Business Finance

Review of Financial Statement Preparation,

Analysis and Interpretation

by: Gloria M. Ducut, DBA

Grade:12
2nd Semester Quarter III
 CONTENT Review of Financial Statement Preparation,
Analysis, and Interpretation
The learners demonstrate an understanding of:
The process of preparing financial statements
CONTENT as well as the methods or tools of analysis of
financial statements, including horizontal
STANDARDS analysis, vertical analysis, and financial ratios to
test the level of liquidity, solvency, profitability,
and stability of the business
 The learners are able to:
PERFORMANCE Solve exercises and problems that require
financial statement preparation, analysis, and
STANDARDS interpretation using horizontal and vertical
analyses and various financial ratios
 CONTENT Review of Financial Statement Preparation,
Analysis, and Interpretation
The learners…

6. Prepare financial statements

7. Define the measurement levels,
namely,liquidity, solvency, stability, and
profitabiliy
8. Perform vertical and horizontal analyses of
Learning financial statements of a single proprietorship
Competencies
9. compute, analyze, and interpret financial
ratios such as current ratio, working capital,
gross profit ratio, net profit ratio, receivable
turnover, debt-to-equity ratio, and the like
• Review of :
Accounting Equation
T-account Analysis
Steps in the accounting process
(accounting cycle)
Basic Financial Statements
Financial ratio analysis
 Motivation: Match column A with Column B
A B

a,.the process of summarizing transactions by

transferring amounts from the journals to the ledger
accounts
_____1. Debit.
_____2. Transactions
b. an accounting record used to list a particular type
of frequently recurring transaction

_____3. Posting
c. records in which transactions are first entered,
providing a chronological record of business activity
_____4. Special Journals d. exchanges of goods or services between/among
two or more entities or some other event having an
economic impact on a business enterprise

_____5. Journals e. an entry on the left side of an account

 Financial Statements LC6

• Income Statement
 Financial Statements LC6

• STATEMENT OF OWNER’S EQUITY (or known also as

“Statement of Changes in Equity”)
 Financial Statements LC6

• BALANCE SHEET (or formally known as “Statement

of Financial Position”)
 Financial Statements LC6

• STATEMENT OF CASH FLOWS

 Analysis and Interpretations of Financial
Statements LC8
Objectives:
• to assess the current profitability and operational efficiency of the firm as
a whole as well as its different departments so as to judge the financial
health of the firm.

• to ascertain the relative importance of different components of the

financial position of the firm.

• to identify the reasons for change in the profitability/financial position of

the firm.
 
• to judge the ability of the firm to repay its debt and assessing the liquidity
and solvency position of the firm.
Vertical analysis or common size analysis
LC8

- is a technique for evaluating financial

statements data that expresses each item
within a financial statement in terms of a
percent of a base amount
- For Balance Sheet/Statement of Financial
Position- accounts are presented as a
percentage of Total Assets
- For Income Statement- accounts are presented
as a percentage of net sales
 Horizontal Analysis or LC8
Trend Analysis

-allows the learners to see the trend for the different

accounts in the Financial Statements

• Amount of change = Current year amount – Base

(earlier) year amount

• Percent of change = Amount of change/Base

(earlier) year amount
 Most important accounts to monitor when
doing trend analysis LC8
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
Horizontal Analysis LC8
Horizontal Analysis LC8
Vertical Analysis LC8
Vertical Analysis LC8
 Ratio Analysis LC7

Working Capital= Current

Assets – Current Liabilities
Ratio Analysis LC7
Ratio Analysis LC 7
Ratio Analysis LC7
 Ratio Analysis LC7

Activity Ratios

-shows how quickly a company collects what is

owed to it and indicates the liquidity of the
receivables
 Ratio Analysis LC7

Activity Ratios

-measure the effectiveness of a

company's ability to collect payments
from its credit customers
 Ratio Analysis LC7

Activity Ratios

- a ratio showing how many times a

company's inventory is sold and
replaced over a period of time
 Ratio Analysis LC7

Activity Ratios

-is an efficiency ratio that measures the

average number of days the company holds
its inventory before selling it.
Balance Sheet (Php in Millions)B Income Statement (Php in Millions)B
Answers
Answers
Answers
End of Chapter 2!