FINANCIAL STATEMENT

ANALYSES
AND THEIR IMPLICATIONS
TO MANAGEMENT
MA. SHELLA SANTIAGO CABRERA
Master of Public Administration
FINANCIAL ANALYSIS
Financial Statement Analysis is a method of
reviewing and analyzing a companys accounting
reports (financial statements) in order to gauge its
past, present or projected future performance. This
process of reviewing the financial statements
allows for better economic decision making.

Financial
Market Disclosur
Data es

Economi
c Data

Financial
Analysis
OBJECTIVES
Profitabi The ability of the firm to yield a
sufficient amount of return on
lity company sales, assets and
invested capital

Liquidity & Working capital

Stability position or short-term
financial position
Asset How efficient the
Utilization company is in
or Debt
Activity managing its
utilization resources
Overall debt status
or of the company
Leverage
USERS OF FINANCIAL STATEMENT ANALYSIS

Manageme Owners Investors Creditors

nt

Governme Employees Customers

nt
LIMITATIONS

Failure to consider changes in the purchasing power,

inconsistencies and dissimilarities in the accounting
principles, policies and procedures used
Failure to consider changes in the purchasing power of currencies

Age of the financial statements

Failure to read and understand the information in the Notes to

financial statement
Financial statements that have not undergone external auditing
procedures may or may not conform with the GAAP standards

Audited statements do not guarantee accuracy

METHODS OF FINANCIAL
ANALYSIS

Horizontal Vertical Trend

Analysis Analysis Analysis
HORIZONTAL ANALYSIS
A financial statement analysis technique
that shows changes in the amounts of
corresponding financial statement items
over a period of time. It is a useful tool to
evaluate the trend situations.
Using comparative financial
statements to calculate peso or
percentage changes in a
financial statement item from
one period to the next
HORIZONTAL ANALYSIS -
Methods

Absolute Comparison

Percentage
Comparison
The management of Clover Company
provides you with comparative balance
sheets of the years ended December
31, 1999 and 1998. Management asks
you to prepare a horizontal analysis on
the information.
 Amount Amount
Peso of Item in of item in
Change comparis the base
on year
 Amount Amount
Peso of Item in of item in
Change comparis the base
on year
 Amount
Percentage
Peso
Chang
of item
in the
10
Change
e base
year 0
($11,500 $23,500) 100% =
48.9%
HORIZONTAL ANALYSIS EXAMPLE
Sales increased by 8.3%
while net income
decreased by 21.9%.
HORIZONTAL
ANALYSIS
ADVANTAGES
When the analysis is
conducted for all financial
statements at the same
time, the complete impact
of operational activities can
be seen on the companys
financial condition during
the period under review.
DISADVANTAGE
S
The aggregated information
expressed in the financial
statements may have
changed over time and
therefore will cause
variances to creep up when
account balances are
compared across periods.
Can also be used to
misrepresent results.
VERTICAL ANALYSIS
Also known ascommon-size analysis
is a popular method of financial
statement analysis that shows each
item on a statement as a percentage
of a base figure within the
statement.
conducted on financial statements
for a single time period only. Each
item in the statement is shown as a
base figure of another item in the
statement, for a given time period,
usually for year
 VERTICAL ANALYSIS

Amount Amou
Percenta
of
ge of
Individu nt of 100
Base Base
al Item
 Company A and B
Comparative Income Statement
For the year ended.
Company A Company B
Sales 100,000 100% 1,000,000 100%
Cost of
goods 70,000 70% 700,000 70%
sold

30,000 30% 300,000 30%

VERTICAL ANALYSIS
ADVANTAGES DISADVANTAGE
S
Only requires financial Lose out on comparison across
statements for a single different time periods to gauge
reporting period performance.

Useful for inter-firm or inter-

departmental comparisons of
performance as one can see
relative proportions of account
balances, no matter the size of
the business or department
TREND ANALYSIS
One of the tools for the analysis of the companys
monetary statements for the investment purposes.
Involves the collection of information from multiple
time periods and plotting the information on a
horizontal line for further review
Is the presentation of amounts as a percentage of a
base year
TREND ANALYSIS - WAYS

Revenue
and cost
analysis
Investment
analysis
TREND ANALYSIS -
USAGE
Examine revenue patterns to see if sales are declining
for certain products, customers, or sales regions.
Examine expense report claims for evidence of
fraudulent claims.
Examine expense line items to see if there are any
unusual expenditures in a reporting period that require
additional investigation
Extend revenue and expense line items into the future
for budgeting purposes, to estimate future results
TREND ANALYSIS

Amount Amount Total of

Percentag of the of both
e Previous Current amoun
Year Year t
$1,991 - $1,820 = $17
TREND ANALYSIS
ADVANTAGES DISADVANTAGES
Helps the analyst to make a Selection of Base Year
proper comparison between the
two or more firms over a period of
time
In terms of percentage is found to Consistency
be more effective in comparison
with the absolutes figures/data on
the basis of which the
management can take the
decisions
Very useful for comparative Useless in Inflationary Situations
analysis of date in order to
measure the financial
performances of firm over a
period of time and which helps
the management to take
decisions for the future i.e. it
helps to predict the future
Helps to measure the profitability
Problems with Financial
Statement Analysis

Comparability between periods

Comparability between companies

Operational information