Business Finance

Review of Financial Statement

Preparation, Analysis and Interpretation

by: Gloria M. Ducut, DBA

Grade:12 Quarter III

2nd Semester
 Review of Financial Statement
CONTENT
Preparation, Analysis, and Interpretation
The learners demonstrate an understanding of:
The process of preparing financial statements
as well as the methods or tools of analysis of
CONTENT
financial statements, including horizontal
STANDARDS
analysis, vertical analysis, and financial ratios to
test the level of liquidity, solvency, profitability,
and stability of the business
The learners are able to:
Solve exercises and problems that require
PERFORMANCE financial statement preparation, analysis, and
STANDARDS interpretation using horizontal and vertical
analyses and various financial ratios
 Review of Financial Statement
CONTENT
Preparation, Analysis, and Interpretation
The learners…

6. Prepare financial statements

7. Define the measurement levels,
namely,liquidity, solvency, stability, and
profitabiliy
8. Perform vertical and horizontal analyses
Learning of financial statements of a single
Competencies proprietorship
9. compute, analyze, and interpret financial
ratios such as current ratio, working capital,
gross profit ratio, net profit ratio, receivable
turnover, debt-to-equity ratio, and the like
• Review of :
Accounting Equation
T-account Analysis
Steps in the accounting process
(accounting cycle)
Basic Financial Statements
Financial ratio analysis
 Motivation: Match column A with Column B
A B
a,.the process of summarizing transactions by
transferring amounts from the journals to the ledger
accounts
_____1. Debit.
_____2. Transactions
b. an accounting record used to list a particular type
of frequently recurring transaction

_____3. Posting
c. records in which transactions are first entered,
providing a chronological record of business activity
_____4. Special Journals d. exchanges of goods or services between/among
two or more entities or some other event having an
economic impact on a business enterprise

_____5. Journals e. an entry on the left side of an account

 Financial Statements LC6

• Income Statement
 Financial Statements LC6

• STATEMENT OF OWNER’S EQUITY (or known also as

“Statement of Changes in Equity”)
 Financial Statements LC6

• BALANCE SHEET (or formally known as “Statement

of Financial Position”)
 Financial Statements LC6

• STATEMENT OF CASH FLOWS

 Analysis and Interpretations of
Financial Statements LC8
Objectives:
• to assess the current profitability and operational efficiency of
the firm as a whole as well as its different departments so as
to judge the financial health of the firm.

• to ascertain the relative importance of different components

of the financial position of the firm.

• to identify the reasons for change in the profitability/financial

position of the firm.

• to judge the ability of the firm to repay its debt and assessing
the liquidity and solvency position of the firm.
 Vertical analysis or common size
analysis LC8

- is a technique for evaluating financial

statements data that expresses each item
within a financial statement in terms of a
percent of a base amount
- For Balance Sheet/Statement of Financial
Position- accounts are presented as a
percentage of Total Assets
- For Income Statement- accounts are
presented as a percentage of net sales
 Horizontal Analysis or LC8
Trend Analysis

-allows the learners to see the trend for the

different accounts in the Financial Statements

• Amount of change = Current year amount – Base

(earlier) year amount

• Percent of change = Amount of change/Base

(earlier) year amount
 Most important accounts to monitor
when doing trend analysis LC8
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
Horizontal Analysis LC8
Horizontal Analysis LC8
Vertical Analysis LC8
Vertical Analysis LC8
 Ratio Analysis LC7

Working Capital=
Current Assets – Current Liabilities
Ratio Analysis LC7
Ratio Analysis LC 7
Ratio Analysis LC7
 Ratio Analysis LC7

Activity Ratios

-shows how quickly a company collects what is

owed to it and indicates the liquidity of the
receivables
 Ratio Analysis LC7

Activity Ratios

-measure the effectiveness of a

company's ability to collect payments
from its credit customers
 Ratio Analysis LC7

Activity Ratios

- a ratio showing how many times a

company's inventory is sold and
replaced over a period of time
 Ratio Analysis LC7

Activity Ratios

-is an efficiency ratio that measures the

average number of days the company holds
its inventory before selling it.
Balance Sheet (Php in Millions)B Income Statement (Php in Millions)B
Answers
Answers
Answers
 Resources
• Copies of sample financial statements
• Several copies of case to distributed to
learner-groups
End of Chapter 2!