ANALYSIS OF FINANCIAL

STATEMENTS
Objectives
• Be familiar with the different tools in analyzing financial
statements
• Perform horizontal analysis to evaluate financial
statements
• Perform vertical analysis to evaluate financial
statements
 Jollibee Foods Corporation
Statements of Financial Position
As of December 31, 2014

Current Assets Current Liabilities

Cash and Cash Equivalents P 10,428,000 Trade Payables P 6,576,000
Accounts Receivable, net 7,621,000 Other Current Liabilities 12,515,000
Total Current Liabilities 19,091,000
Inventories 5,972,000
Non Current Liabilities 6,950,000
Total Current Assets 24,021,000
Total Liabilities 26,041,000
Non-Current Assets 30,097,000 Total Equity 28,078,000
Total Assets 54,119,000 Total Liabilities and Equity 54,119,000
What is Financial Statement Analysis?

Process of selecting related data from

financial statements for the purpose of:

• evaluating a company's PRESENT

financial position and operating
performance in relation to its PAST
• predicting or forecasting the possible
outcome of FUTURE operations
 Phases in Analyzing
Financial Statements

Computation Interpretation
Phase Phase

compute for differences, interpret the results of

percentages, or ratios the figures from the first
phase
 Traditional
Horizontal Analysis/
Comparative Approach

Vertical Analysis/
Common-size Approach

Approaches
 Horizontal Analysis
The analytical tool that compares
It helps mamangement analyze
the same account in the
increases and decreases in
financial statements of two
balance sheet and income
periods (current and past year)
statement
Horizontal Analysis
Reflects the differences in peso amount and in
percentage between two periods only,
namely the present year and previous year

Peso Percentage
Change Change
 Steps in Performing a Horizontal
Analysis

1. Prepare comparative financial statements of 2 consecutive years.

2. Add a third column for the increase or decrease in amount and a

fourth column for the percentage of the increase or decrease.

3. Get the percent of increase or decrease for each account.

 Horizontal Analysis
Calculating Change in Peso Amounts

Increase
2018 2017
(Decrease)

Cash and cash equivalents 150,000 180,000 (30,000)

 Horizontal Analysis
Calculating Change in Percentage

Increase (Decrease)
2018 2017 Amount Percent
Cash and cash
equivalents 150,000 180,000 (30,000) (16.67)

Interpretation of Data: Cash and cash equivalents decreased by P30,000. This

represents decline by 16.67% from 2017 levels.
Drill
Horizontal
Analysis
(Peso/Percentage
change)
 Horizontal Analysis
Increase (Decrease)
  2018 2017 Peso %
Assets
Current Assets
Cash and cash equivalents P 350,000 P 100,000
Trade and other receivables 500,000 750,000
Inventories 180,000 150,000  

1.Prepare a comparative/ horizontal analysis showing

peso and percentage changes
 Answers:
Increase (Decrease)
  2018 2017 Peso %
Assets
Current Assets
Cash and cash equivalents P 350,000 P 100,000 250,000 250
(33.33)
Trade and other receivables 500,000 750,000 (250,000)
Inventories 180,000 150,000   30,000 20
Illustrative Problem:
Fidas Merchandising
Statemen of Financial Position
As of December 31
(in millions)

Assets 2017 2016 Increase / (Decrease)

Current Assets Amount Percent
Cash P 222.9 P 330.2 P(107.3) (32.5)
Accounts Receivable(net) 282.5 172.1 110.4 64.1
Inventory 146.3 92.8 53.5 57.7
Prepaid Expenses 74.1 70.3 3.8 5.4
Total Current Assets P 725.8 P 665.4 P 60.4 9.1
Property, Plant and Equipment 1,866.4 556.2 1,310.2 235.6
Total Assets P2.592.2 P1,221.6 P1,370.6 112.2
Liabilities and Owner's Equity
Current Liabilities
Trade and Other Payables P 551.9 P 620.6 P (68.7) (11.1)
Non-current Liabilities
Loan Payable 1,822.4 376.6 1,445.8 383.9
Total Liabilities P2,374.3 P 997.2 P1,377.1 138.1
Owner's Equity 217.9 224.4 (6.5) (2.9)
Total Liabilities and Owner's Equity P2,592.2 P1,221.6 P1,370.6 112.2
Illustrative Problem:
Fidas Merchandising
Income Statement
For the Years Ended December 31
(in milions)
Increase/(Decrease)
2017 2016 Amount Percent Net Sales
P2,213.3 P1,738.7 P474.6 27.3
Cost of Goods Sold 1,032.1 831.8 200.3 24.1
Gross Profit P1,181.2 P 906.9 P274.3 30.2
Selling and Administrative Expenses 889.2 659.5 229.7 34.8
Operating Income P 292.0 P 247.4 P 44.6 18.0
Interest Expense 90.9 30.5 60.4 198.0
Income before Income TaxesP 201.1 P 216.9 P(15.8) (7.3)
Income Tax Expense 60.3 65.0 (4.7) (7.2)
Net Income P 140.8 P 151.9 (P11.1) (7.3)
SALES- the proceeds from the sales price of goods sold
credited to the revenue account
COST OF SALES/COST OF GOODS SOLD - refers to the
cost of merchandise or goods that were sold during a particular
accounting period.
SALES RETURNS AND ALLOWANCES - the account used
to record returns acknowledge by the supplier to the buyer from
the sale of goods
SALES DISCOUNT - a reduction from the sales price of the
merchandise or goods sold granted by the seller to the buyer or
customer for paying within the discount period
INTEPRETATION # 1:
Current assets increased by 9.1%. This increase is a result of a
64.1% increase in accounts receivable and a 57.7% increase in
inventory. This increase in accounts receivable entails
management to check their credit and collection policy for
prompt collection of accounts especially in net sales was only
27.3% and cash decreased by 32.5%. Likewise, the increase in
merchandise inventory necessitates management to check their
inventory stocks for obsolescence or slow moving items
comparing their increase in sales and the increase in inventory.
INTEPRETATION # 2:

