Understanding Financial Statement

Financial Statement
and
Financial Statement
Analysis
Presented by:
Adeza, Kim
Asinas, Dianne Lorraine
Santiago, Leandro
Statement of Changes in
Equity
A reconciliation of the beginning and
ending balances in a company’s equity
during a reporting period
Beginning Equity xxx

+ Net income xxx
- Dividend payment xxx
+ / - Other Changes xxx
Ending Equity xxx
Statement of Changes in
Equity
Other Changes:
+ Proceeds from sale of stock
+ Treasury stock purchases
+/- Share capital reserves
+/- Gains and losses recognized directly
in equity
+/- Correction of prior periods errors
+/- Fair value valuation for certain
assets
Statement of Changes in Equity
Importance:
It allows analysts and reviewers of financial
statements to see what factors caused a change
in owner’s equity during the accounting period.
Notes to Financial
Statement
It reveals certain important facts about
an entity’s finances that are not shown
elsewhere in the financial statements.
It discloses facts and situations that are

considered “material” and are done
either as a requirement or in “good
faith.”
Notes to Financial
Statement
Elements:
1. General Information
2. Basis of Preparation
3. Summary of Significant Accounting
Policies
4. Details per line item
Notes to Financial
Statement
Guidance Notes / Illustrative Sample:
https://www.pwc.com/sg/en/illustrativ
e-annual-report-2010/assets/14-
significantaccountingpolicies.pdf
https://www.aicpa.org/InterestAreas/F
RC/AccountingFinancialReporting/PCFR
/DownloadableDocuments/FRF-
SME/FRFforSMEs_Illustrative_Financial_
Statements.pdf
Notes to Financial Statement
Importance:
It may reveal issues with regards the company’s
financial health.
Financial Statement Analysis
Objective:
1. To make informed decision about the company
2. To check the financial health of an entity
Methods:
A. Vertical Analysis
B. Horizontal Analysis (Year-to-Year Change and
Trend Analysis)
C. Ratio Analysis
Objective:
Methods:
Trend Analysis)
C. Ratio Analysis
Objective:
Methods:
Trend Analysis)
C. Ratio Analysis
Liquidity Ratios
DEFINITION:
Determine a company's ability to pay off current
debt obligations without raising external capital.
IMPLICATION:
Higher liquidity = Better coverage of outstanding
debts
Liquidity Ratios
USAGE:
Internal (different accounting periods to track
changes) and;
External analysis (company vs industry to check
strategic positioning).
(CAVEAT) May NOT be as effective if used in:

(a) Looking across industries;
(b) Comparing businesses of different sizes in
different geographical locations
Liquidity Ratios
Objective:
a. Working Capital = Current Assets – Current Liabilities
b. Current Ratio (Working Current Assets
2. To check the financial
Capital Ratio) = health of Current
an entity
Liabilities
c. Quick Ratio (Acid-test Quick Assets (Current Assets – Inventory –

Prepaid Expenses)
Methods: Ratio) =
Current Liabilities
d. Days Sales Outstanding Average Accounts Receivable
(Average Collection Period) = Revenue per Day
Trend Analysis)
C. Ratio Analysis
Solvency (Leverage) Ratio
DEFINITION:
Measures the company’s ability to meet its total
financial obligation.
A company must have more current assets than

