5Financial-Statement-Analysis-1

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Cavite State University Main Campus (Don Severino de las Alas) Indang**We aren't endorsed by this school

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ABM 12

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Accounting

Date

Jan 8, 2025

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Uploaded by ElderFieldCoyote51

FUNDAMENTALSST. JOHN PAUL IIMr. Rudito M. CortonSubject TeacherABM 2OFGrade 12

Financial Statement Analysis 1Lesson 5

OBJECTIVES•Appreciate more the value of the FS byanalyzing their components and identifyingtheireffectontheoverallfinancialperformance of the company;•Compute for the peso and percentagechanges in account balances•AnalyzeFSusingtheverticalandhorizontal approaches.At the end of the lessons, learners will be able to:

WHAT IS A FINANCIAL STATEMENT ANALYSIS?FinancialStatementAnalysisistheprocessofassessingthefinancialperformance and position of a givencompany. It tries to evaluate the trendsof thefirm’sfinancial status over acertain period by performing this trendsanalysis involving thecompany’sFS fromthe preceding years up to the present FSbeing evaluated.

WHAT IS A FINANCIAL STATEMENT ANALYSIS?Also, FS analysis would involve thecomputation of ratios to assess thecompany’sprofitability,liquidity,equitymanagement,andfinancialstructure of the organization.

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?Information that one can get from theFinancial Statements per se does notsuffice as a basis for making a sounddecision for the company. One has to digdeep into these reports to see the meatof what will constitute an important basisfor the said decision-making.

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?Let us consider the following situation.Suppose you were invited to invest in twocompanies. However, you can only chooseone to invest in because of your limitedsituation.How will you choose whichcompany to trust in your investment?

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?Suppose further that the two companies areboth merchandising businesses offering thesame line of products and targeting the samemarket.Checking on their FS, you wereprovided with this information:FS DATACOMPANY ALPHACOMPANY BRAVONET INCOME, Dec. 2019PhP 2,000,000PhP 1,850,000TOTAL ASSETS, Dec. 2019PhP 22,114,800PhP 19,394,811

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?•With these data, which company would youchoose to invest in?•Will this information suffice for you to makea proper decision?FS DATACOMPANY ALPHACOMPANY BRAVONET INCOME, Dec. 2019PhP 2,000,000PhP 1,850,000TOTAL ASSETS, Dec. 2019PhP 22,114,800PhP 19,394,811

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?Looking into these two companies FS for theprevious years, we have these data to findout:NET INCOMECOMPANY ALPHACOMPANY BRAVOFY 2019PhP 2,000,000PhP 1,850,000FY 20182,375,2001,573,350FY 20172,801,1481, 397,480Given this additional information, does your initial choice change?

WHAT IS THE IMPORTANCE OF THE FINANCIAL STATEMENT ANALYSIS?•As future investors and economic leaders forthat matter, you have to be concerned aboutthecontinuingeffectsofthebusinessoperation on the overall status of thebusiness.•Looking just at the current FS will misleadus into choosing which company is best toinvest in.

METHODS IN ANALYZING FINANCIAL STATEMENTS

HORIZONTAL ANALYSISHorizontal analysis of the FS is themethod of comparing an account title overa number of accounting periods.For example, you will analyze the trend of the Cash account for several accounting periods. Therefore, you will compare the Cash balances for Year 1, Year 2, and the following years.

HORIZONTAL ANALYSISThis is the reason why it is calledhorizontal analysis following the directionof comparing the balances of just oneaccountsidebysidethisaccount’sbalances making a horizontal comparison.The movement, i.e. the increase ordecrease in the balances will consist theanalysis.This technique is also calledTREND ANALYSIS.

HORIZONTAL ANALYSISHorizontal analysis involves FS of two or moreaccounting periods. Commonly, this technique is usedon the Balance Sheet accounts and Income Statementaccounts but can also be used in analyzing any otherFS.Putting the FS of different accounting periodsside by side will lead us to account for the changesin each account title over time. These changes canbeexpressedeitherinmonetaryvalueorinpercentage.You may use the following formulas tocompute the changes.

