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5 Financial Statement Analysis 1

This chapter discusses financial statement analysis techniques including horizontal analysis and vertical analysis. Horizontal analysis involves comparing line items across financial statements over multiple periods to analyze trends, and can express changes in monetary or percentage terms. Vertical analysis involves expressing each financial statement line item as a percentage of a base amount, such as total assets or sales, to analyze the composition and financing of a company. Financial statement analysis is used to evaluate risks, performance, financial health, and future prospects of a business to aid in economic decision making.

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510 views13 pages

5 Financial Statement Analysis 1

This chapter discusses financial statement analysis techniques including horizontal analysis and vertical analysis. Horizontal analysis involves comparing line items across financial statements over multiple periods to analyze trends, and can express changes in monetary or percentage terms. Vertical analysis involves expressing each financial statement line item as a percentage of a base amount, such as total assets or sales, to analyze the composition and financing of a company. Financial statement analysis is used to evaluate risks, performance, financial health, and future prospects of a business to aid in economic decision making.

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Jc Coronacion
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We take content rights seriously. If you suspect this is your content, claim it here.
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FUNDAMENTALS OF

ACCOUNTANCY,
BUSINESS, AND
MANAGEMENT
CHAPTER 5
Financial Statement
Analysis 1
Learning Objectives
• To compute for peso and percentage changes in
account balances
• To analyze financial statement using the horizontal
analysis approach
• To prepare a common-size financial statement
• To analyze financial statement using vertical
analysis approach
What Is Financial Statement Analysis?

Example: Two companies asked you to invest in them as part


owner. However, you can only afford to give money to one
company. We want to know which of the two companies
(Company A or Company B) is the better choice. Both of them
are in the same industry. Company A and Company B
generated net income in the past year of ₱1,000,000 and
₱900,000, respectively. Looking at the Statement of Financial
Position (SFP), you found out that Company A and Company
B has reported total assets of ₱10,000,000 and ₱8,000,000,
respectively. Based on these information, which company will
you choose? Will it be Company A because the company
reported higher assets and net income?
What Is Financial Statement Analysis?

The following information about the companies’ net income


from the Statement of Comprehensive Income (SCI) over
the past four years were given to you:
What Is Financial Statement Analysis?

Financial statement analysis is the process of


evaluating risks, performance, financial health, and
future prospects of a business using computational and
analytical techniques with the objective of making
economic decisions.
Horizontal Analysis
 Horizontal analysis is also known as trend analysis.
 It is a technique that involves comparison of a line item
(account) over a number of periods. Imagine comparative
financial statements are laid down side by side. One line will
contain the account and its reported balances over time.
 The technique borrowed its name from the horizontal
direction of the analysis.
 The objective of the analysis is to answer the following
questions:
 What is the behavior of the account over time? Is it increasing,
decreasing or not moving?
 What is the relative or the percentage change in the balances
of the account over time?
Horizontal Analysis
 Horizontal analysis uses financial statements of two or
more periods.
 Horizontal analysis may be performed on all financial
statements, specifically for both the SFP and SCI.
 Changes can be expressed in monetary value (peso) or
percentages computed by using the following formulas:

Peso change = Balance of Current Year – Balance of Prior Year


Horizontal Analysis
Horizontal Analysis
Vertical Analysis
 Vertical analysis is the preparation of common-size financial
statements. It is a technique that expresses each financial
statement line item as a percentage of a base amount. For
the SFP, the base amount used is total assets. On the other
hand, sales or net sales is used as base amount for the SCI.
 A common-size SFP shows each line account as a
percentage of total assets. From the asset side, we can infer
the composition of assets. On the other side, we can
determine the company’s financing mix – the percentage of
asset financed by liability and equity.
 A common-size SCI expresses each line as a percentage of
sales. This way, we can see how sales is “used up” by various
expenses. Effectively, net income is the portion of sales not
eaten up by expenses.
Vertical Analysis
Vertical Analysis

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