current liabilities to be LIQUID and more total
assets than total liabilities to be SOLVENT.
IMPLICATION:
Higher solvency ratio = Favorable investment
Solvency Ratios
Objective:
a. Solvency Ratio = Income after Tax + Non-Cash Expense
1. To make informed decision about the
Total company
Liabilities
b. Debt Ratio = Total Liabilities
2. To check the financial health of Total
an entity
Assets
c. Debt-Equity Ratio = Total Liabilities
Total Equity
Methods: d. Conversion of Debt-Equity Debt-Equity Ratio
A. Vertical Ratio to Debt Ratio =
Analysis 1+Debt-Equity Ratio
B. Horizontal Analysis
e. Interest (Year-to-Year
Coverage Ratio = Change
Earnings and and Taxes
before Interest
Trend Analysis) Interest Expense
C. Ratio Analysis
Activity (Efficiency) Ratios
DEFINITION:
Measure a firm's ability to convert different
accounts within its balance sheet into cash or
sales.
USAGE:
Most useful when compared to a competitor or
industry to establish whether an entity's
processes are favorable or unfavorable.
Activity Ratios
Objective:
a. Receivable Turnover = Net Sales
Average Receivable
b. Average Collection Period = 360
Receivable Turnover
c. Inventory Turnover Raw Materials = Cost of Raw Materials Used
Methods: d. Inventory Turnover Finished Goods = Average Raw Materials

Cost of Goods Sold
A. Vertical Analysis Average Inventory
e. Average Age of Inventory = 360
Inventory Turnover
Trend Analysis)
C. Ratio Analysis
Activity Ratios
Objective:
f. Accounts Payable Turnover = Purchases
Average Accounts Payable
2. To check the financial health of an 360
g. Average Payment Period =
entity
Payable Turnover
h. Asset Turnover = Net Sales
Methods: Total Assets
i. Normal Operating Cycle = Average Collection Period
A. Vertical Analysis + Inventory Collection Period
j. Cash (Year-to-Year
Conversion Cycle = Normal Operating
Change and Cycle
Trend Analysis) - Payable Deferral Period
C. Ratio Analysis
Activity vs Profitability Ratios
ACTIVITY ratios measure how efficient a
company utilizes its resources to generate a
profit, whereas PROFITABILITY ratios depict how
much profits a company is generating.
Profitability Ratios
DEFINITION:
Used to assess a business's ability to generate
earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity
over time
USAGE:
Most informative and useful when comparing:
(a) a company to other, similar companies;
(b) the company's own history, or;
(c ) average ratios for the company's industry as a
whole.
CATEGORIES:
Margin ratios - give insight, from several different
angles, on a company's ability to turn sales into
profit.
Return ratios - offer several different ways to
examine how well a company generates a return
for its shareholders.
Objective:
a. Gross Profit Percentage = Gross Profit
1. To make informed decision about Netthe
Salescompany
b. Net Profit Percentage = Net Profit
Net Sales
c. Return on Asset = Net Profit
Methods: Total Assets
d. Return on Equity = Net Profit
A. Vertical Analysis Total Equity
e. Earnings per Share = Net Profit
(Year-to-Year Change and
Trend Analysis) Average No. of Shares
C. Ratio Analysis
Financial What questions do they
Metrics answer?
1. Liquidity Can we make the required
payments?
2. Solvency What is the extent of our
(Leverage) indebtedness?
3. Activity How fast did we use our assets
to generate revenues?
4. Profitability Did we earn satisfactorily?

Financial Statement
Limitation of Analysis
Financial Analysis
Objective: 1. No consistently valid rules of thumb exist
1. To make informed decision
2. No one ratio can tell aabout
story the company
2. To check 3.
the financial
Industry health
averages ofthat
are just an averages
entity
4. Ratios must be defined uniformly and consistently
Methods: 5. More ratios do not necessarily make a better analysis
6. Off-balance sheet events and factors impact the
B. Horizontal Analysis of(Year-to-Year
interpretation financial ratios Change and
Trend Analysis)
7. The goal of financial performance analysis is to diagnose the
C. Ratio Analysis
firm’s financial health
Objective:
END!
Methods:
Trend Analysis)
C. Ratio Analysis

Understanding Financial Statement

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Financial Statement

Beginning Equity xxx

It discloses facts and situations that are

(CAVEAT) May NOT be as effective if used in:

c. Quick Ratio (Acid-test Quick Assets (Current Assets – Inventory –

A company must have more current assets than

Methods: d. Inventory Turnover Finished Goods = Average Raw Materials

4. Profitability Did we earn satisfactorily?

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