FINANCIAL

MANAGEMEN
T
PREPARED BY: CHARLENE
DARYL D. YAYEN, CPA
FINANCIAL MANAGEMENT

 Encompasses 3 diff types of decisions: Investment, Operating, and Financing

 Investment – concerned with the use of funds (buying, holding, or selling of all types of assets)
 Operations – concerned with the use of funds for the day-to-day needs of the business with regards to its operations.
 Financing – concerned with the acquisition of funds to be used for investing and financing day-to-day operations
FINANCIAL MANAGEMENT: OBJECTIVES

 Financial Managers are primarily concerned with investment decisions and financing decisions within business
organizations.

FINANCIAL OBJECTIVE:
MAXIMIZATION OF ECONOMIC WELL-BEING/ WEALTH OF THE OWNERS
Whenever a decision is to be made, management should choose the alternative
that most increases the wealth of the owners of the business.
For corporations, that is maximizing the value of shareholders’ equity.
FINANCIAL STATEMENT ANALYSIS

 WHAT IS FINANCIAL STATEMENT (FS) ANALYSIS?

 To provide information that allows decision makers to understand and evaluate the results of business decisions. In short, it is
to provide information in order to make decisions. Managers analyze financial statements to evaluate past financial
performance and make future decisions.
 It involves the evaluation of an entity’s past performance, present condition, and business potentials by way of analyzing the
FS to obtain information about:
 Profitability of the business firm
 Ability to meet company obligations
 Safety of investment in the business
 Effectiveness of management in running the firm
FORMS OF BUSINESS ENTERPRISE

 Sole Proprietorships – owned and controlled by one person, receives all income from the business and alone decides
whether to reinvest the profits or use them for personal expenses
For tax purposes: the sole proprietor reports income from the business on his personal income tax return. Business
income is treated as the proprietors personal income.
 Partnerships – two or more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves. (with partnership agreement)
 General Partnership – consisting only of general partners who participate fully in the business mgt.
 Limited Partnership – consists of at least one general partner and one limited partner.
Limited partner invest his money to the business but cannot participate in its management.
For tax purposes, generally partnership is non taxable.
 Corporation – is an artificial being created by operation of law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incident to its existence.
SOLE PROPRIETORSHIP
ADVANTAGES
 The proprietor is the sole business decision-maker.
 The proprietor receives all income from business.
 Income from the business is taxed once, at the
individual taxpayer level.
DISADVANTAGES
 The proprietor is liable for all debts of the business
(unlimited liability).
 The proprietorship has a limited life.
 There is limited access to additional funds.
PARTNERSHIP (GENERAL)

ADVANTAGES
 Partners receive income according to terms in
partnership agreement.
 Income from business is taxed once as the partners’
personal income.
 Decision-making rests with the general partners only.
DISADVANTAGES
 Each partner is liable for all the debts of the
partnership.
 The partnership’s life is determined by agreement or
the life of the partners.
 There is limited access to additional funds.
CORPORATION

ADVANTAGES DISADVANTAGES
 The firm has perpetual life.  Income paid to owners is subjected to double
 Owners are not liable for the debts of the firm; the taxation.
most that owners can lose is their initial investment.  Ownership and management are separated in larger
 The firm can raise funds by selling additional organizations.
ownership interest.
 Income is distributed in proportion to ownership
interest.
  BASIC TOOLS IN FINANCIAL
STATEMENT ANALYSIS

FINANCIAL  Horizontal analysis (a.k.a Trend

Analysis)

STATEMENT
 Vertical Analysis (a.k.a. Common
Analysis)
 Ratio Analysis

ANALYSIS  Statement of Cash Flow Analysis

 Financial forecasting using additional
funds needed (AFN)
FS ANALYSIS: HORIZONTAL ANALYSIS

a.k.a. TREND ANALYSIS

 A technique for evaluating a series of financial statement data over a period of time. Its purpose is to determine
the increase and decrease that has taken place, expressed either an amount or a percentage.
 Involves comparison of amounts shown in the FS of two or more consecutive periods. The difference and
percentage change of the amounts are calculated using the EARLIER period as the BASE period.

