CHAPTER 2: FINANCIAL STATEMENT ANALYSIS

I. LEARNING OUTCOMES
Upon finishing this session, the learner is expected to:
1. Analyze the financial statement of a selected corporation using different
financial analysis
2. Interpret the results of financial analysis of a selected corporation

II. LEARNING CONTENTS / PROPER

Financial Statement
Accounting is coined as the language of finance and business. It provides
financial information through formal reports prepared by accountants. These
formal reports are called financial statements.
According to Philippine Accounting Standards (PAS) # 1, the financial
statements should include:
1. Statement of Financial Position (Balance Sheet)
1.1. Presents the company’s financial position at a given period. It
consists of three elements making up the financial position: assets,
liabilities, and equity.
1.1.1. Assets and Their Classification
Assets are resources controlled by entity as a result of past
transactions and events from which future economic benefits
are expected to flow in the entity.
1.1.1.1. Current assets are cash and cash equivalents, the
company intends to hold the asset for the purpose
of trading it, company expects to realize the asset
within 12 months, and company expects to realize
the asset or intends to sell or use it within the
entity’s normal operating cycle.
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1.1.1.2. Noncurrent assets are assets which represent a

longer-term investment and cannot be converted
into cash quickly. They are likely to be held by a
company for more than a year.
1.1.2. Liabilities and Their Classification
Liabilities are the present obligations of the firm from past
transactions or events, the payment of which is expected to
result in an outflow of economic resources or assets
1.1.2.1. Current liabilities are obligations when the firm is
expected to pay the liability within its normal
operating cycle, holds the liability primarily for
purpose of trading, and liability can be paid within
12 months.
1.1.2.2. Noncurrent liabilities are the obligations of the
company which are expected to get paid after the
period of one year.
1.1.3. Shareholders’ Equity and Its Components
Equity is the excess of the firm’s assets over the firm’s
liabilities. The shareholders’ equity of a corporation has
three basic components namely the following:
1.1.3.1. Share capital consists of the issuance of the
company’s own share at their par or stated value.
1.1.3.2. Reserves consists of issuance of the company’s own
share above par / stated value or additional paid in
capital or premium on share capital.
1.1.3.3. Retained earnings consists of among other things,
the accumulated earnings of the company, prior
period adjustments for errors, dividends declared /
paid, effect of changes in accounting policy and
appropriated retained earnings.
2. Statement of Financial Performance (Income Statement)
2.1. The income statement or statement of financial performance
presents the result of the firm’s operation or performance for a given
time. Also, refers to measure of sales, cost and profit in the income
statement.
2.1.1 Revenue is the income generated from normal business
operations and includes discounts and deductions for returned
merchandise. It is the top line or gross income figure from which
costs are subtracted to determine net income. Sales Revenue
formula. Revenue is also known as sales on the income statement.
2.1.2. Expenses are the cost of operations that a company incurs
to generate revenue.
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2.1.3. Profit describes the financial benefit realized when revenue

generated from a business activity exceeds the expenses, costs,
and taxes.
3. Statement of Comprehensive Income
3.1. Consists of recognized gains and losses that are not included in the
income statement but are found in the equity section of statement of
financial position or statement of changes in equity. Unfortunately, net
income only accounts for the earned income and incurred expenses.
There are times when companies make gains or losses resulting from the
fluctuations in the value of their assets. The outcome of such events is
recognized in the cash flow statement but not in the income statement,
which is where other comprehensive income comes in. Any transactions
not captured in the income statement are accounted for in the other
comprehensive income (OCI) report. It entails items such as:
3.1.1. Gains or losses from pension and other retirement programs
3.1.2. Adjustments made to foreign currency transactions
3.1.3. Gains or losses from derivative instruments
3.1.4. Unrealized gains or losses from debt securities
3.1.5. Unrealized gains or losses from available-for-sale securities
4. Statement of Changes in Equity
4.1. Presents the developments or changes that occur in the
shareholders’ equity. The following are presented in this statement:
4.1.1. The total or net comprehensive income
4.1.2. Effects brought about the changes in accounting policies or
correction of errors.
4.1.3. Investment transactions of owners and dividends paid to
owners.
4.1.4. The beginning balance of each component in the statement
of changes in equity and the movements under them that brought
about the ending balances.
5. Statement of Cash Flows
1.1. Cash Flows and Its Classification
Cash flows refer to the movement of cash. It could be either be an
inflow of cash, which pertains to receipts of cash, or an outflow,
which means disbursement of cash.
1.1.1. Operating activities related in the generation of the principal
revenue of the firm. Principal revenue means the main source of
revenue or income of the company such as selling activities;
therefore, cash sales are sources of cash inflow.
1.1.2. Investing activities are cash flows from purchasing or selling
long-term assets and other long-term investments. These are
 15

