SUMMARY OF

CHAPTER 4

(FINANCIAL ANALYSIS)

COLLEGE OF ACCOUNTANCY
San Carlos College

Group Members:
Ma. Elaiza P. Palaganas
Charisse Joy B. Cruz
Raquel D. Torcino
Sandrix S. Padilla
Erika L. Cruz
FINANCIAL ANALYSIS
By: Sandrix Padilla

ANALYSIS OF FINACIAL INFORMATION

One final step in understanding business finance is the analysis of
financial information to reach business decisions. This Analysis typically
involves an examination of the both HISTORICAL and PROJECTED
PROFITABILITY, CASH FLOWS, and RISK.
There are three steps to consider:
1. INFORMATION MUST BE UNDERSTOD BY THE USER-data can
never be analyze unless it is fully understood it also is possible to interpret
financial data if it is only partly understood.
2. INFORMATION MUST BE ORGANIZED- before analysis can be
made, information can be sorted out.
3. INFORMATION MEASUREMENT-once we have understood and
recognized the financial data needed, then measurement can be done using
applied common sense and analysis by means of financial ratios.

MANAGERIAL AND FINANCIAL ACCOUNTING

Accounting- is the process of COLLECTING REPORTING, and ANALYZING the
costs associated with operating a business.
There are two users of the accounting information:
1. EXTERNAL USERS- This system is called Financial Accounting.
2. INTERNAL USERS- This system is called Managerial Accounting.

FOUR MAIN ACCOUNTING STATEMENT ARE:

1. The Balance Sheet- is the financial statement that presents all the
assets of, and claim against, or the liabilities and equity of the firm at a particular
period of time.
2. Income Statement- measures the profit or loss that an organization
has made over a set period of time, quarter of a year.
3. Cash flow statement- is the overviews of the company financial
health, this give data of the cash provided or used in operating activities.
4. Statement of changes in ownership- this describes the effect of
operation on the cash position of the company, the effect of operation and
financing decisions to the change in owner’s equity.
For any firm, there are essentially these sources and uses of funds:
A. Source of Funds
 • Increase in a liability account
• Increase in a net worth account
• Decrease in an asset account
B. Uses of Funds
• Decrease in a liability account
• Decrease in a net worth account
• Increase in an asset account
• Working Capital is the firm’s current assets. Net Working Capital is
current assets minus current liabilities.
• Some firms construct a changes in net working capital or cash flow
statement of sources and uses of funds statement.
Major Corporate Cash Flows
The firm can obtain cash from issuing new stocks to owners, as stockholders or
bonds to creditors, as bondholders.
The firm has these possible sources of cash:
• Sales
• Capital invested by stockholders
• Debt Funds raise from creditors

THE BASIC FINANCIAL STATEMENTS

By: Raquel D. Torcino

Financial Statements- to provide information about the financial position,

financial performance and cash flows of an entity that
is useful to a wide range of users in making economic
decisions.
- To show the results of the management’s stewardship
of the resources entrusted to it.

A. A complete set of financial statements comprises:

1. A statement of financial position as at the end of the period;
2. A statement of profit or loss and other comprehensive income for the
period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes, comprising a summary of significant accounting policies and
other expnanatory information;
6. Comparative information in respect of the preceding period as specified
in paragraphs 38 and 38A;

38 except when IFRS permit or require otherwise, an entity shall

present comparative information in respect of the preceding period for
all amounts reported in the current period’s financial statements. An
entity shall include comparative information for narrative and
 descriptive information if it is relevant to understanding the currents
period’s financial statements.
38A An entity shall present, as a minimum, two statements of financial
position, two statements of profit or loss and other comprehensive
income, two separate statements of profit or loss(if presented), two
statement of cash flows and two statements of changes in equity, and
related notes.

7. A statement of financial position at the beginning of the earliest

comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial
statements.

