Management Accounting

Fundamentals

Financial Statement Analysis

Prof. E. Aurellado
• Finance
Goal: Wealth Creation

• Accounting
Goal: Measurement of wealth
 Assets Liabilities & Equity
Cash P 50,000 Accts payable P 600,000
Receivables 600,000 Other payables 100,000
Inventory 250,000
Current Liabilities 700,000
Current Assets 900,000
Long-term Debt 2,000,000
Total Liabilities 2,700,000

Stockholders’ Equity
PPE 2,300,000 Common stock 1,000,000
Investments 700,000 Retained earnings 200,000
Total S/E 1,200,000

Total Assets P3,900,000 Total Liab.& Equity P 3,900,000

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 Typical Income Statement
Sales P 1,200,000
Cost of Sales 940,000
Gross profit 260,000
Operating expenses
Selling P60,000
Administrative 100,000 160,000
Earnings before interest & taxes 100,000
Interest 30,000
Taxes 21,000
Net income P 49,000
==========
Operating Cycle
Cash (Alpha)
Purchase
Merchandise Inventory
Sell
Accounts receivable
Collect
Cash (Omega)
 Operating Cycle
• Inventory turnover (Days in inventory)

• Accounts receivable turnover

(Days in receivable)

• Operating cycle = Days in inventory +

Days in receivable
 Consider this
Balance Sheet Income Statement
Cash 50,000 Sales 1,200,000
Accts Rec’ble 600,000
Inventories 250,000 Cost of sales 940,000
Current Assets 1,400,000
Gross Profit 260,000
Cost of Sales / Inventory = 940,000/ 250,000 = 3.76x
360 days/ 3.76 = 95.74 days (Days in inventory)
Sales / Accts Receivable = 1,200,000/600,000 = 2x
360 days/ 2 = 180 days (Days in receivables)
 Operating Cycle
• Inventory turnover (Days in inventory)
95.74 days

• Accounts receivable (Days in receivable)

180 days
• Operating cycle = Days in inventory +
Days in receivable
275.74 days
 Concepts
• Liquidity
 Typical Balance Sheet

Assets Liabilities & Equity

Cash P 50,000 Accts payable P600,000
Receivables 600,000 Other payables 100,000
Inventory 250,000 Current Liabilities 700,000
Current Assets 900,000

Current assets/ current liabilities

= 900,000/ 700,000
= 1.28 : 1
= Current Ratio
 Du Pont Analysis
• ROE
= Net income X Sales X Assets
Sales Assets Equity

Profit margin Asset TO Equity

multiplier
 Typical Balance Sheet

Assets Liabilities & Equity

Cash P 50,000 Accts payable P600,000
Receivables 600,000 Other payables 100,000
Inventory 250,000 Current Liabilities 700,000
Current Assets 900,000

Cash + receivables / current liabilities

= 650,000/ 700,000
= 0.92 : 1
= Acid-test Ratio
 Concepts
• Leverage
 Leverage

Lever
Weight Fulcrum
 Leverage

Sales

Equity
Lever
Weight Fulcrum
Financial management
 Leverage

Debt
Lever
Weight Fulcrum
 Concepts
• Solvency
 Solvency -Typical Balance Sheet

Assets Liabilities & Equity

Cash P 50,000 Accts payable P600,000
Receivables 600,000 Other payables 100,000
Inventory 250,000 Current Liabilities 700,000
Current Assets 900,000 Long-term Debt 2,400,000
Stockholders Equity
PPE 2,300,000 Common stock 1,000,000
Investments 700,000 Deficit ( 200,000)
Total S/E 800,000

Total Liab.& Equity P 3,900,000

Total Assets P3,900,000
=========
=========
 Solvency -Typical Balance Sheet
Assets Liabilities & Equity
Cash P 50,000 Accts payable P600,000
Receivables 600,000
Other payables 100,000
Inventory 250,000
Current Assets 900,000 Current Liabilities 700,000
Long-term Debt 3,600,000
PPE 2,300,000 Stockholders Equity
Investments 700,000 Common stock 1,000,000
Deficit (1,400,000)
Total S/E ( 400,000)

Total Assets P3,900,000 Total Liab.& Equity P 3,900,000

========= =========
 Concepts
• Turnover
Turnover
 How turnover creates more income
• Consider the following:
Restaurant at full capacity with no
room for expansion

No. of dining seats 50

Sale per diner/hour P100
 How turnover creates more income
Restaurant at full capacity with no
room for expansion
No. of dining seats 50
Sale per diner/hour P100
Revenue/hour = P100 x 50 = P5,000
Revenue/half hour = P5,000 x 2 = P10,000
Revenue/quarter hr = P5,000x 4 = P20,000
 Du Pont Analysis
• ROE
= Net income X Sales X Assets
Sales Assets Equity
 Du Pont Analysis
• ROE
= Net income X Assets
Stockholders’Equity Assets

= Net income x Assets

Assets Stockholders’Equity

= ROA x Equity Multiplier

 Concepts
• Profitability

ROI
 ROI
• Return on Assets

Net income/ Total Assets

• Return on Equity

Net income/ Stockholders’Equity

 Typical Balance Sheet/Income Statement
Assets
Cash P 50,000 Sales P1,200,000
Receivables 600,000
Inventory 250,000 Cost of Sales 940,000
Current Assets 900,000

Gross profit 260,000

PPE 2,300,000
Opex 160,000
Investments 700,000
EBIT 100,000
Interest 30,000
Total Assets P3,900,000 Taxes 21,000
========= Net income 49,000
======
Return on Assets = Net income/ Total Assets
= 49,000/ 3,900,000 = 1.25%
 Typical Balance Sheet/Income Statement
Liabilities & Equity
Accts payable P600,000 Sales P1,200,000
Other payables 100,000
Current Liabilities 700,000 Cost of Sales 940,000
Long-term Debt 2,000,000
Capital stock
Common stock 1,000,000 Gross profit 260,000
Retained earnings 200,000 Opex 160,000
Total S/E 1,200,000 EBIT 100,000
Interest 30,000
Total Liab.& Equity P 3,900,000 Taxes 21,000
========= Net income 49,000
======
Return on Equity = Net income/ Stockholders’ Equity
= 49,000/ 1,200,000 = 0.04%
• Accounting Equation:
• Assets = Liabilities + Equity BALANCE SHEET

• Business Equation:
• Revenues – Cost = Profit INCOME STATEMENT

Profit EQUITY
• ASSETS = LIABILITIES & EQUITY

• CASH ACCOUNTS PAYABLE

• ACCOUNTS RECEIVABLE OTHER PAYABLES
• INVENTORY Working
capital mgt
TOTAL WORKING CAPITAL

• PROPERTY & EQUIPMENT LONG-TERM DEBT

Capital budgeting
• INVESTMENTS EQUITY Capital
structuring
• SALES a function of
• COST OF SALES Sales & Marketing
• GROSS PROFIT
• OPERATING EXPENSES a function of
• EARNINGS BEFORE TAX Accounting &
• INCOME TAX Finance
• NET INCOME