cash flow from sale or purchase transactions wherein non-

operating assets such as noncurrent assets.
1.1.3. Financing activities are company’s cash inflows or outflows
involving its owners (equity financing) and creditors (debt
financing). These are non-trade borrowings and cash receipts
from issuances of shares of stock.
6. Notes to the Financial Statements
6.1. Sets of information that cannot be disclosed on the face of the
financial statements. The notes may include:
6.1.1. Corporate / Company Information
6.1.2. Basis of Preparing the Financial Statements and the
Statement of Compliance
6.1.3. Summary of Significant Accounting Policies
The financial statements are the output of accounting and input of
financial management. Financial management applies different tools and
techniques in analyzing, interpreting and decision-making for business
organizations.

Financial Statement Analysis

Financial Statement Analysis is the process of reviewing and analyzing a
company’s financial statements to make better economic decisions to earn
income in future. These statements include the income statement, statement of
financial position, statement of cash flows, notes to financial statements and
statement changes in equity.
There are four main ways to analyze financial statements namely a)
Horizontal analysis provides a year-to-year comparison of company’s
performance in different periods, b) Vertical analysis provides is the
proportional analysis of a financial statement, where each line item on a
financial statement is listed as a percentage of another item, c) Trend analysis
shows amounts of corresponding financial statement items over a period of
time. d) Ratio analysis can be used to provide information about company’s
performance to that of others in its industry.
Financial statement analysis is important because it provides meaningful
information to the shareholders in taking such decisions. The management of
the company is responsible for taking decisions and formulating plans and
policies for the future.
 16

Four Ways of Financial Statements Analysis

Financial Definition Other Term Formula Objective
Statement
Analysis
1. Horizontal 1. Comparison 1. 1. Percentage of 1.1.
Analysis of historical Comparative change equals Profitability
financial Analysis Amount of 1.2. Liquidity
information growth/reductio 1.3.
over a series of n or change Solvency /
reporting divided by Debt
periods amount in the Utilization
base year or 1.4. Stability
previous year 1.5. Efficiency
multiplied by 100 / Asset
Utilization
2. Vertical 2. Proportional 2. Common- 2. Percentage of 2.1.
Analysis analysis of size Analysis item equals item Profitability
financial figure or amount 2.2. Liquidity
statement base figure or 2.3.
where each line amount Solvency /
item on a Debt
financial Utilization
statement is 2.4. Stability
listed as a 2.5. Efficiency
percentage of / Asset
another item Utilization
3. Trend 3. Method is 3. Time- 3. Base period / 3.1.
Analysis more thorough series oldest year Profitability
because it Analysis amounts are 3.2. Liquidity
presents a view written as 100%. 3.3.
in the long run Percentage Solvency /
of company’s relationship of Debt
progression or each account in Utilization
regression the financial 3.4. Stability
statements is 3.5. Efficiency
computed by / Asset
dividing each Utilization
amount by the
base year figure.
4. Ratio 4. Evaluate 4. Financial 4. Profitability 4.1.
Analysis relationships Analysis ratio with net Profitability
among income as 4.2. Liquidity
financial numerator 4.3.
statement figure, liquidity Solvency /
items ratio with Debt
 17

current asset as Utilization

numerator 4.4. Stability
figure, efficiency 4.5. Efficiency
ratio with sales / Asset
as numerator Utilization
figure and
leverage ratio
with liabilities as
numerator figure
and market value
ratio with shares
as base figure.

