ANALYSIS &

INTERPRETATION
OF FINANCIAL
STATEMENTS
 “REASONS TO ANALYZE &
INTERPRET“
 Transform data in the statements
into information which is interpreted
and used as basis for better
economic decisions and actions.
 Analyze statements to determine if
it is profitable to lend money.
 Organized whether it is reasonable
to demand increases in wages.
 Analyze the statements to
see if the companies are
conforming with government
regulations.
 To determine past
performance as a means of
control and as a guide for
future.
 “REASONS TO ANALYZE &
INTERPRET“
a. INVESTORS- to assess the ability
of the investee to pay dividends or
to pay return to investors.
b. EMPLOYEES- determine the
ability of the borrowers to pay the
loans granted to them on time.
c. LENDERS- to determine the
ability of the borrowers to pay the
loans granted to them on time.
d. SUPPLIERS- ability of customers to
pay debts.
e. MANAGEMENT- to determine the
activities of the enterprise for POLC.
f. CUSTOMER- determine the ability of
the company to exist over a long
period of time.
g. PUBLIC- determine the activities of
the enterprise.
h. GOVERNMENT AGENCIES-
determine the capacity of the
enterprise to pay taxes.
 DIFFERENT KINDS OF
STATEMENTS
• FINANCIAL POSITION- presents
the assets, liabilities, and owner’s
equity
• INCOME STATEMENT- presents
sales, cost of sales, selling
expenses, administrative expense
and net income.
COMPARATIVE ANALYSIS
INTRACOMPANY- involves
comparison within the entity
INTERCOMPANY- involves
comparison of data of one entity
with those of another entity
INDUSTRY AVERAGE- shows the
standing of the entity in the
industry where it belongs
 HORIZONTAL ANALYSIS
• A technique for evaluating a
series of financial statement data
over a period of time.
• Increases or decreases from
period to period are computed in
peso and percentage.
• Involves sidewise comparison
shows changes from year to year.
 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑐ℎ𝑎𝑛𝑔𝑒
Percentage of change = x 100%
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡

EXAMPLE:
1. GLOBE COMPANY BALANCE SHEET
( DEC. 31, 20X4)
2. GLOBE COMPANY INCOME
STATEMENT
 TREND ANALYSIS
– help you compare financial
information over time to a base
year or period.
 EXAMPLES:
1. EXCELLENT COMPANY
COMPARATIVE BALANCE SHEET
2. EXCELLENT COMPANY
BALANCE SHEET
3. EXCELLENT COMPANY
COMPARATIVE INCOME
STATEMENT
4. EXCELLENT COMPANY INCOME
STATEMENT TREND RATIOS
 VERTICAL ANALYSIS
- A technique for evaluating
financial statement data that
expresses each item in a
financial statement as a
percentage of base amount
 COMPOSITION OF ASSETS
AND EQUITIES
- One way of judging
whether or not balance is
proper to determine the
percentage of each asset
to total assets
 EXAMPLE:
1. The percentage
composition of the ASSET
of MLB Company is as
follows :
 EXAMPLE:
1. The percentage
composition of the
LIABILITIES and
OWNER’S EQUITY of MLB
Company is as follows :
 COMPOSITION OF INCOME
AND EXPENSE
- Income is the result of two kinds of
flows which have opposite effects.

REVENUE- which tends to increase

income
EXPENSE- tend to reduce it

- It is important to determine which

specific revenue or expense item
needs attention
 EXAMPLE:
1. The condensed income
statement of KING
COMPANY shows the
component percentages
for two (2) years
 RATIO ANAYSIS
1. LIQUIDITY RATIOS- measures the
ability of an entity to pay currently
maturing obligations and meet
unexpected cash needs.
2. PROFITABILITY RATIOS- measures
the ability of an entity to earn
income over a period of time.
3. SOLVENCY RATIOS- measure the
ability of an entity to survive over a
long period of time.
 LIQUIDITY RATIOS
CURRENT RATIOS
- the relationship of available
current assets to meet payments of
current liabilities.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
ACID TEST RATIO OR QUICK RATIO
- this is used if the inventory is
not readily convertible to cash.

Acid test ratio=

𝐶𝑎𝑠ℎ+𝑡𝑒𝑚𝑝𝑜𝑟𝑎𝑟𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡+𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝑛𝑒𝑡)
𝑡𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
 PROFITABILITY RATIOS
A. RATIO OF GROSS PROFIT TO NET
SALES
- is the relationship between
GROSS PROFIT and NET SALES

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
GROSS PROFIT RATIO =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
 B. RATIO OF NET INCOME
WITH NET SALES
- is a measure of the profitability
for each PESO SALE

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
NET PROFIT RATIO =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
C. OPERATING RATIO
- is the relationship of COST OF
SALES and OPERATING EXPENSES to
NET SALES. This ratio is useful in
ascertaining operating efficiency of
the business.

OPERATING RATIO =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠+𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
D. RATIO OF NET INCOME TO
OWNER’S EQUITY
- is the relationship of NET
INCOME to OWNER’S EQUITY

FORMULA :

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑃𝑒𝑟𝑖𝑜𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
E. RATIO OF NET INCOME TOTAL
ASSETS
- is used to determine the
efficiency with which management
utilizes the ASSETS of the
business.

FORMULA:
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
F. RATIO OF NET SALES TO TOTAL
ASSETS
- shows the relationship between
the PESO SALES VOLUME and the
TOTAL ASSETS of the business. It
measures efficiency in the use of the
company’s resources.

FORMULA:
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 SOLVENCY RATIOS
 Debt to Equity Ratio
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
 Debt to Total Assets Ratio
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

RECALL THE ACCOUNTING EQUATION :

ASSETS = LIABILITIES + OWNER’S EQUITY
LIABILITIES
- are the creditor’s
claim on total assets

OWNER’S EQUITY
- is the owner’s claim
on total assets
EXAMPLE :

If total LIABILITIES is 1 MILLION

and total OWNER’S EQUITY is 2
MILLION so the TOTAL ASSETS will
be P3 MILLION

Claim on total assets :

CREDITORS = 1/3
OWNERS = 2/3
 PROPRIETARY OR EQUITY
RATIO
- is the ratio of the total
OWNER’S EQUITY to the total
ASSETS.

PROPRIETARY RATIO =

′
𝑇𝑜𝑡𝑎𝑙 𝑂𝑤𝑛𝑒𝑟 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
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