MODULE 3

• financial statements are centered on generally accepted accounting principles (GAAP) in the Philippines

  gaap
• Public companies have stricter standards for financial statement reporting.
• Private companies have greater flexibility in their financial statement preparation and also have the option to use either accrual or cash accounting
• Three of the most important techniques include:

  • horizontal analysis,
  • vertical analysis,
  • ratio analysis.
• Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years
• Vertical analysis looks at the vertical affects line items have on other parts of the business and also the business’s proportions.
• Comparisons can be made on a number of different bases.

  • intracompany basis
  • industry averages
  • intercompany basis
• This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years

  intracompany basis
• This basis compares an item or financial relationship of a company with industry averages (or norms) published by financial ratings organizations such as Dun & Bradstreet, Moody’s, and Standard & Poor’s.

  industry averages
• This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies

  intercompany basis
• Statement of Financial Position or Balance Sheet


  This shows the list of assets, liabilities and capital as of a given period.
• Statement of Performance or Income Statement. 


  This represents a summary of the enterprise’s revenue and expenses for a specified period.
• statement of cash flow


  This statement shows the cash receipts and cash payments of the enterprise during the period. It shows where cash came from and how it is spent
• cashflow classified as to

  • operating
  • investing
  • financing activities
• statement of changes in equity or capital


  This statement summarizes the movement in the capital account which arises from owner’s investments, withdrawals and net income or loss for the period.
• notes to financial statement


  This part contains the lists of the appropriate accounting standards and interpretations adopted in the preparation of the financial statements as well as the breakdown of the items presented on the face of the financial statements.
• Horizontal analysis evaluates a series of financial statement data over a period of time.
• Vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount.
• Ratio analysis expresses the relationship among selected items of financial statement data.
• Horizontal analysis, also called trend analysis.
• Its purpose is to determine the increase or decrease that has taken place. This change may be expressed either as a peso value or a percentage.

  horizontal analysis
• Vertical analysis, also called common-size analysis.
• vertical analysis


  is accomplished by comparing each financial statement item or account to a base amount, which is usually the Total Assets and Total Liabilities and Equity for the Balance Sheet and the Sales for the Income Statement.
• Formula of horizontal analysis

  CY-PY/PY
• Formula of vertical analysis for balance sheet

  item amount/total asset

  item amount/total liabilities
• formula for income statement

  item amount/net sales
• Ratio analysis expresses the relationship among selected items of financial statement data.
• ratio expresses the mathematical relationship between one quantity and another.
• shareholders


  Both current and prospective shareholders are interested in the firm’s current and future level of profitability
• creditor/suppliers


  The firm’s creditors are interested primarily in the short-term liquidity of the company and its ability to make interest and principal payments. A secondary concern of creditors is the firm’s profitability; they want assurance that the business is healthy.
• Cross-sectional analysis involves the comparison of different firms’ in the same industry financial ratios at the same point in time.
• Benchmarking is a type of cross-sectional analysis being popularly used in the business field today. It is done by comparing a firm’s ratio values to those of a key competitor or group of competitors that it wishes to emulate.
• Time-series analysis evaluates performance over time. Comparison of current to past performance, using ratios, enables analysts to assess the firm’s progress.
• Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
• Acid Test (Quick) Ratio = Quick Assets / Current Liabilities
• Debt Ratio = Total Debt / Total Equity
• Current Ratio = Current Assets / Current Liabilities
• Activity ratios measure the speed with which various accounts are converted into sales or cash—inflows or outflows.
• Accounts receivable turnover = Net Credit Sales ÷ Average
• Average collection period = 365 ÷ Accounts Receivable Turnover