Analysis and

Interpretation of
Financial Statements
TABOBO, Quennie
SABINO, Chesca
GO, Willesa
CASTRO, Dave Michael
BUEN, Ma. Hanna Louize
AGOOT, Ma. Regel

BCFMA3-1
1st Semester, SY 2013-2014

Financial Statement
Analysis
O Is a process which examines

past and current financial

data for the purpose of
evaluating performance and
estimating future risks and
potential
O Means different things to
different people depending
on their individual interest

Uses of Financial
Statement Analysis
O identify major changes or turning

points in trends, amounts, and

relationships
O yield valuable information about trends
and relationships, the quality of a
companys earnings, and the strengths
and weaknesses of its financial
position
O assessment of past performance and
current position
O assessment of future potential and

Uses of Financial
Statement Analysis
O assist investors and creditors in finding

the type of information they require for

making decisions relating to their interests
in a particular company (such as risk,
return, dividend or interest yield, safety,
liquidity, growth, and others)
Whether to continue or discontinue its
main operation or part of its business;
What to make or to purchase certain
materials in the manufacture of its
product;

Uses of Financial
Statement Analysis
What to acquire or to rent/lease certain

machineries and equipment in the

production of its goods;
Whether to issuestocksor negotiate for
a bankloanto increase itsworking
capital;
What and when to make decisions
regarding investing or lending capital;
Other decisions that allow management
to make an informed selection on
various alternatives in the conduct of its
business.

Users of Financial
Statement Analysis
O Corporate

Creditors
Investors
Management
Security Analysts
Bank Lending Officers
Auditors
Taxing authorities
Regulatory Agencies
Labor Unions
Customers

Users of Financial
Statement Analysis
O Cooperative

Members
Creditors [debt-paying ability
Management
Bank Lending Officers
Auditors
Taxing authorities
Regulatory Agencies
Labor Unions

Various tools necessary

in Financial Statement
Analysis
OHorizontal / Dynamic

Analysis
OVertical / Static Analysis
OFinancial Ratio Analysis

Horizontal Analysis
O Comparison of 2 or more years

financial data.
O Concentrates on trends in the
accounts in peso value and %
terms
O Presented in comparative form

Vertical Analysis
(Common-size Statement)
O Are that reveals each item in
percentage terms.
O A material financial statement item
is used as a base value and all other
accounts of financial statement are
compared to it.

Financial Ratio Analysis

The results of the ratio analysis will
allow us to:
O Appraise the position of a business
O Identify trouble spots that need
attention
O Make projections and forecasts
about the course of future
operations

Financial Ratio Analysis

OLiquidity Ratio
OAsset Utilization Ratio
OInventory Ratio
OSolvency Ratio
OProfitability Ratio

Liquidity Ratio
O Ability to satisfy maturing

short-term debt
3 BASIC MEASURE OF LIQUIDITY
O Net Working Capital
O Current Ratio
O Quick Ratio

Liquidity Ratio:
Net Working Capital (NWC)
NWC = Current Assets
Current Liabilities

Liquidity Ratio:
Current Ratio (CR)
OIndicates

the
organizations
ability to meet its current
liabilities (those due within a
year) with its current assets
Current Ratio =
Current Assets
Current Liabilities

Liquidity Ratio: Quick

Ratio
OIndicates the organizations ability

to meet its current liabilities with

current assets other than
inventory
Quick Asset or Acid Test Ratio =
Cash + Marketable Security
Current Liabilities

Asset Utilization Ratios

O Reflect the way in which a business

enterprise uses its assets to obtain

revenue and profit. One example is
how well receivables are turned into
cash. The higher the ratio, the more
efficiently the business manages its
assets.

Asset Utilization Ratio:

Accounts Receivable Turnover
OAccounts Receivable turnover is the number

of times accounts receivable are collected

in the year. It is derived by dividing net
credit sales by average accounts
receivable.
Account Receivable Turnover =
Net Credit Sales
Average Accounts Receivable

Asset Utilization Ratio:

Accounts Collection Period
Accounts Collection Period =
365 days
Accounts Receivable
Turnover

Asset Utilization Ratio:

No. of Days Sales in Receivable
No. of Days Sales in
Receivable =
Average Account Receivable
Average Daily Credit Sales

Asset Utilization Ratio:

Total Asset Turnover
OIndicates how efficiently the

organization is utilizing its assets to

make money
Total Asset Turnover =
Net Sales
Average Total Assets

Inventory Ratios
O Are especially useful when a build up

in inventory exists. Inventory ties up

cash; holding large amounts of
inventory can result in both lost
opportunities for profit and
increased storage costs. Before you
extend credit or lend money to a
business enterprise, you should
examine its inventory turnover and
average age of inventory.

Inventory Ratio:
Inventory Turnover
OIndicates

how
often
the
organization sells and replaces
its inventory over a specified
period of time
Inventory Turnover =
Cost of Goods Sold
Average Inventory

Inventory Ratio:
Average Age of Inventory
Average Age of Inventory =
365 days
Inventory Turnover

Solvency Ratios
OProvide data about the long-

term solvency of a firm

Solvency Ratio =
Net Worth
Long-Term Debt

Solvency Ratio:
Debt to Total Assets
OIndicates the proportion of

assets that are financed with

debt (short and long-term debt)
Debt to Total Assets =
Total Liabilities
Total Assets

Profitability Ratios
OUsed to examine how

successful a firm is in using its

operating processes and
resources to earn income

Profitability Ratio:
Gross Margin (Profit) Rate
OIndicates how much of every

dollar of sales is left after costs of

good sold
Gross Margin (Profit) Rate =
Gross Margin
Net Sales

Profitability Ratio:
Surplus Margin on Sales
OIndicates how much of each dollar

of sales is left over after all

expenses
Surplus Margin on Sales =
Net Surplus
Net Sales