Online Resources:
Financial Statement Analysis video explanation
https://youtu.be/yW7TWRYpO3g
Horizontal Analysis video explanation
https://www.wallstreetmojo.com/horizontal-analysis/
Vertical Analysis video explanation
https://www.youtube.com/watch?v=OT1BVZPNfks
Trend Analysis video explanation
https://www.youtube.com/watch?v=cMiJ38le8Us
Ratio Analysis video explanation
https://www.youtube.com/watch?v=GoKIZqSFMIE

Objectives of Financial Statement Analysis.

There are four main objectives of financial statement analysis to measure

profitability, liquidity, efficiency and solvency. Profitability measures the
company’s ability to earn an adequate return on sales, assets and
shareholders’ equity. Liquidity measure the company’s ability to pay off short-
term obligations as they come due. Efficiency is the asset utilization tells how
quickly the company is turning over its accounts receivable, inventory, and
longer-term assets. Solvency is the debt utilization indicate the over-all debt
position of the company in light of its asset base and earning power.
Online resources:
https://www.youtube.com/watch?v=FIfnR5I1XTk
 18

Application of the Four Ways to Analyze Financial Statement

Illustrative Example of Horizontal Analysis, Vertical Analysis, Trend Analysis
and Ratio Analysis.
STUDY HARD AND SMART CORPORATION
Comparative Statement of Financial Position
December 31, 2021 & 2020
HORIZONTAL ANALYSIS Year INCREASE (DECREASE)
ASSETS 2021 2020 AMOUNT PERCENT
Current Assets:
Cash & Cash Equivalents ₱100,000.00 ₱96,000.00 ₱4,000.00 4%
Trade & Other Receivables ₱300,000.00 ₱296,000.00 ₱4,000.00 1%
Inventory ₱350,000.00 ₱298,000.00 ₱52,000.00 17%
Prepaid Expenses ₱101,000.00 ₱115,000.00 -₱14,000.00 -12%
Total Current Assets ₱851,000.00 ₱805,000.00 ₱46,000.00 6%
Noncurrent Assets:
Property, Plant & Equipment ₱136,000.00 ₱169,000.00 -₱33,000.00 -20%
Intangibles ₱38,000.00 ₱38,000.00 ₱0.00 0%
Total Noncurrent Assets ₱174,000.00 ₱207,000.00 -₱33,000.00 -16%
TOTAL ASSETS ₱1,025,000.00 ₱1,012,000.00 ₱13,000.00 1%

LIABILITIES AND SHAREHOLDERS'

EQUITY
Current Liabilities:
Trade & Other Payables ₱239,000.00 ₱280,000.00 -₱41,000.00 -15%
Unearned Revenues ₱105,000.00 ₱80,000.00 ₱25,000.00 31%
Notes Payable – current ₱45,000.00 ₱45,000.00 ₱0.00 0%
Total Current Liabilities ₱389,000.00 ₱405,000.00 -₱16,000.00 -4%
Noncurrent Liabilities:
Notes Payable - noncurrent ₱209,000.00 ₱220,000.00 -₱11,000.00 -5%
Total Noncurrent liablities ₱209,000.00 ₱220,000.00 -₱11,000.00 -5%
Total Liabilities ₱598,000.00 ₱625,000.00 -₱27,000.00 -4%
Shareholders' Equity:
Preference Shares Php 100 par ₱110,000.00 ₱110,000.00 ₱0.00 0%
Ordinary Shares Php 1 par ₱16,000.00 ₱16,000.00 ₱0.00 0%
Premium on Ordinary Shares ₱136,000.00 ₱136,000.00 ₱0.00 0%
Total Paid-in-Capital ₱262,000.00 ₱262,000.00 ₱0.00 0%
Retained Earnings ₱165,000.00 ₱125,000.00 ₱40,000.00 32%
Total Shareholders' Equity ₱427,000.00 ₱387,000.00 ₱40,000.00 10%
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ₱1,025,000.00 ₱1,012,000.00 ₱13,000.00 1%