General features of financial statements:

A. Fair presentation and compliance with IFRS
B. Going Concern
C. Accrual Basis of Accounting
D. Materiality and aggregation
E. Offsetting
F. Frequency of reporting
G. Comparative information
H. Consistency of presentation

VERTICAL AND HORIZONTAL ANALYSES OF FINANCIAL STATEMENTS

By: Ma. Elaiza P. Palaganas

Vertical Analysis- is the process of analyzing the entries on a financial

statement, in relation to the industry standard.
Horizontal Analysis- allows us to analyze changes over time but in order to
do, needing two periods of data. Since a comparison
between current and previous data, the formula for a
horizontal analysis is:
Value in new time period minus value in old time period
X 100 = %change
Value in old time period

Ruth Rac Enterprises Balance sheet for 20AA

ASSETS Php % LIABILITIES Php %
Cash 128.6 8.9% Current Liabilities 207.7 14.3%
Accounts 199.8 13.8% Long-term liabilities 81.9 5.7%
Receivable
Inventory 132.4 19.1% Other non-current 168.1 11.6%
liabilities
Other current 26.3 1.8% Total Liabilities 457.7 31.6%
assets
Total current 487.1 33.6%
assets
 Investments and 63.5 4.4% Stockholder’s 991.5 68.4%
long-term Equity
receivables
Property, Plant 808.4 55.8%
and Equipment
Other Assets 90.2 6.2%
TOTAL 1,449.2 100% TOTAL 1,449.2 100%

Ruth-Rac Enterprises Income Statement 20AA

Net Sales Php1,6786 100%
Cost of Goods Sold 1,199.57 71.5%
Gross profit on sales 479.1 28.5%
Selling, general and administrative costs 174.8 10.4%
Earnings before interest and taxes 304.3 18.1%
Interest Income 3.2 0.2%
Interest Expense 6.9 0.4%
Earnings before income taxes 300.6 17.9%
Provision for income taxes 91.5 5.5%
NET Earnings 209.1 12.5%

FINANCIAL RATIOS
By: Charisse Joy B. Cruz

FINANCIAL RATIO- these are key indicators of the financial performance of

the company and are usually derived from its three
statements including Income Statement, Balance
Sheet, and Cash Flows.
1. Primary Ratio - It considers profit or return of the business entity, normally
for the year, in relation to the capital employed or invested,
or net assets during the same period.
2. Secondary Ratio - These are futher investigation of primary ratio.
3. Tertiary Ratio - It evaluate ls profitability of the business and analysis of
activity.
*Profitability ratio - can be assessed from the point of view of Gross
Profit or contribution to sales as a percentage.
*Activity/Use of asset ratio- It is an examination of activity on
company sales separately with Fixed
Assets & Working Capital.
4. Financial Status Ratio - Those that helps to analyze a business financial
standing in terms of its ability to pay liabilities and
settle obligations.
*Liquidity Ratios- The relationship of Current Assets to Current
Liabilities. Acid Test/Quick Test Ratio can be used to
measure liquidity.
5. Solvency Ratios- It calculates the ability of the business to meet the
interest due from the profits available.
6. Investment Ratios- Intended to give investors financial position of the
business and the invested capital.
*Return on Equity- combines its view to the profits belonging to the
shareholders - the profit after tax and interest - and its
relationship to Shareholders' funds.
*Earnings per share - central measurement of profitability from an
investor's point of view.
*Dividend Yield - reveals rewards to investors - the dividends paid to
them, with the market price of their shares.

COMMOMNLY CALCULATED RATIOS:

1. Liquidity Ratios
*Current ratio= CA
CL
*Quick ratio= CA-inventory
CL
2. Activity Ratios
*Inventory Turnover= COGS
Ave. Inventory

*Days of Sales Inventory= 360

Inventory Turnover

*Account Receivable Turnover= Net Sales

Ave. A/R

*Average Collection Period= 360

A/R Turnover

*Inventory Conversion Cycle= Days of inventory +Days of sales

outstanding

*Fixed Assets Turnover= Sales

Ave. Fixed Assets

*Total Assets Turnover= Sales

Ave. Total Assets
LEVERAGE RATIOS, PROFITABILITY RATIOS & MARKET VALUES
By: Erika L. Cruz

3. Leverage Ratios
*Debt to Equity= Debt
Equity

*Debt Ratio= Debt

Total Assets

*Times-interest-earned Ratio= Operating Income or EBIT

Interest
4. Profitability Ratios
*Gross profit Margin= Revenue-COGS
Sales

*Operating Profit Margin= EBIT

Sales

*Net Profit Margin= Net Profit (EBIT)

Sales

*Return on Assets= Net Profit (EBIT)

Total Assets

*Return on Equity= Net Profit

Owner’s Equity (TA-TL)
5. Market Values
*Book Value= Total Assets
Number of Shares Outstanding

*Earnings per share= Net Income-Preferred Dividends

No. of shares outstanding

*Price Earnings Ratio= Market Price of the Stock

Earnings per share