Group No.

1:
Financial Statement Analysis
Concha, Paula
Eusebio, Carla
Nacino, Collins
Financial Statement Analysis

 The collective name for tools and techniques that are intended to provide
relevant information to the stakeholders.
 The purpose of FSA is to assess the financial health and performance of the
company.
 FSA consist of the comparisons for the same company over the period of time
and comparisons of different companies either in the same industry or in different
industries.
 The Basic Financial Statements
 Statement of Financial Position / Balance
Sheet
• Shows what assets the company owns and
who has claims on those assets as of a
given date - for example, December 31,
2019.
 Statement of Changes in Equity
• A statement reporting the changes in the
shareholders’ equity. Whether it is due to
Net income /loss, Dividends declared,
prior period error etc.
 Notes to the Financial Statements
• Shows the detailed
understand better
statements.
 Statement of Comprehensive Income /
Income Statement
• Shows the firm’s sales and costs (and thus
profits) during the period - for example,
2019.
 Statement of Cash Flows
• Shows how much cash the firm began the
year with, how much cash it ended up
with, and what it did to increase or
decrease its cash.
information to
the financial
 Tools for Financial Statement Analysis

 The commonly used tools for financial statement analysis are:

 Financial Ratio Analysis
 Comparative financial statement analysis
 Horizontal Analysis/Trend Analysis
 Vertical Analysis/Common size analysis/Component Percentages
Horizontal Analysis - Example
 The percentage analysis of
increases and decreases in
related items in comparative
financial statements is called
Horizontal Analysis.
 Each item on the most recent
statement is compared with
the related item on one or
more earlier statements in
terms of the following:
 1. Amount of increase or
decrease.
 2. Percent of increase or
decrease.
Vertical Analysis - Example
The percentage analysis
of the relationship of
each component in a
financial statement to a
total within the
statement is called
vertical analysis.
In vertical analysis of the
balance sheet, the
percentages are
computed as follows:
1. Each asset item is
stated as a percent of
the total assets.
2. Each liability and
stockholders’ equity item
is stated as a percent of
the total liabilities and
stockholders’ equity.
Ratio Analysis
Profitability Ratios
Liquidity Ratios
Leverage Ratios
Activity Ratios
Other indicators
Illustrative Problem – Rainbow Company
 Liquidity Assessment
Liquidity Formula Calculation 2010 Industry Ave Interpretation

Current Ratio Current Assets 1,500,000.00 2.00 1.70 The company has the ability to pay its
maturing obligations, higher than 1.0
Current Liabilities 750,000.00

Quick Ratio Current Assets - Inventories or Prepaid Expenses 1,500,000.00 - 750,000.00 1.00 0.80 The company has the ability to pay its maturing
obligations instantly
Current Liabilities 750,000.00

Working Capital Current Assets - Current Liabilities 1,500,000.00 - 750,000.00 750,000.00 The company has the ability to pay its
maturing obligations, without
additional loan
 Leverage Assessment

Leverage Formula Calculation 2010 Industry Ave. Interpretation

Debt (%) 1,960,000.00 0.51 57.00 51% of the total assets may been financed by
Total Debt
debt
Total Assets 3,843,000.00
Time Interest Earned Earnings before interest and taxes (EBIT) 545,000.00 + 105,000.00 6.19 3.90 Firm has the ability to pay its annual interest.
Lenders find the firm's credit score worthy
Interest Charges 105,000.00
 Activity Formula Calculation 2010 Industry Ave. Interpretation
Inventory Turnover (CGS) 3,400,000.00 5.7x 6.00 The firm has 5.7x turn of inventory for 2010.
Cost of Goods
Should be compared to the industry of the firm
to interpret inventory management
(720,000.00 + 480,000.00) /2 effectiveness.
Average Inventories

Accounts Receivable 13.3x 13.00 The firm has 13.3x turn of accounts receivables
Net sales 5,000,000.00 for 2010. Should be compared to the industry
Turnover of the firm to interpret collection management
Average Accounts Receivable (425,000.00 + 325,000.00)/2 effectiveness.

Number of days' sales in Average Inventory 3,400,000.00 / 365 days 64.4 days 60.00 it takes an average of 64.4 days for the firm to
sell its inventories
inventory Average Daily Cost of Goods Sold 600,000.00 / 9,315.00

This ratio should be compared with the

Fixed Asset Turnover Sales 5,000,000.00 2.39 2.20
industry ave. to assess effectiveness of how a
Net Fixed Assets 2,093,000.00 times company generate sales from its fixed assets.

Average Collection Period 30.60 25.00 it takes an average of 30.60 days for the firm to
425,000.00 collect its receivables.
Receivables
Annual Sales/ 360 5,000,000.00 / 360 days
13,888.89
Profitability Assessment
Profitability Formula Calculation 2010 Industry Ave. Interpretation

Gross Margin (%) 1,600,000.00 0.32 30.00 Shows the percentage revenue available to
Gross Margin
cover operating expenses and yield a profit.
Sales 5,000,000.00 Should be compared to the industry ave.

Net Profit Margin (%) 2,450,000.00 0.49 49.00 Shows after tax profit after sales. Should be
Net Income
compared to the industry ave.
Sales 5,000,000.00

Return on Equity (%) 245,000.00 0.49 52.00 The return the shareholders are earning on
Net Income
their capital investment. Favorable since
Common Equity 500,000.00 greater than 12 to 15% range average.

Return on Total Assets (%) 0.06 0.08 Measures the return earned by stockholders n
245,000.00 the firms total assets.
Net Income
Total Assets 3,843,000.00
 Conclusion:

 Liquidity of the company is favorable as it is above the industry average which means the company
has the ability to pay its maturing obligations by its current assets.
 The company can pay the annual interest charges by its net profit. However, 51% of the assets of the
company are financed by debt.
 The company should improve its receivable collecting effectiveness (by providing incentives or
quotas) as well as its inventory management to decrease its expenses related to inventory (storage,
insurance etc).
 The profitability of the company is above average to attract future investors (shareholders) It can
improve profitability by:
 Proper inventory management
 Decreasing avoidable costs
References:

 Managerial Accounting by Carl S. Warren, James M. Reeve and Jonathan E. Duchac