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Analysis & Interpretation of Financial Statements

The document provides an overview of financial statement analysis and interpretation. It discusses reasons to analyze financial statements such as to determine profitability, compliance with regulations, and past performance. It also describes different types of financial statements, comparative analysis techniques like horizontal and vertical analysis, and ratio analysis including liquidity, profitability and solvency ratios to evaluate financial performance.

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179 views

Analysis & Interpretation of Financial Statements

The document provides an overview of financial statement analysis and interpretation. It discusses reasons to analyze financial statements such as to determine profitability, compliance with regulations, and past performance. It also describes different types of financial statements, comparative analysis techniques like horizontal and vertical analysis, and ratio analysis including liquidity, profitability and solvency ratios to evaluate financial performance.

Uploaded by

Secret Deity
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ANALYSIS &

INTERPRETATION
OF FINANCIAL
STATEMENTS
“REASONS TO ANALYZE & INTERPRET“
Transform data in the statements into
information which is interpreted and used
as basis for better economic decisions and
actions.
 Analyze statements to determine if it is
profitable to lend money.
 Organized whether it is reasonable to
demand increases in wages.
“REASONS TO ANALYZE & INTERPRET“

Analyze the statements to see if the


companies are conforming with
government regulations.
 To determine past performance as a
means of control and as a guide for future.
“REASONS TO ANALYZE & INTERPRET“

Lenders

Employees
“REASONS TO ANALYZE & INTERPRET“

Public Government Agencies


DIFFERENT KINDS
OF FINANCIAL
STATEMENT
DIFFERENT KINDS OF STATEMENTS

FINANCIAL POSITION- presents the


assets, liabilities, and owner’s equity

INCOME STATEMENT- presents sales,


cost of sales, selling expenses,
administrative expense and net income.
COMPARATIVE ANALYSIS

INTRACOMPANY- involves comparison


within the entity

INTERCOMPANY- involves comparison of


data of one entity with those of another entity

INDUSTRY AVERAGE- shows the standing of


the entity in the industry where it belongs
HORIZONTAL ANALYSIS
 A technique for evaluating a series of
financial statement data over a period of
time.

 It shows changes from year to year.

Involves sidewise comparison shows


changes from year to year.
 Percentage of change = x 100%
TREND ANALYSIS

help you compare financial


information over time to a base
year or period.
 
•When several years are involved in a horizontal analysis, the base
year is the earlier year. The base year is 100%. The amount of the
items for succeeding years are divided by the base year amount. The
series of quotient show the trend in the item. ‘
To illustrate, consider the following trend in the net income of
paso company:
YEAR NET INCOME COMPUTATION TREND PERCENTAGES
20X2 P2,100,000 P2,100,000 P2,100,000 = 100%
20X3 2,205,000 P2,205,000 P2,100,000 = 105%
20X4 2,310,000 P2,310,000 P2,100,000 = 110%
VERTICAL ANALYSIS

A technique for evaluating financial


statement data that expresses each
item in a financial statement as a
percentage of base amount
COMPOSITION OF ASSETS AND EQUITIES

One way of judging whether or not


balance is proper to determine the
percentage of each asset to total assets
THE PERCENTAGE COMPOSITION OF THE ASSET OF MLB
COMPANY IS AS FOLLLOW:
JUNE 30, 2014 JUNE 30, 2013
Amount Percent Amount Percent
Current Assets
Cash P 100,000 4.9% P120,000 6.1%
Account Receivables (net) 670,000 32.9% 636,000 32.5%
Merchandise Inventory 1,020,000 50.0% 980,000 50.0%
Prepaid Expense 80,000 3.9% 84,000 4.3%
Total Current Assets P1,870,000 91.7% P1,820,000 92.9%

Non Current Assets


Equipment (net of
Accumulated Depreciation) 170,000 8.3% 140,000 7.1%
Total Assets P2,040,000 100.0% P1,960,000 100.0%
THE PERCENTAGE COMPOSITION OF THE LIABILITIES AND
OWNER’S EQUITY OF MLB COMPANY IS AS FOLLLOW:
JUNE 30, 2014 JUNE 30, 2013
Amount Percent Amount Percent
Current Liabilities
Accounts Payable P540,000 26.5% P460,000 23.5%
Long-Term Liabilities
Loan Payable 400,000 19.6% 500,000 25.5%
Total Liabilities 940,000 46.1% 960,000 49%
Owner’s Equity 1,100,000 53.9% 1,000,000 51%
Total Liabilities and Owner’s
Equity P2,040,000 100.0% P1,960,000 100.0%
COMPOSITION OF INCOME AND EXPENSE
- Income is the result of two kinds of flows which
have opposite effects.

