FINANCIAL STATEMENT

ANALYSIS
• STATEMENT OF
FINANCIAL
POSITION
• STATEMENT OF
FINANCIAL
PERFORMANCE
• STATEMENT OF
CHANGES IN
EQUITY
• STATEMENT OF
CASH FLOW
 FINANCIAL STATEMENT ANALYSIS

• INVOLVES CAREFUL SELECTION OF DATA FROM FINANCIAL

STATEMENTS FOR THE PRIMARY PURPOSE OF FORECASTING THE
FINANCIAL HEALTH OF THE COMPANY.

• ACCOMPLISHED BY EXAMINING TRENDS IN KEY FINANCIAL DATA,

COMPARING FINANCIAL DATA ACROSS COMPANIES, AND ANALYZING
KEY FINANCIAL RATIOS.

• COMPARISON OF ACTUAL FINANCIAL CONDITIONS ITH EXPECTED

 OBJECTIVES OF FINANCIAL STATEMENT
ANALYSIS

• IDENTIFY ORGANIZATION’S FINANCIAL

STRENGTH AND WEAKNESSES.
 GENERAL APPROACH TO FS ANALYSIS

1. BACKGROUND STUDY AND EVALUATION OF FIRM

INDUSTRY, ECONOMY, AND OUTLOOK
2. SHORT-TERM SOLVENCY ANALYSIS
3. CAPITAL STRUCTURE AND LONG-TERM SOLVENCY
ANALYSIS
4. OPERATING EFFICIENCY AND PROFITABILITY ANALYSIS
5. OTHER CONSIDERATIONS
 INDICATIONS OF SHORT-TERM SOLVENCY
• FAVORABLE CREDIT POSITION
• SATISFACTORY PROPORTION OF CASH TO THE
REQUIREMENTS OF THE CURRENT VOLUME
• ABILITY TO PAY CURRENT DEBTS IN THE REGULAR
COURSE OF BUSINESS
• ABILITY TO EXTEND MORE CREDIT TO CUSTOMERS
• ABILITY TO REPLENISH INVENTORY PROMPTLY
 GENERAL APPROACH TO FS ANALYSIS

1. BACKGROUND STUDY AND EVALUATION OF FIRM

INDUSTRY, ECONOMY, AND OUTLOOK
2. SHORT-TERM SOLVENCY ANALYSIS
3. CAPITAL STRUCTURE AND LONG-TERM SOLVENCY
ANALYSIS
4. OPERATING EFFICIENCY AND PROFITABILITY ANALYSIS
5. OTHER CONSIDERATIONS
 INDICATIONS OF LONG TERM FINANCIAL
POSITION
1. MAINTAIN A WELL-BALANCED RELATIONSHIP BETWEEN
FUNDS AND EQUITY.
2. EFFECTIVELY EMPLOY BORROWED FUNDS AND EQUITY.
3. DECLARE SATISFACTORY AMOUNT OF DIVIDENDS TO
SHAREHOLDERS.
4. WITHSTAND ADVERSE BUSINESS CONDITIONS.
5. ENGAGE IN RESEARCH AND DEVELOPMENT TO PROVIDE
NE PRODUCTS OR IMPROVE OLD PRODUCTS, METHOD OR
PROCESSES.
 GENERAL APPROACH TO FS ANALYSIS

1. BACKGROUND STUDY AND EVALUATION OF FIRM

INDUSTRY, ECONOMY, AND OUTLOOK
2. SHORT-TERM SOLVENCY ANALYSIS
3. CAPITAL STRUCTURE AND LONG-TERM SOLVENCY
ANALYSIS
4. OPERATING EFFICIENCY AND PROFITABILITY ANALYSIS
5. OTHER CONSIDERATIONS
INDICATORS OF MANAGERIAL EFFICIENCY IN
USE OF ASSETS

