Financial Statement Analysis • Marketable Securities

Outline • Accounts Receivable

I. Financial Statements • Inventory

II. Financial Statement Analysis • Prepaid Expenses

III. Limitations of FS Analysis Noncurrent Assets

IV. Vertical Analysis • Long-term investments

V. Horizontal Analysis • Fixed Assets

VI. Financial Ratios • Intangible Assets

1. Liquidity Ratios Liabilities - Balance Sheet

2. Asset Management Ratios Current Liabilities

3. Debt Management Ratios • Current portion of long term

4. Profitability Ratios debt

5. Market Ratios • Bank indebtedness

III. True or False • Interest payable

IV.MC Theories • Rent, tax, utilities

V. Problems • Wages payable

FINANCIAL STATEMENTS • Customer prepayments

- are written records that convey the financial • Dividends payable and others
activities and conditions of a business or entity
Noncurrent Liabilities
and consist of four major components.
• Long-term debt
Key Financial Statements:
• Pension fund liability
• Balance Sheet
Shareholder’s Equity - Balance Sheet
• Income Statement
 Retained earnings
• Statement of Changes in Equity
 Treasury stock
• Statement of Cash Flows  Preferred stock
 Common stock
• Notes to Financial Statements
 Additional paid in capital

INCOME STATEMENT
BALANCE SHEET
• Provides a financial summary of the firm’s
• Represents “snapshots” of its financial operating results during a specified period.
position at a given point in time
• A summary of how the business generates its
• Known as the Statement of Financial Position revenues and incurs its expenses through both
operating and non-operating activities.
Assets = Liabilities + Shareholder’s Equity
• Also known as the profit and loss statement.

Assets - Balance Sheet

STATEMENT OF CHANGES IN EQUITY
Current Assets
• Changes in stockholder’s equity during the
• Cash accounting period is reported in this statement.
• Shows the beginning stockholder’s equity, any
changes, and the end-of-year stockholder’s
equity.
Statements in Common-Size and Comparative
• May also refer to as the statement of retained
Form
earnings or statement of changes in partner’s
equity or capital statement.

STATEMENT OF CASH FLOWS

Provides aggregate data regarding all cash

inflows a company receives from its ongoing
operations and external investment sources, as
well as all cash outflows that pay for business
activities and investments during a given period.
This merges the balance sheet and the income Common –Size Statements
statement.

Operating Activities

Cash flows are directly related to the sale and

production of the firms' products and services.

Investing Activities

Cash flows associated with purchase and sale of

both fixed assets and business interests.

Financing Activities
Cash flows that result from debt and equity
financing transactions; includes occurrence and
repayment of debt, cash inflow from the sale of
stock, and cash outflows to pay cash dividends
and repurchase stocks.

Financial Statements Analysis

Limitations of Financial Statement Analysis

Differences in accounting methods between

companies sometimes make comparisons
difficult.

Prepare and interpret financial statements in

common size and comparative form.
Horizontal Analysis
Trend Percentages

Trend percentages state several years' financial

data in terms of a base year, which equals 100
percent.

Trend Analysis
FINANCIAL RATIOS
Look at the income information for Berry
Products for the years 2010 through 2014. We
will do a trend analysis on these amounts to see
what we can learn about the company.
 Quick Assets = Current Assets – (Inventory +
Prepayments)
Liquidity Ratios - Measures the ability of the
company to meet its short-term debts.

The data and ratios that managers use to assess Quick assets include Cash, Marketable
liquidity include Securities, Accounts Receivable, and current
Notes Receivable. This ratio measures a
1. Working Capital
company's ability to meet obligations without
2. Current ratio having to liquidate inventory.

3. Acid-rest (quick) ratio Cash Ratio

4. Cash ratio Cash Ratio = Cash and Cash Equivalents /

Current Liabilities

Acid-Test Ratio = P7,500 / P80,000 = 0.09375

Working Capital
Cash and Cash Equivalents include Cash, and
WC= Current Assets – Current Liabilities Marketable Securities.
The excess of current assets over current
liabilities is known as working capital.
State the effect of the following transactions
Working capital is not free. It must be financed on the current ratio. Use increase, decrease, or
with long-term debt and equity. no effect for your answer. Assume that the
current ratio is presently greater than 1.

1. Collection of an accounts receivable NE

2. Collection of an accounts receivable within

the discount period. DECREASE

3. Declaration of cash dividends. Decrease

4. Additional stock is sold for cash. Increase

Current Ratio
5. Accounts payable are paid. Increase
Current Ratio = Current Assets / Current
Liabilities 6. Equipment is purchased for cash. Decrease

The current ratio measures a company's short- 7. Inventory purchases are made in cash. No
term debt-paying ability. Effect

A declining ratio may be a sign of deteriorating 8. Inventory purchases are made on account.
financial condition, or it might result from Decrease
eliminating obsolete inventories. 9. Sold an inventory on account. Increase
IF Working Capital = 0, Current Ratio = 1. 10.Sold an inventory for cash. Increase

Assume that the current ratio is presently less

than 1.