Property, Plant and Equipment showed a 235.6% increase.

This may be due to purchases made by the company to invest in
plant assets. It is possible for the owner to invest property and
equipment in the business. However, in case of Fidas
Merchandising , owner's equity showed a decrease of 2.9%. This
might not be possible unless the owner invested non-current
assets then afterwards large amounts of withdrawals during the
year.
INTEPRETATION # 3:
Current liabilities and owner's equity decreased despite increase
in total liabilities and owner's equity. This can be explained by the
383.9% increase in the company's non-current liabilities which
means that the company made heavy borrowings during the year.
Sources of business funds are generated either from the investment
of the owner or loans from banks or financial institutions. In the case
of Fidas Merchandising, the company obtained additional funds
through loan. With the significant increase in non-current assets, it
can be inferred that the loan obtained by the company was used to
finance the acquisitions of the property, plant and equipment.
INTEPRETATION # 4:
Net sales increased by 27.3% during the year. However, despite
the increase in sales, net income decreased by 7.3%. Looking at the
other components of the income statement, cost of goods sold
increased by 24.1%. Even with this increase in cost of goods sold,
gross margin registered a 30.2% increase. Selling and adminitrative
expenses showed a 34.8% increase. Despite this, income from
operations recorded an 18% increase. The company's increase in
interest expense of 198% resulted in a decrease in income before
taxes despite the increase in net sales. Analyzing the components of
the income statement, we were able to explain the decrease in net
income despite increase in net sales. Hence, management can now
understand that the magnaminous increase in interest expense
caused the decrease in overall net income.
 Assignment No. 2
* To be posted on Jan 4, 2021, Monday at 9:45 AM

Deadline: Jan. 6, 2021, Wed. at 11:59PM

 Mini- Task 1
Grade 11 Hayes A
Group 1 - Ayala and SM
Group 2 - Cebu Air and Philippine Airlines
Group 3 - Coca-Cola ad Pepsi Co.
Group 4 - Globe and PLDT

FORMAT- refer to page 8 of Module 1

RUBRIC - refer to page 9 of Module 1
DEADLINE: January 8, 2021 (Friday)
 Mini- Task 1
Grade 11 Hayes B
Group 1 - JJ and PG
Group 2 - Jollibee and Shakeys
Group 3 - Nike and Adidas
Group 4 - Petron and Shell

FORMAT- refer to page 8 of Module 1

RUBRIC - refer to page 9 of Module 1
DEADLINE: January 8, 2021 (Friday)
 Vertical Analysis
An analytical tool that shows the relationship
of each part to the whole in a single financial
statement

The analysis will give a better

perspective of the company’s
operating performance
Vertical Analysis of Income Statement
In income
statements, all
items are
usually
expressed as a
percentage of
sales.

13-27
Vertical Analysis of Balance Sheet

In balance
sheets, all asset
items are
usually
expressed as a
percentage of
total assets.
13-28
 Steps in Performing a Vertical
Analysis
1. Prepare comparative financial statements of two cosecutive years.
2. Add one additional column on the right side of each year.
3. Convert the absolute peso amount of the items in the financial
statements into percentage by dividing each item by the base.
(Base=100%)
Formula: Peso Amount ÷ Base x 100 %

4. Base to use
Statement of Financial position Total Assets
Statement of Comprehensive Income Total or Net Sales
Statement of Cash Flows Total Cash Available for Use

5. Make a conclusion on the allocation and indication of possibilities.

 Drill
Vertical
Analysis
 Vertical Analysis
Cash P 200,000
Accounts Receivables 400,000
Inventories 250,000
Equipment 550,000
Total Assets P 1,400,000

Accounts Payable 300,000

Notes Payable 400,000
Owner's Capital 700,000
Total Liabilities and Owner's Equity P 1,400,000
 Answers
Cash P 200,000 14.3%
Accounts Receivables 400,000 28.6%
Inventories 250,000 17.9%
Equipment 550,000 39.3%
Total Assets P 1,400,000 100%

Accounts Payable 300,000 21.4%

Notes Payable 400,000 28.6%
Owner's Capital 700,000 50%
Total Liabilities and Owner's Equity P 1,400,000
100%

Interpretation of Data: The largest component of asset is Equipment at 39.3%. Cash is the
smallest component at 14.3%. On the other hand, 50% of assets are financed by debt and
the other half is financed by equity.