1. ABILITY TO EARN A SATISFACTORY RETURN ON ITS

INVESTMENT OF BORROWED FUNDS AND EQUITY.
2. ABILITY TO CONTROL OPERATING COSTS WITHIN
REASONABLE LIMITS.
3. OPTIMUM LEVEL OF INVESTMENT IN ASSETS.
 GENERAL APPROACH TO FS ANALYSIS
1. BACKGROUND STUDY AND EVALUATION OF FIRM
INDUSTRY, ECONOMY, AND OUTLOOK
2. SHORT-TERM SOLVENCY ANALYSIS
3. CAPITAL STRUCTURE AND LONG-TERM SOLVENCY
ANALYSIS
4. OPERATING EFFICIENCY AND PROFITABILITY ANALYSIS
5. OTHER CONSIDERATIONS
 OTHER CONSIDERATIONS
• QUALITY OF EARNINGS
- REASONS TO MANIPULATE EARNINGS:
a. MEET INTERNAL EARNINGS TARGET
b. MEET EXTERNAL EXPECTATIONS
c. TO EVEN-OUT INCOME
d. PROVIDE “WINDOW DRESSING” FOR AN IPO OR A LOAN
 STEPS IN FS ANALYSIS
1. ESTABLISH OBJECTIVES OF THE ANALYSIS
2. STUDY THE INDUSTRY IN WHICH FIRM OPERATES AND
RELATE INDUSTRY CLIMATE TO CURRENT AND
PROJECTED ECONOMIC DEVELOPMENT
3. DEVELOP KNOWLEDGE OF THE FIRM AND THE
QUALITY OF MANAGEMENT
4. EVALUATE FS USING TECHNIQUES
5. SUMMARIZED FINDINGS BASED ON ANALYSIS AND
REACH CONCLUSIONS ABOUT FIRM RELEVANT TO THE
ESTABLISHED OBJECTIVES
 TECHNIQUES
• HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS
(INCREASE-DECREASE METHOD)
• TREND PERCENTAGES
• COMMON SIZE FINANCIAL STATEMENTS
• FINANCIAL RATIOS
MAJOR AREAS THAT MAY BE COVERED IN THE ANALYSIS ARE:
• SHORT-TERM SOLVENCY
• CAPITAL STRUCTURE AND LONG-TERM SOLVENCY
• OPERATING EFFICIENCY AND PROFITABILITY
• SEGMENTED ANALYSIS (WHEN RELEVANT)
 LIMITATIONS OF FS ANALYSIS
• INFORMATION DERIVED BY THE ANALYSIS ARE NOT
ABSOLUTE MEASURES OF PERFORMANCE ANY AND ALL
OF THE AREAS OF BUSINESS OPERATIONS.
THEY ARE ONLY INDICATORS OF DEGREES OF
PROFITABILITY AND FINANCIAL STRENGTH OF THE FIRM.
 LIMITATIONS OF FS ANALYSIS

• LIMITATIONS INHERENT IN THE ACCOUNTING DATA THE

ANALYST WORKS WITH.
a. VARIATION AND LACK OF CONSISTENCY IN THE
APPLICATION OF ACCOUNTING PRINCIPLES, POLICIES AND
PROCEDURES
b. TOO-CONDENSED PRESENTATION OF DATA
c. FAILURE TO REFLECT CHANGE IN PURCHASING POWER
 LIMITATIONS OF FS ANALYSIS
• LIMITATIONS OF THE PERFORMANCE MEASURE OR TOOLS
AND TECHNIQUES USED IN ANALYSIS.
- QUANTITATIVE MEASURES ARE NOT ABSOLUTE MEASURES
- TIMING OF TRANSACTIONS AND USE OF AVERAGE
• ANALYSTS SHOULD BE ALERT TO THE POTENTIAL FOR
MANAGEMENT TO INFLUENCE THE OUTCOME OF
FINANCIAL STATEMENTS
FINANCIAL STATEMENT
ANALYSIS
TECHNIQUES
 HORIZONTAL ANALYSIS OF COMPARATIVE
STATEMENTS
• YEAR-TO-YEAR COMPARISONS FOR THE SAME COMPANY
• STUDY OF PERCENTAGE CHANGES IN COMPARATIVE
STATEMENTS

STEPS:
 COMPUTE THE PESO AMOUNT OF THE CHANGE FROM THE
BASE PERIOD TO THE LATER PERIOD, AND
 DIVIDE THE PESO AMOUNT OF CHANGE BY THE BASE-
ABC CORPORATION
 TREND ANALYSIS
TREND PERCENTAGES ARE INDEX NUMBERS SHOWING
RELATIVE CHANGES IN FINANCIAL DATA RESULTING WITH
THE PASSAGE OF TIME.
TREND PERCENTAGES STATE SEVERAL YEAR’S FINANCIAL
DATA IN TERMS OF A BASE YEAR.
 COMPUTATION AND EVALUATION
1. CHOOSE THE YEAR TO BE USED AS THE BASE AND
CONVERT THE AMOUNT OF EACH ITEM TO 100%.
2. COMPUTE THE PERCENTAGE RELATIONSHIP THAT
EACH STATEMENT ITEM BEARS TO THE SAME ITEM IN
THE “BASE YEAR” BY SIMPLY DIVIDING EACH VALUE BY
THE BASE YEAR.
3. COMPARE THE TRENDS OF RELATED FINANCIAL AND
OPERATING DATA TO FORM AN OPINION AS TO
WHETHER FAVORABLE OR UNFAVORABLE TENDENCIES