FORMULA: Current Year Value – Base Year Value

Base Year Value
Reminder: Percentage change is not computed if the base is zero or negative.
FS ANALYSIS: HORIZONTAL ANALYSIS

S1: Assume the following sales data for Sunyang Company:

Year Sales
2021 P 800, 000
2020 750, 000
2019 625, 000
2018 400, 000
What is the percentage increase in sales from 2018 to 2019, assuming that 2018 is the base year?
a. 60.00% c. 50.00%
b. 56.25% d. 62.50%
FS ANALYSIS: HORIZONTAL ANALYSIS

S2: Assume the following sales data for Sunyang Company:

Year Sales
2021 P 800, 000
2020 750, 000
2019 625, 000
2018 400, 000
What is the percentage increase in sales from 2018 to 2020, assuming that 2018 is the base year?
a. 85.70% c. 87.50%
b. 80.75% d. 87.05%
FS ANALYSIS: HORIZONTAL ANALYSIS

S3: Last year, a business had no long term investments; this year, long term investments amount to 500,000. In a
horizontal analysis, the change in long term investments should be expressed as:

a. An absolute value of P500,000 and an increase of 100%

b. An absolute value of P500,000 and an increase of 1%
c. An absolute value of P500,000 and no value for a percentage change.
d. No change in any terms because there was no investment in previous year.
FS ANALYSIS: VERTICAL ANALYSIS

a.k.a. COMMON ANALYSIS

 A process of comparing figures in the FS of a single period. It involves conversion of amounts in the FS to a
common base. This is accomplished by expressing all figures in the FS as percentages of an important item
 Total Sales or Net Sales (in income statement)
 Total Asset (in balance sheet)

 These converted statements are called common-size statements or percentage composition statements.

Reminder: ONLY PERCENTAGES ARE PRESENTED!

FS ANALYSIS: VERTICAL ANALYSIS

S4: Glory Corporation reported the following:

Cash and Cash equivalents 2450,000 Accounts Payable 750,000

Receivables 450,000 Shareholders’ Equity 12,000,000
Inventory 1350,000 Total Liabilities and equity 12,750,000
Fixed Assets 8,500,000
Total Assets 12,750,000
Compute for the following by using vertical analysis:
a. Percentage of cash 19.22% c. Percentage of Inventory 10.59%
b. percentage of Accounts Receivables 3.53% d. Percentage of Accounts Payable 5.88%
FS ANALYSIS: RATIO ANALYSIS

 This technique establishing relationship among financial statement accounts at given

date or period of time. These ratios analyze firm’s liquidity, the use of leverage, asset
management, cost control, profitability, growth, and valuation.
 LIQUIDITY RATIOS
 ACTIVITY RATIOS
 SOLVENCY RATIOS
 PROFITABILITY RATIOS
 MARKET VALUE RATIOS
FS ANALYSIS: RATIO ANALYSIS – LIQUIDITY RATIO

 Current Ratio
 To evaluate company’s liquidity and ability to pay current obligations.

 Acid Test/ Quick Ratio

Net Working Capital = Current Assets – Current Liabilities

FS ANALYSIS: RATIO ANALYSIS – LIQUIDITY RATIO
S5: The following are taken from the Balance Sheet of Jang-Uk Company.

1. What is the company’s current ratio?

a. 0.80 c. 0.21
b. 0.51 d. 3.03
FS ANALYSIS: RATIO ANALYSIS – LIQUIDITY RATIO
S5: The following are taken from the Balance Sheet of Jang-Uk Company.

2. What is the company’s quick ratio?

a. 0.51 c. 1.93
b. 0.80 d. 0.32
FS ANALYSIS: RATIO ANALYSIS – LIQUIDITY RATIO
S5: The following are taken from the Balance Sheet of Jang-Uk Company.

3. What is the company’s Net Working Capital?

S6: Compute the requested ratios, using the following financial and operating data taken from financial
statements of Woo Young-Woo Corporation

Compute for the following

a. current ratio for 2021 and 2022
b. quick ratio for 2021 and 2022
c. net working capital for 2021 and 2022
FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS

 It measures the firm’s use of assets to generate revenue and income.

 These ratios evaluate liquidity because they indicate how quickly assets are turned
into cash.

• Receivable Turnover – it measures the number of times receivables are recorded and
collected during the period.