STUDY HARD AND SMART CORPORATION

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Income Statement
For the years ended December 31, 2021 & 2020
HORIZONTAL ANALYSIS Year INCREASE (DECREASE)
2021 2020 AMOUNT PERCENT
Sales ₱3,000,000.00 ₱2,700,000.00 ₱300,000.00 11%
Less: Cost of goods sold ₱2,200,000.00 ₱1,900,000.00 ₱300,000.00 16%
Gross Income ₱800,000.00 ₱800,000.00 ₱0.00 0%
Less: Distribution Costs ₱372,000.00 ₱345,000.00 ₱27,000.00 8%
Administrative Expenses ₱207,000.00 ₱254,000.00 -₱47,000.00 -19%
Total Operating Expenses ₱579,000.00 ₱599,000.00 -₱20,000.00 -3%
Operating Income ₱221,000.00 ₱201,000.00 ₱20,000.00 10%
Less: Interest Expense ₱41,000.00 ₱41,000.00 ₱0.00 0%
Net Income Before Taxes ₱180,000.00 ₱160,000.00 ₱20,000.00 13%
Less: Income Tax ₱62,000.00 ₱60,000.00 ₱2,000.00 3%
Net Income After Taxes ₱118,000.00 ₱100,000.00 ₱18,000.00 18%

STUDY HARD AND SMART CORPORATION

Cash Flow Statement
For the years ended December 31, 2021 & 2020
HORIZONTAL ANALYSIS Year INCREASE (DECREASE)
2021 2020 AMOUNT PERCENT
Cash Flow from Operating Activities:
Net income after taxes ₱118,000.00 ₱100,000.00 ₱18,000.00 18%
Adjusted for:
Add: Depreciation ₱10,000.00 ₱10,000.00 ₱0.00 0%
Less: Increase in accounts receivable ₱4,000.00 ₱3,000.00 ₱1,000.00 33%
Less: Increase in inventory ₱52,000.00 ₱50,000.00 ₱2,000.00 4%
Add: Decrease in prepaid expenses ₱14,000.00 ₱12,000.00 ₱2,000.00 17%
Less: Decrease in accounts payable ₱41,000.00 ₱39,000.00 ₱2,000.00 5%
Add: Increase in unearned revenue ₱25,000.00 ₱23,000.00 ₱2,000.00 9%
Net Cash flow from operating activities ₱70,000.00 ₱53,000.00 ₱17,000.00 32%
Cash flow from Investing Activities:
Increase in property, plant and equipment -33,000 -30,000 -₱3,000.00 10%
Net Cash flow from investing activities -33,000 -25,000 -₱8,000.00 32%
Cash flow from financing activities:
Less: Decrease in notes payable -11,000 -8,000 -₱3,000.00 38%
Less: Cash dividend -22,000 -16,000 -₱6,000.00 38%
Net cash flow from financing activities -33,000 -24,000 -₱9,000.00 38%
Net increase (decrease) in cash flows ₱4,000.00 ₱4,000.00 ₱0.00 0%
Cash at the beginning period 96,000 92,000 ₱4,000.00 4%
Cash at the ending period ₱100,000.00 ₱96,000.00 ₱4,000.00 4%
 20

