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    Analysis and Interpretation of FS-Part 1

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    Rhea Ramirez
    1. The document discusses the comparability of financial statements and different types of comparisons including intracompany, intercompany, and industry standards. 2. It also describes horizontal analysis which compares percentage changes between periods and vertical analysis which expresses items as a percentage of a base amount like total assets. 3. An example is provided showing horizontal and vertical analysis calculations and interpretations.

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    Analysis and Interpretation of FS-Part 1

    Uploaded by

    Rhea Ramirez
    268 views2 pages
    1. The document discusses the comparability of financial statements and different types of comparisons including intracompany, intercompany, and industry standards. 2. It also describes horizontal analysis which compares percentage changes between periods and vertical analysis which expresses items as a percentage of a base amount like total assets. 3. An example is provided showing horizontal and vertical analysis calculations and interpretations.

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    1. The document discusses the comparability of financial statements and different types of comparisons including intracompany, intercompany, and industry standards. 2. It also describes horizontal analysis which compares percentage changes between periods and vertical analysis which expresses items as a percentage of a base amount like total assets. 3. An example is provided showing horizontal and vertical analysis calculations and interpretations.

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    Analysis and Interpretation of FS-Part 1

    Uploaded by

    Rhea Ramirez
    1. The document discusses the comparability of financial statements and different types of comparisons including intracompany, intercompany, and industry standards. 2. It also describes horizontal analysis which compares percentage changes between periods and vertical analysis which expresses items as a percentage of a base amount like total assets. 3. An example is provided showing horizontal and vertical analysis calculations and interpretations.

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    `ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

    Comparability - the ability of the financial statements to create a basis and allow the identification of
    similarities and differences between the statements being compared.

    COMPARISON STANDARDS

    1. INTRACOMPARABILITY - the company's financial statements for the current period are
    being compared with the FS of prior or earlier periods. This kind of comparison would point
    out the areas for improvements and may be used as a performance evaluation tools for
    employees.
    EXAMPLE:
    A.) net income of ABC company - 2016 versus net income of ABC last year 2015
    B.) total assets of DEF company - 2016 versus total assets of DEF last year - 2015

    2. INTERCOMPARABILITY - with the comparative analysis of the company against a direct


    competitor. This is a very valuable tool especially for companies that do not have the
    monopoly of the market. It shows if the entity underperformed or overachieved in the
    recently concluded accounting period.
    EXAMPLE:
    A.)FS of Smart Telecom vs Globe telecom
    B.) Jollibee vs mcdonalds

    3. INDUSTRY STANDARD - comparing the company's FS with the standard average for that
    certain industry. By looking at the industry averages as a whole instead on a per competitor
    basis, the process would exclude the seasonal fluctuations affecting the direct competitor.
    EXAMPLE:
    FS of Smart telecom are being compared with the industry standardfor the telecom industry.

    HORIZONTAL ANALYSIS VS VERTICAL ANALYSIS

    HORIZONTAL ANALYSIS - the company will compare their own financial statements for the current
    period. The prior period amount normally serves as the basis or the starting point of the comparison.
    Increases or decreases are being taken and such will be measured in percentages.

    ASSETS 2015 2016 Increase/decrease Increase/decrease %


    Cash 420,000.00 500,000.00 80,000.00 19.05%

    A/R 100,000.00 80,000.00 (20,000.00) -20.00%


    Inventory 35,000.00 60,000.00 25,000.00 71.43%
    Land 625,000.00 700,000.00 75,000.00 12.00%
    Patent 50,000.00 90,000.00 40,000.00 80.00%
    1,230,000.00 1,430,000.00 200,000.00 16.26%

    LIAB 2015 2016 Increase/decrease Increase/decrease %


    A/P 330,000.00 400,000.00 70,000.00 21.21%
    N/P 200,000.00 250,000.00 50,000.00 25.00%
    530,000.00 650,000.00 120,000.00 22.64%

    OE 2015 2016 Increase/decrease Increase/decrease %


    capital 700,000.00 780,000.00 80,000.00 11.43%
    1,230,000.00 1,430,000.00 200,000.00 16.26%
    VERTICAL ANALYSIS - companies express items of a certain FS as a percentage of a given base amount. -
    Items in balance sheet are normally compared to the total assets of the company for that given year.

    DEF Company
    Balance Sheets
    as of December 31, 2016

    ASSETS LIABILITY AND OWNER’S EQUITY


    Cash P 500,000 34.97 % Accounts Payable P 400,000 27.97 %
    A/R 80,000 5.59 % Notes Payable 250,000 17.48 %
    Inventory 60,000 4.20 %
    Land 700,000 48.95 % Capital 780,000 54.55 %
    Patent 90,000 6.29 %
    P 1,430,000 100 % P 1,430,000 100 %

    Activity Example:

    GLOBE COMPANY
    BALANCE SHEET

    2016 2017 Increase/decrease Percentage


    ASSETS
    Current Assets
    Cash on Hand 205,000 182,500
    A/R 410,000 485,000
    Inventory 886,000 575,000
    Prepaid Asset 139,000 112,500
    TOTAL Current Assets 1,640,000 1,355,000

    Non-Current Assets
    Land 410,000 410,000
    Building 1,640,000 1,640,000
    Less: Accum Dep’n (410,000) (410,000)
    Equipment 1,025,000 900,000
    Less: Accum Dep’n (205,000) (225,000)
    TOTAL PPE 2,460,000 2,395,000

    TOTAL ASSETS 4,100,000 3,750,000

    LIAB & OE
    Current Liabilities
    Accounts Payable 347,500 455,000
    Taxes Payable 202,500 145,000
    TOTAL Current Liabilities 550,000 600,000

    Non-Current Liabilities
    Bonds Payable 1,500,000 1,500,000

    TOTAL LIABILITIES 2,050,000 2,050,000

    OWNER’s EQUITY 2,050,000 2,050,000

    TOTAL LIAB & OE 4,100,000 3,750,000

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