_____Net Credit Sales_____

Average Receivables
FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS
• Receivable Turnover – it measures the number of times receivables are recorded and collected during the
period.

_____Net Credit Sales_____

Average Receivables

• Average Age of Receivable – it indicates the average number of days during which the company must wait
before receivables are collected.

_____360____
Receivable Turnover
S7: Use the following information for the next two (2) questions:

Naksu Company’s net sales for the year is P15,000,000 and average accounts receivable is P3,000,000.
Use 365 days to answer the following:

1. What is the receivable turnover ratio?

2. How many days sales are in accounts receivable on the average (average age of receivable)?
S8: Use the following information for the next two (2) questions:

Naksu Store had credit sales of P6,000,000 and cost of goods sold of P2,000,000 for the year. The
accounts receivable balances at the beginning and end of the year were P350,000 and P250,000, respectively.

1. What is the receivable turnover ratio?

2. How many days sales are in accounts receivable on the average (average age of receivable)?
S9: Naksu Company has an accounts receivable turnover ratio of 9. The average accounts
receivable during the period was P 525,000

What is the amount of net sales for the period?

FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS
• Inventory Turnover – it measures the number of times that the inventory is replaced during the period.

_____Cost of Goods Sold_____

Average Merchandise Inventory

• Average Age of Inventory – it indicates the average number of days during which the company must wait
before inventories are sold.

_________360________
Inventory Turnover
S10: Use the following information for the next two (2) questions:

Mudeok Company’s cost of goods sold is P7,200,000 and average inventory of merchandise is
P600,000. Use 365 days to answer the following:

1. What is the inventory turnover ratio?

2. How many days sales are in inventory on the average (average age of inventory)?
S11: Compute for Inventory Turnover and Average Days of Inventory using 360 days.
S12: What was Jin Byu Yeon’s Gross margin for 2022?
FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS
• Payable Turnover – it measures the number of times payables are recorded and paid during the period.

_____Net Credit Purchases_____

Average Trade Payable

• Average Age of Trade Payable – it indicates the length of time during which payables remain unpaid

_________360________
Trade Payable Turnover
S13: Compute for Payable Turn and Average Age of Trade Payables assuming the purchases for the year 2022 are
7,500,000 and 6,000,000 for the year 2021. Use 360 days.
FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS
• Operating Cycle – it measures the average number of days to convert inventories to cash.

Average Age of Inventory + Average Age of Receivables

• Total Asset Turnover – Measures the level of capital investment relative to sales volume.

_________Net Sales________
Average Total Asset
S14: If accounts receivable should be collected in 40 days and inventory turns over six times
per year. How long is the operating cycle?

a. 46 days c. 250 days

b. 15 days d. 100 days

S15: Mama Jin Corporation’s sale last year were P38,000 and its total assets were 16,000.
What was its total asset turnover ratio?

a. 2.04 c. 2.26
b. 2.14 d. 2.38
FS ANALYSIS: RATIO ANALYSIS – ACTIVITY RATIOS
• Fixed Asset Turnover – it indicates how much revenue the company generates for each peso invested in
fixed assets.

_____Net Sales_____
Average Net Fixed Asset

• Working Capital Turnover – Indicates adequacy of working capital to support operations (sales)
_________Net Sales________
Average Working Capital
FS ANALYSIS: RATIO ANALYSIS – SOLVENCY RATIOS

 Relate to the company ‘s long-run survival. It shows the company’s ability to repay
lenders when debt matures and make the required payments prior to the date of
maturity.

• Debt Ratio – proportion of total assets provided by creditors

_____Total Liabilities_____
Total Assets
FS ANALYSIS: RATIO ANALYSIS – SOLVENCY RATIO
• Equity Ratio – Proportion of total assets provided by owners

_____Total Shareholder’s Equity_____

Total Assets

• Debt to Equity Ratio – Proportion of assets provided by creditors compared to that provided by owners.

_________Total Liabilities________
Total Shareholder’s Equity
S16: JinMu Corporation processes ice stones. The following information pertains to
its financial position as of December 31, 2022.