STUDY HARD AND SMART CORPORATION

Common-Size Statement of Financial Position
December 31, 2021 & 2020
VERTICAL ANALYSIS Year PERCENTAGES
ASSETS 2021 2020 2021 2020
Current Assets:
Cash & Cash Equivalents ₱100,000.00 ₱96,000.00 10% 9%
Trade & Other Receivables ₱300,000.00 ₱296,000.00 29% 29%
Inventory ₱350,000.00 ₱298,000.00 34% 29%
Prepaid Expenses ₱101,000.00 ₱115,000.00 10% 11%
Total Current Assets ₱851,000.00 ₱805,000.00 83% 80%
Noncurrent Assets:
Property, Plant & Equipment ₱136,000.00 ₱169,000.00 13% 17%
Intangibles ₱38,000.00 ₱38,000.00 4% 4%
Total Noncurrent Assets ₱174,000.00 ₱207,000.00 17% 20%
TOTAL ASSETS ₱1,025,000.00 ₱1,012,000.00 100% 100%

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Trade & Other Payables ₱239,000.00 ₱280,000.00 23% 28%
Unearned Revenues ₱105,000.00 ₱80,000.00 10% 8%
Notes Payable - current ₱45,000.00 ₱45,000.00 4% 4%
Total Current Liabilities ₱389,000.00 ₱405,000.00 38% 40%
Noncurrent Liabilities:
Notes Payable - noncurrent ₱209,000.00 ₱220,000.00 20% 22%
Total Noncurrent liabilities ₱209,000.00 ₱220,000.00 20% 22%
Total Liabilities ₱598,000.00 ₱625,000.00 58% 62%
Shareholders' Equity:
Preference Shares Php 100 par ₱110,000.00 ₱110,000.00 11% 11%
Ordinary Shares Php 1 par ₱16,000.00 ₱16,000.00 2% 2%
Premium on Ordinary Shares ₱136,000.00 ₱136,000.00 13% 13%
Total Paid-in-Capital ₱262,000.00 ₱262,000.00 26% 26%
Retained Earnings ₱165,000.00 ₱125,000.00 16% 12%
Total Shareholders' Equity ₱427,000.00 ₱387,000.00 42% 38%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ₱1,025,000.00 ₱1,012,000.00 100% 100%
 21

STUDY HARD AND SMART CORPORATION

Common-Size Income Statements
For the years ended December 31, 2021 & 2020
VERTICAL ANALYSIS Year PERCENTAGES
2021 2020 2021 2020
Sales ₱3,000,000.00 ₱2,700,000.00 100% 100%
Less: Cost of goods sold ₱2,200,000.00 ₱1,900,000.00 73% 70%
Gross Income ₱800,000.00 ₱800,000.00 27% 30%
Less: Distribution Costs ₱372,000.00 ₱345,000.00 12% 13%
Administrative Expenses ₱207,000.00 ₱254,000.00 7% 9%
Total Operating Expenses ₱579,000.00 ₱599,000.00 19% 22%
Operating Income ₱221,000.00 ₱201,000.00 7% 7%
Less: Interest Expense ₱41,000.00 ₱41,000.00 1% 2%
Net Income Before Taxes ₱180,000.00 ₱160,000.00 6% 6%
Less: Income Tax ₱62,000.00 ₱60,000.00 2% 2%
Net Income After Taxes ₱118,000.00 ₱100,000.00 4% 4%
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STUDY HARD AND SMART CORPORATION

Statement of Financial Position
December 31, 2021 & 2020
TREND ANALYSIS Year PERCENTAGES
ASSETS 2021 2020 2021 2020
Current Assets:
Cash & Cash Equivalents ₱100,000.00 ₱96,000.00 104% 100%
Trade & Other Receivables ₱300,000.00 ₱296,000.00 101% 100%
Inventory ₱350,000.00 ₱298,000.00 117% 100%
Prepaid Expenses ₱101,000.00 ₱115,000.00 88% 100%
Total Current Assets ₱851,000.00 ₱805,000.00 106% 100%
Noncurrent Assets:
Property, Plant & Equipment ₱136,000.00 ₱169,000.00 80% 100%
Intangibles ₱38,000.00 ₱38,000.00 100% 100%
Total Noncurrent Assets ₱174,000.00 ₱207,000.00 84% 100%
TOTAL ASSETS ₱1,025,000.00 ₱1,012,000.00 101% 100%