1. Collection of an accounts receivable

2. Collection of an accounts receivable within

the discount period
Acid-Test (Quick) Ratio
3. Declaration of cash dividends
Acid Test Ratio = Quick Assets/ Current
Liabilities. 4. Additional stock is sold for cash
Acid Test Ratio = 79,500/80,000 = 0.99375 5. Accounts payable are paid
6. Equipment is purchased for cash sA credit sales lang not cash sales kasi nga dun
nangagaling AR
7. Inventory purchases are made in cash

8. Inventory purchases are made on account

9. Sold an inventory on account

This ratio measures how many times a company
10.Sold an inventory for cash
converts its receivables into cash each year.
Compute and interpret financial ratios that
Average Collection Period
managers use for asset management purposes.
ACP = 365 Days / Accounts Receivable Turnover
Asset Management Ratios
ACP = 365 Dyas / 7.5652 Times = 48.25 or 49
1. Inventory Turnover (Inv. TO) and Average
days.
Selling Period (ASP).
This ratio measures, on average, how many days
2. Accounts Receivable Turnover (ARTO) and
it takes to collect an account receivable.
Average Collection Period (ACP).
Operating Cycle (OC)
3. Operating Cycle (OC)
This ratio measures the elapsed time from when
4. Fixed Asset Turnover (FATO)
inventory is received from suppliers to when
5. Total Asset Turnover (TATO) cash is received from customers.

Inventory Turnover Average Selling Period + Average Collection

Period = Operating Cycle
Inventory Turnover = Cost of Goods Sold /
Average Inventory ASP + ACP = OC

This ratio measures how many times a 111 days + 49 days = 160 days.
company's inventory has been sold and
SP – NAKUHA AND NABENTA
replaced during the year.
CP – NEBNTA AND NACOLLECT
If a company's inventory turnover is less than its
industry average, it either has excessive Fixed Asset Turnover (FATO)
inventory or the wrong sorts of inventory.
FATO = Sales / Average Net Fixed Assets
- Masyado ka raw marami inventory
This ratio measures how efficiently a company's
which is not god kasi may kapalit na cost
assets are being used to generate sales. This
yon.
ratio expands beyond current assets to include
- Prev yr beg, cy end
noncurrent assets.

- Nabawas na Depreciation sa FixedAssets

- For every peso of your fixed assets 1.04
Average Selling Period (ASP) naeeaern
- Mas higher mas better
This ratio measures how many days, on average,
it takes to sell the entire inventory.

ASP = 365 days / Inventory Turnover

- Depends on the product u sell if its

Total Asset Turnover (TATO)
good or bad.
TATO = Sales / Average Total Assets
Accounts Receivable Turnover
TATO = P522,000 / (P720,000+ P665,100) divide
Accounts Receivable Turnover = Sales on
by 2 = 0.7537
Account/ Average Accounts Receivable.
- Still nakakagenerate naman not bad
Numerator = san sya nanggagaling
yung 0.7537 but mas higher mas
maganda
This ratio measures how efficiently a company's ASP + ACP – APP = CCC
assets are being used to generate sales. This
111 days + 49 days - 42 days = 118 days
ratio expands beyond current assets to include
noncurrent assets. This ratio measures the elapsed time from when
cash is paid to suppliers to when cash is
Compute and interpret financial ratios that
received from customers.
managers use for debt management purposes.

Debt Management Ratios

Debt to Asset Ratio (DTA)
1. Accounts Payable Turnover (APTO) and APP
and CCC DTA = Total Liabilities / Total Assets
2. Debt to Asset Ratio (DTA) DTA = P300,000 / P720,000 = 0.4167
3. Debt to Equity Ratio (DTE)

4. Equity Multiplier (EM) Debt-to-Equity Ratio (DTE)

5. Time-Interest Earned Ratio (TIER) DTE = Total Liabilities / Stockholders' Equity
6. Fixed Charge Coverage Ratio (FCCR) This ratio indicates the relative proportions of
debt to equity on a company's balance sheet.
Accounts Payable Turnover (APTO)
Stockholders like a lot of debt if the company's
ΑΡΤΟ = Purchases on Account / Average
rate of return on its assets exceeds the rate of
Accounts Payable
return paid to creditors.
This ratio measures how many times a company
Creditors prefer less debt and more equity
settles its accounts payable each year.
because equity represents a buffer of
- Cash purchases is not included protection. In practice debt-to-equity ratios
from 0.0 to 3.0 are common

