.
c. The decline in marketable securities and other current assets over the year also
indicates lesser investment in not-so-productive assets. All these trends in different directions
reflect an increasing efficiency of working capital management.