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Trade & Other Payables ₱239,000.00 ₱280,000.00 85% 100%
Unearned Revenues ₱105,000.00 ₱80,000.00 131% 100%
Notes Payable – current ₱45,000.00 ₱45,000.00 100% 100%
Total Current Liabilities ₱389,000.00 ₱405,000.00 96% 100%
Noncurrent Liabilities:
Notes Payable - noncurrent ₱209,000.00 ₱220,000.00 95% 100%
Total Noncurrent liabilities ₱209,000.00 ₱220,000.00 95% 100%
Total Liabilities ₱598,000.00 ₱625,000.00 96% 100%
Shareholders' Equity:
Preference Shares Php 100 par ₱110,000.00 ₱110,000.00 100% 100%
Ordinary Shares Php 1 par ₱16,000.00 ₱16,000.00 100% 100%
Premium on Ordinary Shares ₱136,000.00 ₱136,000.00 100% 100%
Total Paid-in-Capital ₱262,000.00 ₱262,000.00 100% 100%
Retained Earnings ₱165,000.00 ₱125,000.00 132% 100%
Total Shareholders' Equity ₱427,000.00 ₱387,000.00 110% 100%
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ₱1,025,000.00 ₱1,012,000.00 101% 100%
 23

STUDY HARD AND SMART CORPORATION

Income Statements
For the years ended December 31, 2021 & 2020
TREND ANALYSIS Year PERCENTAGES
2021 2020 2021 2020
Sales ₱3,000,000.00 ₱2,700,000.00 111% 100%
Less: Cost of good sold ₱2,200,000.00 ₱1,900,000.00 116% 100%
Gross Income ₱800,000.00 ₱800,000.00 100% 100%
Less: Distribution Costs ₱372,000.00 ₱345,000.00 108% 100%
Administrative Expenses ₱207,000.00 ₱254,000.00 81% 100%
Total Operating Expenses ₱579,000.00 ₱599,000.00 97% 100%
Operating Income ₱221,000.00 ₱201,000.00 110% 100%
Less: Interest Expense ₱41,000.00 ₱41,000.00 100% 100%
Net Income Before Taxes ₱180,000.00 ₱160,000.00 113% 100%
Less: Income Tax ₱62,000.00 ₱60,000.00 103% 100%
Net Income After Taxes ₱118,000.00 ₱100,000.00 118% 100%
STUDY HARD AND SMART CORPORATION
Cash Flow Statement
For the years ended December 31, 2021 & 2020
TREND ANALYSIS Year INCREASE (DECREASE)
2021 2020 AMOUNT PERCENT
Cash Flow from Operating Activities:
Net income after taxes ₱118,000.00 ₱100,000.00 118% 100%
Adjusted for:
Add: Depreciation ₱10,000.00 ₱10,000.00 100% 100%
Less: Increase in accounts receivable ₱4,000.00 ₱3,000.00 133% 100%
Less: Increase in inventory ₱52,000.00 ₱50,000.00 104% 100%
Add: Decrease in prepaid expenses ₱14,000.00 ₱12,000.00 117% 100%
Less: Decrease in accounts payable ₱41,000.00 ₱39,000.00 105% 100%
Add: Increase in unearned revenue ₱25,000.00 ₱23,000.00 109% 100%
Net Cash flow from operating activities ₱70,000.00 ₱53,000.00 132% 100%
Cash flow from Investing Activities:
Increase in property, plant and equipment -33,000 -30,000 110% 100%
Net Cash flow from investing activities -33,000 -25,000 132% 100%
Cash flow from financing activities:
Less: Decrease in notes payable -11,000 -8,000 138% 100%
Less: Cash dividend -22,000 -16,000 138% 100%
Net cash flow from financing activities -33,000 -24,000 138% 100%
Net increase (decrease) in cash flows ₱4,000.00 ₱4,000.00 100% 100%
Cash at the beginning period 96,000 92,000 104% 100%
Cash at the ending period ₱100,000.00 ₱96,000.00 104% 100%
RATIO ANALYSIS Formula Solution Answer
 24