HORIZONTAL ANALYSIS% ??𝒂??? =??𝒂??? ?? 𝑷????𝒂𝒍𝒂??? ?? ??? 𝑷??????? 𝑷?????× ?????𝒂??? ?? 𝑷???=?𝒂𝒍𝒂??? ?? ??? ??????? 𝑷????? −?𝒂𝒍𝒂??? ?? ??? 𝑷??????? 𝑷?????NET INCOMEFY 2019FY 2018𝑪?𝒂??𝒆??𝑷𝒆𝒔?% 𝑪?𝒂??𝒆COMPANY BRAVO1 850 0001 573 350COMPANY ALPHA2,375,2002,801,148Example:276 65017.58%(425 948)(15.21%)

Seatwork (by pair)12/31/202212/31/2021Current Assets500 000400 000Property, Plant, and Equipment, net1 584 0001 320 000Current Liabilities364 000280 000Long-term Liabilities532 000380 000Owner’s Capital1 188 0001 060 000The aggregated Statement of Financial Position of FABM2 Company is presented below. Perform horizontal analysis.

VERTICAL ANALYSISVertical analysis is a method offinancial statement analysis in whicheachlineitemislistedasapercentage of a base figure withinthe statement.Vertical Analysis: Definition, How It Works, and Example (investopedia.com)

VERTICAL ANALYSISVertical Analysis of the FS is also calledCOMMON SIZE ANALYSIS because itpresents the FS account titles as apercentage of a base amount.TheBalance Sheet items are presented as apercentage of the Total Assets, while theIncome Statement items as a percentageof Sales/Net Sales.

VERTICAL ANALYSISWe can present all the items on the BalanceSheet as a percentage of the total assets.This will give us information regarding thecomposition of the assets, as each assetaccount is presented as a percentage of thetotal assets.On the other side of theequation, we can infer what percentage of theasset is financed by the liability and what partof the asset goes to the owners.

VERTICAL ANALYSISIn the Income Statement, account balances arepresented as a percentage of sales.This willgive us the data about the amount/percentageof sales that is used up by a particularexpense.It will also present the Net Incomeas the part of sales that were not used up.

VERTICAL ANALYSISExample:Vertical Analysis: Definition, How It Works, and Example (investopedia.com)

Using the financial statement presented below, perform vertical analysis.

Seatwork 212/31/202212/31/2021Current Assets500 000400 000Property, Plant, and Equipment, net1 584 0001 320 000Current Liabilities364 000280 000Long-term Liabilities532 000380 000Owner’s Capital1 188 0001 060 000The aggregated Statement of Financial Position of FABM2 Company is presented below. Perform vertical analysis.

AssignmentThe aggregated Statement of Financial Position of FABM2 Company is presented below. Perform horizontal and vertical analysis.FABM2 CompanyStatement of Financial Position As of December 3120222021Cash 110,00087,400Accounts Receivable 90,00069,920Inventory 129,000218,500Prepaid Rent 12,0004,370Delivery Van 550,000493,810Total Assets 891,000874,000Accounts Payable 75,00067,298Loan Payable 400,000393,300FABM2, Capital 416,000413,402Total Liabilities and Equity 891,000874,000

Sources:BooksArganda, Amelia M., Herrero, Carmen C. Accounting Principles I: Textbook/ Workbook. Quezon City: Kalayaan Press Mktg. Ent. Inc., 2015.Horngren, Charles T., Harrison, Walter T., Oliver, Suzanne. Accounting. Jurong, Singapore: Pearson Education South Asia Pte. Ltd., 2009.Rabo, Tugas, Slendrez. Fundamentals of Accountancy, Business and Management 1.Quezon City: Vibal Group, Inc., 2016Web References“Horizontal or Trend Analysis of Financial Statements.” Accounting for Managementhttps://www.accountingformanagement.org/horizontal-analysis-of-financial-statements/

THANK YOU!!!