RATIO AND

TREND ANALYSIS
 Financial Statements Analysis
The object of accounting is to provide information that will be helpful in
decision making. Truly enough, financial statements are able to provide
information about the entity’s financial position, financial performance and
cash flows.

It is important for the owners and managers of the entity to be able to

evaluate the results of all their business activities. This analysis can help
them:
• Confirm past expectations
• Evaluate present financial results
• Predict future outcomes
Three ways of FS analysis
1. Horizontal Analysis
2. Vertical Analysis
3. Analysis through Ratio interpretation
Horizontal Analysis is the method of comparing and analyzing financial
results of different accounting periods in each financial statement account
and element.

2020 2019 Peso Percentage

change change

Cash and cash equivalents 500,000 400,000 100,000 25%

 Current year Amount change
Horizontal Analysis less prior year over base year

2020 2019 Amount Change Percentage Change

ASSETS
100,000 25%
Cash 500,000 400,000
-31,500 -35%
Accounts Receivable 58,500 -12,000 -30%
90,000 60,000 cash 20% cash
The entity’s The entity’s
Supplies 28,000 40,000 increased -by P100,000 increased
- by 25%
from 2019 to 2020 from 2019 to 202
Land 360,000 300,000 116,500 12.26%
Equipment 120,000 120,000
TOTAL ASSETS 1,066,500 950,000

51,500 51.50%
LIABILITIES AND CAPITAL - -
Account Payable 151,500 100,000 65,000 10%

116,500 12.26%
Notes Payable 200,000 200,000
Capital 715,000 650,000
Horizontal Analysis

2020 2019 Amount Change Percentage Change

Net Sales 5,000,000 4,000,000 1,000,00 25%
0
25%
600,000
Less: Cost of Goods Sold 3,000,000 2,400,000 25%
400,000
- -33.33%
Gross Profit 2,000,000 1,600,000
100,000
Add: Other Income 200,000 300,000 15.79%
300,000
Revenues 2,200,000 1,900,000 -100,000 -11.11%

Less: Operating Expenses 800,000 900,000 400,000 40%

Net Income Before Tax 1,400,000 1,000,000 40%

120,000 40%
Less: Income Tax Expense 420,000 300,000
280,000

Net Income 980,000 700,000

Vertical Analysis is the method of analyzing financial results expressing
each financial statement account and element as a component of a base.

2020 Component
ASSETS
Cash 500,000 46.88%
Account Receivable 58,500 5.49%
Vertical Analysis
2020 2020 Common 2019 2019 Common
Size Size
ASSETS
Cash 500,000 46.88% 400,000 42.11%
5.49% 90,000 9.47%
Accounts Receivable 58,500 2.63% 40,000 4.21%
Supplies 28,000 300,000 31.58%cash
The entity’s
33.76% comprises of 42.11% of
12.63%
Land 360,000 120,000 the entity’s assets in 2019
11.25%
Equipment 120,000 100% 950,000 100%
The entity’s land
comprises of 33.76% of
the entity’s assets in 2020
TOTAL ASSETS 1,066,500
14.21% 100,000 10.53%

LIABILITIES AND CAPITAL 18.75% 200,000 21.05%

67.04% 68.42%
Accounts Payable 151,500 650,000
Notes Payable 200,000 100% 950,000 100%

Capital 715,000
Vertical Analysis
2020 2019
2020 Common Size 2019 Common Size

Net Sales 100% 4,000.000 100%

5,000.000 60% 2,000.000 60%
Less: Cost of Goods Sold 40% 1,600.000 40%
3,000.000 4% 7.50%
Gross Profit 2,000.000 44% 300,000 47.50%
Add: Other Income 200.000 16% 22.50
1,900.000 %
Revenues 28% 25%
2,000.000 8.40% 900,000 7.50%
Less: Operating Expenses 19.60% 17.50
%
800.000 1,000.000
Net Income before tax
1,400.000 300,000
Less: Income Tax Expense
420,000 700,000
Net Income 980,000
Vertical Analysis
2020
2020 Common Size As P1.00