Short term debt 30,000

Long term debt 40,000
Equity 70,000
Total Assets 140,000

Compute for the following:

a. Equity Ratio

b. Debt Ratio

c. Debt to Equity Ratio

S17: Prepare for the following:
a. Vertical Analysis for
i. Cash
ii. Fixed Assets
iii. Long term debts
iv. Capital Stock
b. Current Ratio
c. Debt Ratio
d. Equity Ratio
e. Debt to Equity Ratio
 FS ANALYSIS: RATIO ANALYSIS – SOLVENCY RATIOS

• Times Interest Earned Ratio – it determines the extent of which operations cover interest expense

_____Earnings Before Interest & Tax

Interest Expense

S18: The following data were abstracted from the records of Black Pink Corporation for the year

Sales P 1,800,000
Bond interest expense 60,000
Income taxes 300,000
Net Income 400,000
How many times was bond interest earned?
a. 7.67 times c. 12.67 times
b. 11.67 times d. 13.67 times
FS ANALYSIS: RATIO ANALYSIS – PROFITABILITY RATIOS

 Relate to the company ‘s performance in the current period. It shows the company’s
ability to generate income. Measure earning in relation to some base, such as assets,
sales or capital.

• Net Profit Margin Ratio (a.k.a. Return on Sales) – represents the percentage of revenue that ultimately
makes it into net income, after deducting expenses. It determines the amount of income by owners

_____Net Income_____
Net Sales
FS ANALYSIS: RATIO ANALYSIS – PROFITABILITY RATIOS
• Gross Profit Percentage – it indicates how much profit was made, on average, on each peso of sales after
deducting the cost of goods sold.

_____Net Sales – Cost of Goods Sold_____

Net Sales

• Basic Earning Power – Indicates the overall profitability of Assets.

__Earnings Before Interest and Taxes

Total Assets
S20: Selected data from SeoYul Company’s year-end financial statements presented below. The difference between
average and ending inventory is immaterial.

Current ratio 2.0

Acid Test ratio 1.5
Current Liabilities P120,000
Sales P800,000
Inventory turnover 8

What is the gross margin percentage ratio?

a. 20%
b. 40%
c. 50%
d. 60%
S21: Selected financial data from SeoYul Company’s for the most recent year appear below:

Sales P100,000
Cost of goods sold 60,000
Dividends declared and paid 5,000
Interest Expense 8,000
Operating Expenses 18,000

Income tax rate is 30%. What is the return on sales ratio?

a. 14.0%
b. 40%
c. 9.8%
d. 5.8%
FS ANALYSIS: RATIO ANALYSIS – PROFITABILITY RATIOS
• Return on Total Asset – Efficiency with which assets are used to operate the business.

_____Net Income_____
Average Total Assets
• Return on Equity (ROE) – Measures the amount earned on the owners’ or stockholders’ investment

_____Net Income____
Average Shareholder’s Equity
• Return on Common Equity – Measures the profitability of common equity.

_____Net Income – Preferred Dividends____

Average Common Equity
S22: The following information was made available by ParkJin Company:
Net Income P 40,000
Interest expense 8,000
Total Asset, beginning 260,000
Total Asset, Ending 315,000

Income tax rate is 35%. What is the company’s return on asset for the year?

a. 14.5% c. 16.7%
b. 15.7% d. 13.9%

S23: The following information was made available by Maid Servant Kim Company:
Net Income P 130,000
Dividends paid to preferred stockholders 42,000
Average common Stockholders’ equity 610,000

Income tax rate is 35%. What is the company’s return on common equity for the year?

a. 15.8% c. 21.3%
b. 28.1% d. 14.4%
FS ANALYSIS: RATIO ANALYSIS – PROFITABILITY RATIOS
• Economic Value Added (EVA) – Shows the amount of current investment that was “financed” by depreciation
and increased

Net Operating Profit after Taxes – Total Cost of Capital

• Preference Share BVPS – Amount that each PS will receive upon liquidation of the Company.

_____Liquidation Value of PS + Unpaid Dividends____

Outstanding and Subscribed PS
• Ordinary Share BVPS – Amount that each OS will receive upon liquidation of the Company.