REVENUE- which tends to increase income

EXPENSE- tend to reduce it

- It is important to determine which specific


revenue or expense item needs attention
To illustrate, the condensed income statement of King Co. shows the component
percentages for two years.
Amount Components Percentages
2014 2013 2014 2013
Gross Sales P1,313,600 P1,400,000 106.8% 105.2%
Less: Sales Returns
and Allowances 83,600 69,000 6.8% 5.2%
Net Sales 1,230,000 1,331,000 100.0% 100.0%
Less: Cost of Sales 812,000 868,000 66.0% 65.2%
Gross Income from Sales 418,000 463,000 34.0% 34.8%
Less: Operating Expenses 339,000 368,000 27.6% 27.6%
Net Income from Operations P79,000 P95,000 6.4% 7.2%
RATIO ANAYSIS

Ratio analysis is the comparison of line items


in the financial statements of a business. Ratio
analysis is used to evaluate a number of issues
with an entity, such as its liquidity, efficiency
of operations, and profitability.
RATIO ANAYSIS
1. LIQUIDITY RATIOS- measures the ability of
an entity to pay currently maturing obligations
and meet unexpected cash needs.
2. PROFITABILITY RATIOS- measures the ability
of an entity to earn income over a period of time.
3. SOLVENCY RATIOS- measure the ability of an
entity to survive over a long period of time.
LIQUIDITY RATIOS
•CURRENT
  RATIOS
- the relationship of available current
assets to meet payments of current
liabilities.

Current Ratio=
₱ ₱
₱ ₱
₱ ₱
₱ ₱
₱ ₱
₱ ₱
₱ ₱
₱ ₱
•ACID
  TEST RATIO OR QUICK RATIO
- this is used if the inventory is not readily
convertible to cash.

Acid test ratio=


ACID TEST RATIO OR QUICK
RATIO
PROFITABILITY RATIOS
A.RATIO OF GROSS PROFIT TO NET
SALES
- is the relationship between GROSS
PROFIT and NET SALES
A.Determine ratio of gross profit to
net sales
•B.
 RATIO OF NET INCOME WITH NET
SALES
- is a measure of the profitability for
each PESO SALE

NET PROFIT RATIO =


₱

₱
RATIO ₱

OF NET
INCOME ₱
₱

WITH ₱
₱
NET ₱

SALES ₱

₱
• 
C. OPERATING RATIO
- is the relationship of COST OF SALES
and OPERATING EXPENSES to NET
SALES. This ratio is useful in ascertaining
operating efficiency of the business.

OPERATING RATIO =
₱

₱
₱

₱
OPERATIN ₱
₱
G RATIO ₱

₱
•D.
 RATIO OF NET INCOME TO
OWNER’S EQUITY
- is the relationship of NET INCOME
to OWNER’S EQUITY

FORMULA :
RATIO OF NET INCOME TO OWNER’S EQUITY

₱
₱ ₱
₱

₱
₱ ₱
₱
•E.
 RATIO OF NET INCOME TO
TOTAL ASSETS
- is used to determine the
efficiency with which management
utilizes the ASSETS of the business.

FORMULA:
RATIO OF NET INCOME TO TOTAL ASSETS

₱
₱ ₱
₱

₱
₱ ₱
₱
•   RATIO OF NET SALES TO TOTAL
F.
ASSETS
- shows the relationship between the PESO
SALES VOLUME and the TOTAL ASSETS
of the business. It measures efficiency in the
use of the company’s resources.

FORMULA:
RATIO OF NET SALES TO TOTAL ASSETS

₱
₱ ₱
₱

₱
₱ ₱
₱
SOLVENCY RATIOS
•  Debt to Equity Ratio

 Debt to Total Assets Ratio

RECALL THE ACCOUNTING EQUATION :


ASSETS = LIABILITIES + OWNER’S
EQUITY
LIABILITIES
- are the creditor’s claim on total
assets

OWNER’S EQUITY
- is the owner’s claim on total assets
Debt to Equity Ratio

₱ ₱

₱ ₱
Debt to Total Assets Ratio

₱ ₱

₱ ₱
•  PROPRIETARY OR EQUITY RATIO
- is the ratio of the total OWNER’S
EQUITY to the total ASSETS.

PROPRIETARY RATIO =
PROPRIETARY OR EQUITY RATIO

₱ ₱

₱ ₱
ENRICHMENT

Answer Activity No. 5 on


your Modular Worksheet
(Submission Date:
(Oct. 4, 2020)
QUIZ 1.6
Take your quiz on or
before
October 5, 2020

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