Net Sales 5,000.000 100% 1.00

Less: Cost of Goods Sold 3,000.000 60% 0.60

Gross Profit 2,000.000 40% 0.40

Add: Other Income 200.000 4% 0.04

Revenues 2,000.000 44% 0.44

Less: Operating Expenses 800.000 16% 0.16

Net Income before tax 1,400.000 28% 0.28

Less: Income Tax Expense 420,000 8.40% 0.08

Net Income 980,000 19.60% 0.20

Let us try calculating the analysis components
through

MICROSOFT EXCEL
 Trend Analysis

Comparative financial statements for three, four, or five years.

Where the first year or the base year is labeled as 100%

 Fidel Merchandising
Statement of Financial Position ( in Millions)
ASSETS 2017 % 2016 % 2015 %
Current Assets
Cash P 222.9 76.9 P 330.2 113.9 P 290.0
100
Accounts Receivable 282.5 181.1 172.1 110.3 156.0
100
Inventory 146.3 160.9 92.8 102.1 90.9
100
Prepaid Expenses 74.1 122.1 70.3 115.8 60.7
100
Total Current Asset P 725.8 121.5 P 665.4 111.3 P 597.6
100
Property, Plant & Equipment 1,866.4 298.4 556.2 88.9 625.5 100
TOTAL ASSETS P 2,592.2 211.9 P 99.9 P 1,223.1
100
1,221.6
LIABILITIES AND OWNER’S EQUITY
95.0 106.9
Current Liabilities 551.9 620.6 580.7 100
455.6 94.2
Non-current Liabilities 1,822.4 376.6 400.0 100
242.1 101.7
Total Liabilities P 2,374.3 997.2 P 980.7 100
89.9 92.6
Owner’s Equity 217.9 224.4 242.4 100
211.9 99.9
TOTAL LIABILITIES & OWNER’S EQUITY P 2592.2 1,221.6 1,223.1 100
 Fidel Merchandising
Statement of Financial Position ( in Percent)
ASSETS 2017 2016 2015
Current Assets
Cash 76.9 113.9 100
Account Receivable 181.1 110.3 100
Inventory 160.9 102.1 100
Prepaid Expenses 122.1 115.8 100
Total Current Asset 121.5 111.3 100
Property, Plant, or Equipment 298.4 88.9 100
TOTAL ASSETS 211.9 99.9 100
LIABILITIES AND OWNER’S EQUITY
Current Liabilities 95.0 106.9 100
Non-current Liabilities 455.6 94.2 100
Total Liabilities 242.1 101.7 100
Owner’s Equity 89.9 92.6 100
TOTAL LIABILITIES AND OWNER’S EQUITY 211.9 99.9 100
TOTAL ASSETS
RECOMMEND TREND:

UPWARD TREND
Recommended Trend
UPWARD TREND
ANALYSIS:
Total Asset in increased by 99.9% in
2016 and 211.9% in 2017
CONCLUSION:
The total assets is improving by
showing an upward trend as it
increases its value over the 3 year
period.
RECOMMENDATION:
Despite of increase in the Total
Asset. There was a decrease in cash.
For the recommendation. The
business must watch over its
cashflow. It may opt to improve its
collection to get more cash
 Fidel Merchandising
Statement of Financial Position ( in Percent)
ASSETS 2017 2016 2015
Current Assets
Cash 76.9 113.9 100
Account Receivable 181.1 110.3 100
Inventory 160.9 102.1 100
Prepaid Expenses 122.1 115.8 100
Total Current Asset 121.5 111.3 100
Property, Plant, or Equipment 298.4 88.9 100
TOTAL ASSETS 211.9 99.9 100
LIABILITIES AND OWNER’S EQUITY
Current Liabilities 95.0 106.9 100
Non-current Liabilities 455.6 94.2 100
Total Liabilities 242.1 101.7 100
Owner’s Equity 89.9 92.6 100
TOTAL LIABILITIES AND OWNER’S EQUITY 211.9 99.9 100
TOTAL LIABILITIES AND OWNER’S EQUITY
RECOMMENDED TREND FOR LIABLITIES:

DOWNWARD TREND

RECOMMENDED TREND FOR LIABLITIES:

UPWARD TREND
TOTAL LIABILITIES AND OWNER’S EQUITY

RECOMMENDED TREND FOR LIABLITIES: RECOMMENDED TREND FOR LIABLITIES:

DOWNWARD TREND UPWARD TREND

Financed by Financed by
Creditors Owners\ Inventors

TOTAL LIABILITIES VS. OWNER’S EQUITY

FOR LIABILITIES: FOR EQUITY:
DOWNWARD TREND UPWARD TREND

UPWARD TREND DOWNWARD TREND

 UPWARD TREND DOWNWARD TREND

ANALYSIS:
The Total Liabilities shows an upward trend as it increased by 101.7% in 2016 and 241.1% in 2017.
On the other hand, the Owner’s Equity shows a downward trend as it increased by 92.6% in 2016
down to 89.9% in 2017.
CONCLUSION:
Since, the Total Liabilities are higher than Owner’s Equity, it means that Fidel Merchandising is
heavily financed by creditors.
RECOMMENDATION:
The business must watch over its liabilities and loans. Pay early to minimized the interest and
avoid getting more loans in the future.
 Fidel Merchandising
Income Statement
As of December 31 (in Millions)
2017 % 2016 % 2015 %
Net Sales P 2,213.3 143.4 P 1,738.7 112.7 P 1,543.2 100
Cost of Goods Sold 1032.1 147.4 831.8 118.8 700.1 100
Gross Profit P 1,181.2 140.1 P 906.9 107.6 P 843.1 100
Selling & Admin Expenses 889.2 160.1 659.5 118.7 555.5 100
Operating Income P 292.0 101.5 P 247.4 86.0 P 287.6 100
Interest Expense 90.9 363.6 30.5 122.0 25.0 100
Income Before Income Taxes P 201.1 76.6 P 216.9 82.6 P 262.6 100
Income Tax Expense (30%) 60.3 77.9 65.0 84.0 77.4 100
NET INCOME P 140.8 76.0 P 151.9 82.0 P 185.2 100
 Fidel Merchandising
Income Statement
As of December 31 (in Percent)
2017 2016 2015
RECOMMENDED TREND:
Net Sales 143.4 112.7 100
Cost of Goods Sold 147.4 118.8 100
UPWARD TREND
Gross Profit 140.1 107.6 100
Selling & Admin Expenses 160.1 118.7 100
Operating Income 101.5 86.0 100
Interest Expense 363.6 122.0 100
Income Before Income Taxes 76.6 82.6 100
Income Tax Expense (30%) 77.9 84.0 100
NET INCOME 76.0 82.0 100
UPWARD TREND RECOMMENDED TREND:

UPWARD TREND

ANALYSIS:
Net Sale shows an upward trend as it increased by 112.7% in
2016 and 143.4% in 2017. However, the Net income shows a
downward trend as it increased by 82% in 2016 down to 76%
DOWNWARD TREND in 2017.

CONCLUSION:
The Net Income of Fidel Merchandising show an
UNFAVORABLE movement as it decreases over the 3-year
period.
 Fidel Merchandising
Income Statement
As of December 31 (in Percent)

2017 2016 2015

RECOMMENDATION:
Net Sales 143.4 112.7 100
Cost of Goods Sold 147.4 118.8 100 The business should minimized its
interest expense by avoiding late
Gross Profit 140.1 107.6 100
payment, and refrain from getting
Selling & Admin Expenses 160.1 118.7 100 more loans.
Operating Income 101.5 86.0 100
Interest Expense 363.6 122.0 100
Income Before Income Taxes 76.6 82.6 100
Income Tax Expense (30%) 77.9 84.0 100
NET INCOME 76.0 82.0 100