Analysis and Interpretation
of Financial Statements 1
FABM II
Performance Standards
1. Solve exercises and problems that require computation
and interpretation using horizontal analysis and
vertical analysis.
2. Using the downloaded sample financial statements,
learner performs horizontal and vertical analysis.
-The Statement of Financial Position (SFP) reports the balances
of assets, liabilities and equity of the business as of a point in
time.
- The Statement of Comprehensive Income (SCI) shows the
results of operations of the business by reporting the revenue and
expenses for the specific accounting period.
- The Statement of Cash Flows (SCF) / Cash Flows Statement
(CFS) reports the actual cash inflows and outflows for the period
that are classified into the three main business activities, namely,
operating, investing and financing activities.
- The Statement of Changes in Equity (SCE) reports all the
changes, whether increases or decreases to the owner’s interest on
the company during the period
- The Notes to Financial Statements discussed the nature of the
company’s operations, its accounting policies, basis for estimates,
components of the accounts and significant transactions.
• Financial statement (FS) analysis is the process of
evaluating risks, performance, financial health, and
future prospects of a business by subjecting financial
statement data to computational and analytical
techniques with the objective of making economic
decisions (White [Link] 1998).There are three kinds of
FS analysis techniques:
- Horizontal analysis
- Vertical analysis
- Financial ratios
Vertical anaylsis, also called common-size analysis, is a
technique that expresses each financial statement item
as a percentage of a base amount (Weygandt [Link].
2013).
- For the SFP, the base amount is Total Assets.
• Balance of Account / Total Assets.
• From the common-size SFP, the analyst can infer the
composition of assets and the company’s financing
mix.
Example
✓Peso change = P250,000 - P175,000 = P75,000
✓Percentage change = (P250,000 - P175,000) / P175,000
= 42.86%
Horizontal analysis, also called trend analysis, is a
technique for evaluating a series of financial
statement data over a period of time with the purpose of
determining the increase or decrease that
has taken place ([Link] 2013). This will reveal the
behavior of the account over time. Is it
increasing, decreasing or not moving? What is the
magnitude of the change? Also, what is the
relative change in the balances of the account over time?
Horizontal analysis uses financial statements of two or more
periods.
- All line items on the FS may be subjected to horizontal
analysis.
- Only the simple year-on-year (Y-o-Y)grow this covered in
this lesson.
- Changes can be expressed in monetary value (peso) and
percentages computed by using the
following formulas:
• Peso change=Balance of Current Year-Balance of Prior Year
• Percentage change= (Balance of Current Year-Balance of
Prior Year)/(Balance of Prior Year)
Vertical anaylsis, also called common-size analysis,
is a technique that expresses each financial
statement item as a percentage of a base
amount (Weygandt [Link]. 2013).
- For the SFP, the base amount is Total Assets.
• Balance of Account / Total Assets.
• From the common-size SFP, the analyst can infer
the composition of assets and the company’s
financing mix
.
• Example:
✓The above may be evaluated as follows: The largest
component of asset is Equipment at 39.3%. Cash is the
smallest
component at 14%. On the other hand, 50% of assets are
financed by debt and the other half is financed by equity.
- For the SCI, the base amount is Net Sales.
• Balance of Account / Total Sales.
• This will reveal how “Net Sales” is used up by the
various expenses.
• Net income as a percentage of sales is also known as the
net profit margin.
• Example
% of assets
Cash P 200,000 200,000/1,400,000 = 14.3%
Accounts Receivable 400,000 400,000/1,400,000 = 28.6%
Inventory 250,000 250,000/1,400,000 = 17.9%
Equipment 550,000 550,000/1,400,000 = 39.3%
Total Assets P 1,400,000 Sum of the components is 100%
Accounts Payable P 300,000 300,000/1,400,000 = 21.4%
Notes Payable 400,000 400,000/1,400,000 = 28.6%
Owner, Capital 700,000 700,000/1,400,000 = 50.0%
Total Liabilities and equity P 1,400,000 Sum of the
components is 100%
