APPROACH & TECHNIQUES

OF FINANCIAL STATEMENT
ANALYSIS
 STEPS IN ANALYZING FINANCIAL
STATEMENTS

1. Explicitly define the analysis objectives.

2. Formulate specific questions and criteria
consistent with the analysis objectives.
3. Identifying the most effective and efficient
tools of analysis.
4. Interpreting the evidence
 PROSEDUR ANALISIS LAPORAN
KEUANGAN

1. Siapkan Laporan Keuangan.

2. Lakukan verifikasi terhadap laporan
keuangan tersebut.
3. Lakukan penghitungan sesuai pendekatan
dan teknik analisis yang digunakan.
4. Lakukan interpretasi berdasarkan hasil
penghitungan tersebut.
5. Berikan rekomendasi berdasarkan hasil
interpretasi tersebut
 COMPARISONS TOOL
 Internal Comparisons

 External Comparisons
 APPROACH

• Horizontal Approach (Internal Analysis)

• Vertical Approach (Internal Analysis)
• Cross-section Approach (External Analysis)
 Horizontal Approach (2)
Horizontal analysis also is referred to as comparative
statement analysis. Individuals conduct comparative
financial statement by reviewing consecutive balance
sheets, income statement, or statement of cash flows
from period to period. Horizontal analysis given the left-
right or right-left analysis of account balances.

Change Analysis
Item Period 2016 ($) Period 2017 ($) Amount ($) Percent
Cash & bank 10,000 15,000 5,000 50
Sales 150,000 120,000 (30,000) (20)
Net income 50,000 45,000 (5,000) (10)
 Horizontal Approach (2)

Complications in comparative analysis

Change Analysis
Item (in millions) Period 2016 Period 2017 Amount Percent
Net Income (loss) $(4,500) $1,500 $6,000 -
Tax Expense 2,000 (1,000) (3,000) -
Cash 10 2,010 2,000 20
Notes Payable - 8,000 8,000 -
Notes Receivable 10,000 - (10,000) (100)
 Horizontal Approach(3)

Amount ($) Change Analysis

2017 20116 Amount ($) Percent

Net sales 12,238 11,397 841 7.38

Cost of sales 5,536 5,192 344 6.63
Gross profit 6,702 6,205 497 8.01
Selling, general, & adm. Exp. 4,355 3,921 434 11.07
Other expense, net 186 69 117 169.57
Operating profit 2.161 2,215 (54) -2.44
Interest expense, net 159 136 23 16.91
Income before income taxes 2,002 2,079 (77) -3.70
Provision for income taxes 648 728 (80) -10.99
Net income 1,354 1,351 3 0.22
 Vertical Approach (2)
Vertical analysis given the up-down or down-up
evaluation of accounts in common-size statements.
Period 2017 Common-size
Net sales $12,238 100%
Gross profit 6,702 55%
Operating profit 2,161 18%
Net income 1,354 11%
 Vertical Approach (2)
Vertical analysis given the evaluation of accounts in
ratio analysis
Period 2017
Net sales $12,238 FINANCIAL RATIO
Gross profit 6,702 1. Gross profit to Net Sales
Operating profit 2,161 2. Operating Profit to Net Sales
3. Net Income to Net Sales
Net income 1,354 4. Net Sales to Total Assets
Total assets 150,200 5. Net Income to Total Assets
Total liabilities 100,200 6. Total Liabilities to Total Assets
7. Total Liabilities to Equity
Equity 50,000
 Cross-section Approach (2)
Firm X Firm Y Average Industry
Net sales $120,000 $100,000 $90,000
Net profit 20,000 15,000 10,000
Cash 400,000 300,000 350,000
Total assets 850,000 700,000 650,000
Total liabilities 600,000 450,000 500,000
Total equities 250,000 250,000 150,000
 TECHNIQUES/METHODS
• Trend Analysis
• Common-size Analysis
• Ratio Analysis
• Valuation
• Management Discussion & Analysis (MD&A)
 Trend Analysis (1)
Comparative Analysis or Trend Analysis techniques:
Year-to-year change analysis
Year-to-year Change Analysis is comparing financial
statements over relatively short time periods – two or
three years.
 Index-number trend analysis (multi years
analysis)
Index number trend analysis is long-term trend
comparisons.
 Trend Analysis (2)

Year-to-year change analysis

Amount ($) Change Analysis
2017 2016 Amount ($) Percent
Net sales 12,238 11,397 841 7.38
Cost of sales 5,536 5,192 344 6.63
Gross profit 6,702 6,205 497 8.01
Selling, general, & adm. Exp. 4,355 3,921 434 11.07
Other expense, net 186 69 117 169.57
Operating profit 2.161 2,215 (54) -2.44
Interest expense, net 159 136 23 16.91
Income before income taxes 2,002 2,079 (77) -3.70
Provision for income taxes 648 728 (80) -10.99
Net income 1,354 1,351 3 0.22
 Trend Analysis (3)
Index-number trend analysis
Current Year Balance
Index Number  x100
Base Year Balance
2015 2016 2017 Index Number
Base year 2015
2015 2016 2017
Net sales 150 200 120 100 133.3 80.0
Net profit 50 60 60 100 120.0 120.0
Cash 200 250 210 100 125.0 105.0
Total assets 650 660 700 100 101.5 107.7
Equity 450 400 425 100 88.0 94.4
 Common-Size Analysis
Common-size financial statement analysis to
knowing what proportion of a group or
subgroup is made up of a particular account.

Common-size analysis is useful in understanding

the internal makeup of financial statements.
 Common-size Analysis
In analyzing a balance sheet, it is common to express
total assets (or liabilities plus equity) as 100 percent.
Then accounts within these groupings are expressed as
a percentage of their respective total.
In analyzing an income statement, sales are often set at
100 percent with the remaining income statement
accounts expressed as a percentage of sales.
Common-size analysis is an analysis of percentage
financial statements where all balance sheet items are
divided by total assets and all income statement items
are divided by net sales or revenue.
 Common-size Analysis

Amount ($) Common-size (%)

2016 2017 2016 2017
Net sales 12,238 11,397 100.0 100.0
Cost of sales 5,536 5,192 45.2 45.6
Gross profit 6,702 6,205 54.8 54.4
Selling, general, & adm. Exp. 4,355 3,921 35.6 34.4
Other expense, net 186 69 1.5 0.6
Operating profit 2.161 2,215 17.7 19.4
Interest expense, net 159 136 1.3 1.2
Income before income taxes 2,002 2,079 16.4 18.2
Provision for income taxes 648 728 5.3 6.4
Net income 1,354 1,351 11.1 11.9
 Common-Size Analysis

Current Assets Amounts ($) Common-size

Cash & cash equivalent 10,000 11%
Inventories 50,000 56%
Account Receivables 25,000 28%
Other current assets 5,000 5%
Total 90,000 100%
Common-size Analysis
 Ratio Analysis
Liquidity ratios
Solvency ratios
 Activity ratios
Profitability ratios
 Market Ratio
 Valuation Models
Valuation normally refers to estimating the
intrinsic value of a company or its stock.
Debt Valuation
Equity Valuation