Profitability ratios

1. Profit margin Net income ₱118,000.00

4%
Net sales 3,000,000

2. Return on assets Net income ₱118,000.00

12%
Average total assets (1025000+1012000)/2

3. Return on equity Net income ₱118,000.00

29%
Average total equity (427,000+387,000)/2

Asset Utilization ratios

4. Receivable turnover Net sales ₱3,000,000.00

10x
Average receivables (300,000+296,000)/2

5. Average collection period 365 days 365 days

37 days
Receivable turnover 10 x

6. Inventory turnover Cost of goods sold ₱2,200,000.00

7x
Average inventory (350,000+298,000)/2

7. Fixed asset turnover Net sales ₱3,000,000.00

20x
Average fixed assets (136,000+169,000)/2

8. Total asset turnover Net sales ₱3,000,000.00

3x
Average total assets (1025000+1012000)/2

Liquidity ratios

9. Current ratio Current assets ₱851,000

2x
Current liabilities 389,000
Current assets less
10. Quick ratio inventory ₱851,000 - 350,000 1x
Current liabilities 389,000

Debt utilization ratios

11. Debt to total assets Total liabilities ₱598,000

58%
Total assets 1,025,000

12. Equity to total assets Shareholder's equity ₱427,000

42%
Total assets 1,025,000
 25

13. Debt to equity ratio Total liabilities ₱598,000

140%
Shareholder's equity 427,000
 26

Analyze and Interpret the Results of the Applications of Financial Statement

Analysis.
Here are the following observations from Study Hard and Smart Corporation’s.

 In the last two years, Study Hard and Smart Corporation has seen an
increase in Net Sales figures from 2018 to 2019 with amount of Php
300,000 that is 11% increase.
 Cost of Sales has increased also from 2018 to 2019 with an amount of
Php 300,000 that is 16% increase.
 Net Income has increase in the last two years (2018 to 2019) with an
amount of Php 18,000 that is 18% increase.
 Assets has increase by 1%, however, liabilities decrease by 4% and
shareholder’s equity has increase by 10%.
 Cash flow from operating activities has increase by 32% while cash flow
from investing activities has increase by 32% and cash flow from
financing activities has increase by 38%.
 Study Hard and Study Smart is profitable because the of the acceptable
profitability ratios such as return on sales (4%), return on assets (12%)
and return on equity (29%).

Interpretation from Study Hard and Smart Corporation is:

 From the income statements and statement of financial position, the

company may portray a pretty good hold on their financial affairs. As to
profitability, the company is profitable comparing increasing sales and
profit from 2018 to 2019. As to liquidity, the company can be able to pay
its short-term debt comparing current assets with its current liabilities
from 2018 to 2019. The company is solvent or stable because it can meet
its long term liabilities comparing with that of total assets both 2018 and
2019. Also, the company is efficient in managing its resources because of
increasing speed and turnover of accounts receivable, inventory and
noncurrent assets.
 With such analysis, this company may do in the upcoming years, what
they are trying to accomplish over the years and what’s their recent
purchase, sales, revenue, net income, fixed assets, current assets,
capital structure and every minute data mentioned in the balance sheet,
income statement and cash flow statement.
 27

