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    Analysis and Interpretation of Financial Statements 1

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    Nikolai Marasigan
    Financial statement analysis is the process of evaluating a business's financial health, performance, and risks by analyzing trends in financial statements over time using horizontal analysis, vertical analysis, and financial ratios. Horizontal analysis examines changes in account balances over several periods expressed in monetary amounts and percentages. Vertical analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the balance sheet and net sales for the income statement, to analyze the composition of assets/financing and how net sales are allocated to expenses. These techniques provide insights into a company's financial position and performance.

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    Analysis and Interpretation of Financial Statements 1

    Uploaded by

    Nikolai Marasigan
    581 views10 pages
    Financial statement analysis is the process of evaluating a business's financial health, performance, and risks by analyzing trends in financial statements over time using horizontal analysis, vertical analysis, and financial ratios. Horizontal analysis examines changes in account balances over several periods expressed in monetary amounts and percentages. Vertical analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the balance sheet and net sales for the income statement, to analyze the composition of assets/financing and how net sales are allocated to expenses. These techniques provide insights into a company's financial position and performance.

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    Financial statement analysis is the process of evaluating a business's financial health, performance, and risks by analyzing trends in financial statements over time using horizontal analysis, vertical analysis, and financial ratios. Horizontal analysis examines changes in account balances over several periods expressed in monetary amounts and percentages. Vertical analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the balance sheet and net sales for the income statement, to analyze the composition of assets/financing and how net sales are allocated to expenses. These techniques provide insights into a company's financial position and performance.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    581 views10 pages

    Analysis and Interpretation of Financial Statements 1

    Uploaded by

    Nikolai Marasigan
    Financial statement analysis is the process of evaluating a business's financial health, performance, and risks by analyzing trends in financial statements over time using horizontal analysis, vertical analysis, and financial ratios. Horizontal analysis examines changes in account balances over several periods expressed in monetary amounts and percentages. Vertical analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the balance sheet and net sales for the income statement, to analyze the composition of assets/financing and how net sales are allocated to expenses. These techniques provide insights into a company's financial position and performance.

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    Analysis and Interpretation

    of Financial Statements 1
    Financial statement (FS) Analysis

     is the process of evaluating risks, performance, financial health, and future prospects of a
    business by subjecting financial statement data to computational and analytical techniques
    with the objective of making economic decisions (White et.al 1998). There are three kinds
    of FS analysis techniques:
     Horizontal analysis
     Vertical analysis
     Financial ratios
    Horizontal Analysis

     also called trend analysis, is a technique for evaluating a series of financial statement data
    over a period of time with the purpose of determining the increase or decrease that has
    taken place (Weygandtet.al 2013). This will reveal the behavior of the account over time.
    Is it increasing, decreasing or not moving? What is the magnitude of the change? Also,
    what is the relative change in the balances of the account over time?

     Horizontal analysis uses financial statements of two or more periods.


     All line items on the FS may be subjected to horizontal analysis.
     Only the simple year-on-year (Y-o-Y)grow this covered in this lesson.
    Horizontal Analysis
     Changes can be expressed in monetary value (peso) and percentages computed by using
    the following formulas:
    • Peso change=Balance of Current Year-Balance of Prior Year
    • Percentage change= (Balance of Current Year-Balance of Prior Year)/(Balance of Prior Year)
    • Example:
    2015 2014
    Sales P 250,000 P 175,000

    ✓Peso change = P250,000 - P175,000 = P75,000


    ✓Percentage change = (P250,000 - P175,000) / P175,000 = 42.86%
    ✓This is evaluated as follows: Sales increased by P75,000. This represents growth of 42.86%
    from 2013 levels.
    Vertical Analysis

     also called common-size analysis, is a technique that expresses each financial statement
    item as a percentage of a baseamount (Weygandt et.al. 2013).
     For the SFP, the base amount is Total Assets.
    • Balance of Account / Total Assets.
    • From the common-size SFP, the analyst can infer the composition of assets and the
    company’s financing mix.
    Vertical Analysis

    ✓The above may be evaluated as follows: The largest component of asset is Equipment at
    39.3%. Cash is the smallest component at 14%. On the other hand, 50% of assets are financed
    by debt and the other half is financed by equity.
    Vertical Analysis

     For the SCI, the base amount is Net Sales.


    • Balance of Account / Total Sales.
    • This will reveal how “Net Sales” is used up by the various expenses.
    • Net income as a percentage of sales is also known as the net profit margin.
    Vertical Analysis

     ✓The above may be evaluated as follows:


    • The cost of goods sold is 44% of sales. The company has a gross profit rate of 55.5%.
    Operating expenses is 22% of sales.
    • The company earns income of P 0.33 for every peso of sales. Gross profit generated for every
    peso of sale is P 0.555
     The use of common-size financial statements allows the comparison of two companies of
    different sizes. This is because the SFP and SCI comparative information are standardized
    as a percentage of assets and sales, respectively.

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