_____Total SHE – [Liquidation Value of OS + Unpaid Dividends]____

Outstanding and Subscribed OS
 FS ANALYSIS: RATIO ANALYSIS – PROFITABILITY RATIOS
Using DuPont Formula

Return on Asset (ROA) = Return on Equit (ROE) =

Profit MarginX Asset TurnOver Return On Asset X Equity Multiplier

____Profit Margin__ ____Sales____
Sales Ave. Total Asset • Equity Multiplier – is a metric that reveals how much company’s total assets
are financed by shareholder’s equity. Essentially, this ratio is a risk indicator
used by investors to determine a company's position when it comes to
leverage.
S24: Songrim Company’s Return on equity is 12% and debt ratio is 0.40. Determine the Return on Asset.

a. 5.35%
b. 8.40%
c. 6.60%
d. 7.20%
FS ANALYSIS: RATIO ANALYSIS – MARKET VALUE RATIOS
• Price Earnings Ratio – Indicates the number of pesos required to in order to receive P1 of earnings.

_____Price per Share_____

Earnings per Share

• Earnings Per Share (EPS) – the amount of earnings per year of each Ordinary shares.

____Net Income – Preferred Dividends____

Weighted Average Outstanding OS
FS ANALYSIS: RATIO ANALYSIS – MARKET VALUE RATIOS
• Dividends per Share - the amount of dividends earned by each outstanding share.
_____Declared Dividends____
Shares Outstanding
• Dividend Yield – Measures the rate of return in the investors’ common stock investments.

_____Dividend per Share____

Price per Share

• Dividends pay-out Ratio – Indicates the proportion of earnings distributed as dividends

_____Dividend Per Share____

Earnings per Share
S25: Presented below are selected data from the financial statements of Beyonce Bee Company for 2022 and 2021:
December 31, 2022 December 31, 2021
Net Income 100,000 123,000
Cash dividends paid on preferred stock 12,000 15,000
Cash dividends paid on common stock 48,000 38,000
Weighted average number of common shares outstanding 105,000 95,000
Compute for the Earnings per share reported on 2021 and 2022 income statement.
a. 0.44 c. 0.84
b. 0.55 d. 0.95

S26: Following are selected data taken from the records of Master Lee Company:

Income before tax 200,000

Income tax rate 40%
Dividend pay-out ratio .80
Number of shares outstanding 10,000 shares

How many dividends per share was paid by the company during the year?
a. 9.60 c. 16.00
b. 6.40 d. 15.00
FS ANALYSIS: LIMITATIONS

Traditional financial The use of different

Financial statements statements are based generally accepted Ratio analysis may be
contain numerous on cost and are not accounting principles affected by seasonal
estimates. adjusted for price level may distort factor.
changes. comparison.

Accounting policies
Management may
Diversification limits among different
window dress financial
comparability companies may widely
statements.
vary.
STATEMENT OF CASH FLOW ANALYSIS

 What is Statement of Cash Flow?

 Why is it important to analyze?

- Statement of CF is a financial statement that summarizes the movement of cash and cash
equivalents that come in and go out of a company.

- It measures how well a company manages its cash position, meaning how well the company
generates cash to pay its debt obligations and fund its operating expenses.
 STATEMENT OF CASH FLOW ANALYSIS

 Operating Activities – Related to selling goods and services of the

 Examples: Cash received from customers through sale of goods or services performed

Cash payments to suppliers, for taxes and for other operating expenses.
 Investing Activities – Related to the acquisition or sale of non-current asset, and lending money and collecting
loans
 Examples: Cash received from sale of, and paid for purchases of derivative instruments.
Loans extended to other companies

 Financing Activities – Related to resources obtain from the owners and creditors.
 Examples: Cash received from issuing share capital

Cash proceeds from issuing bonds, loans, notes, mortgages and other short or long term borrowings.
Cash payment to shareholders to redeem shares (treasury shares)
S27: Answer the following questions
FINANCIAL
FORECASTING
USING
ADDITION
FUNDS NEEDED
(AFN)
  The Financial Analysis helps in making
FINANCIAL Financial Forecasts, particularly the required
ADDITIONAL FUNDS NEEDED (AFN),
FORECASTING determined based on entity’s capital
requirements and from a variety of financial
USING ADDITIONAL ratios.

FUNDS NEEDED
(AFN)
a.k.a EXTERNAL FUNDS NEEDED (EFN)
THANK YOU!
^_^