III. LEARNING / CHAPTER ACTIVITIES

Concept Application Learning Activity

1. From the account balances given below for ARAL PA MORE
CORPORATION, prepare the statement of financial position. Observe
proper classification. The amounts given are in thousand pesos.
Accounts Receivable ₱ 400
Advances to officers not currently collectible 100
Sinking fund 400
Building 5,000
Long-term refundable deposit 50
Cash and cash equivalent 500
Cash surrender value 60
Equipment 1,000
Lease rights 100
Accrued interest income 10
Inventories 1,300
Land 1,500
Land held for speculation 500
Notes receivable 250
Computer software 3,250
Prepaid expenses 70
Trading securities 280
Unearned rent income 40
Retained earnings (deficit) (1,800)
Share premium – preference shares 500
Premium on bonds payable 1,000
Preference share capital 2,000
Share premium – ordinary 200
Notes payable 300
SSS payable 10
Accounts payable 400
Accrued salaries 100
Accumulated depreciation – building 2,000
Accumulated depreciation – equipment 200
Allowance for doubtful accounts 20
Bonds payable 5,000
Dividends payable 120
Ordinary share capital 5,000
Withholding tax payable 30
Preference share redemption fund 350
 28

2. From the 2020 account balances given below for STUDY NOW
CORPORATION, prepare the income statement (functional approach).
Observe proper classifications.

Freight – in ₱ 1,000,000
Income tax 500,000
Purchases 10,500,000
Purchase returns 150,000
Purchase allowances 150,000
Rent income 500,000
Freight – out 350,000
Salesmen’s commission 1,300,000
Depreciation expense – store equipment 250,000
Inventory (January 1) 2,000,000
Inventory (December 31) 3,000,000
Sales 15,700,000
Sales returns 250,000
Sales allowances 30,000
Sales discounts 20,000
Officers’ Salaries 1,000,000
Depreciation expense – office equipment 600,000
Purchase discounts 200,000
Dividend income 300,000
Loss on sale of equipment 100,000
Loss on sale of investment 100,000
 29

Research-based Learning Activity:

1. Conduct financial analysis on the three-year latest period of financial
statements of chosen publicly listed corporation in the Philippines or
international and create recommendations thereto.
1.1. Example: San Miguel Corporation 3-year latest period from 2019 to
2021.
2. Based on the financial statements you have chosen, present the
accounts and amounts of the following:
2.1. Statement of Financial Position
2.2. Income Statement
2.3. Cash Flow Statement
3. Analyze the 3-year financial statement of your selected company using
the following:
3.1. Horizontal Analysis
3.2. Vertical Analysis
3.3. Trend Analysis
3.4. Ratio Analysis
4. Interpret and recommend the results in using the objectives of financial
statement analysis such as:
4.1. Profitability
4.2. Liquidity
4.3. Efficiency
4.4. Solvency
4.5. Stability
 30

IV. REFERENCES

Books:

a. Anastacio, M. F., (2016) Fundamentals of Financial Management, Rex

Book Store Inc.
b. Brigham, E. & Houston, J. (2015) Financial Management, Cengage
Learning Philippine Edition
c. Block, S. & et. al. (2011) Corporate Finance Foundations, McGraw-Hill
Irwin
d. Cabrera, M. E. (2015) Financial Management, GIC Enterprises & Co. Inc.

Online Resources:
a. Financial Statement Analysis video explanation
https://youtu.be/yW7TWRYpO3g
b. Horizontal Analysis video explanation
https://www.wallstreetmojo.com/horizontal-analysis/
c. Vertical Analysis video explanation
https://www.youtube.com/watch?v=OT1BVZPNfks
d. Trend Analysis video explanation
https://www.youtube.com/watch?v=cMiJ38le8Us
e. Ratio Analysis video explanation
https://www.youtube.com/watch?v=GoKIZqSFMIE
f. Objectives of Financial Statement Analysis
https://www.youtube.com/watch?v=FIfnR5I1XTk