DTE = P300,000 / P420,000 = 0.7143

Possible pa igrant to
Workback
Pag mas mababa DTE possible pagbigyan ka ng
mga creditors

Kung gano kalaki liab sa equity

FROM NAKUHA MO YUNG ITEM AND THEN
Equity Multiplier (EM)
NAGBAYAD KA
Equity Multiplier = Average Total Assets/
Average Payment Period (APP)
Average Stockholders' Equity
APP = 365 Days / Accounts Payable Turnover
This ratio indicates the portion of a company's
APP = 365 Days / 8.7876 Times = 41.54 or 42 assets that are funded by equity.
days
It focuses on average amounts maintained
Gano katagal mo nababayaran throughout the year rather than amounts at one
point in time.
This ratio measures, on average, how many days
it takes to pay an accounts payable.

Cash Conversion Cycle (CCC)

Average Seling Period + Average Collection

Period – Average Payment Period = Cash
Conversion Cycle SE not included yung preferred stock
From naglabas ka ng pera up to the time na
nacollect mo ulit yon.
Times Interest Earned Ratio (TIER) 3.Profit Margin

Times Interest Earned = Earnings before Interest Numerator – name of margin

Expense and Income Taxes / Interest Expense
Denominator – Sales
TIER = P114,420 / P24,180 = 4.732 times
Gross Profit Margin (GP Margin)
This is the most common measure of a
Gross Profit Margin = Gross Profit / Sales
company's ability to provide protection for its
long- term creditors. A ratio of less than 1.0 is This measure indicates how much of each sales
inadequate. Peso is left after deducting the cost of goods
sold to cover expenses and provide a profit.
- Kayaba bang mabyaran interest
- Kapag beow 1 d mo kayang bayaran The percentage should be more stable for
creditors retailing companies than for other companies.
Fixed Charge Coverage Ratio (FCCR) GP Margin = P156,420 / P522,000 = 29.97%
FCCR = Earnings before Interest Expense and This measure indicates how much of each sales
Income Taxes + Fixed Charge / Interest Expense Peso is left after deducting the cost of goods
+ Fixed Charge sold to cover expenses and provide a profit.
FCCR = EBIT + FC / Interest + FC Operating Profit Margin (OP Margin)
Nabawas na kasi yyung fixed charge kasama sa Operating Profit Margin = Operating Profit /
costs of sales and opex kaya I addback Sales

OP Margin = P114,420 / P522,000 = 21.92%

Profit Margin (PM)

Profit Margin = Net Income / Sales

Kaya icover interest expense and fixed expenses PM = P67,680 / P522,000 = 12.97%
Compute and interpret financial ratios that In addition to cost of goods sold, this ratio also
managers use to assess profitability. looks at how selling and administrative
expenses, interest expense, and income tax
Profitability Ratios
expense influence performance.
1. Gross Profit Margin (GP Margin)
Returns
2. Operating Profit Margin (OP Margin)
1.Return on Sales (ROS)
3. Profit Margin
2.Return on Assets (ROA) DUPONT
4. Return on Sales (ROS)
3.Return on Equity (ROE) DUPONT
5. Return on Assets (ROA) + DUPONT
4.Dupont Formula
6. Return on Equity (ROE) + DUPONT
Numerator – NI available to Common Stock NICS
7. Earnings per share (EPS)
Denominator – Name of Return
8. Dividends per share (DPS)
RETURN ON ASSETS IS ALSO A RETURN ON
9. Dividend Pay-out Ratio (DPOR) INVESTMENT

Plus DUPONT Formula

Margins

You’re like kinukuha percentage sa sales

1.Gross Profit Margin (GP Margin)

2.Operating Profit Margin (OP Margin)

D mmo isasama interest expense pero isasama
tax rate

For special purpose

Per Share

1.Earnings per share (EPS)

2.Dividends per share (DPS)

3.Dividend Pay-out Ratio (DPOR)

Excuding preffered ulit

Yung sobra nasa RETAINED EARNINGS

55.CHUCHU YUNG SA RE

Compute and interpret financial ratios that

managers use to assess market performance.

Market Ratios

1.Price-Earnings Ratio (PER)

2.Market Book Ratio (MBR)

3.Dividend Yield Ratio (DYR)

TRUE OR FALSE

1. Common-size statements are financial

statements of companies of similar size. F

False
Common-size statements express all line items
as a percentage of a base amount (e.g., sales or
total assets) and are used for comparing
companies of any size, not just companies of True
similar size. Profitability ratios (like return on assets, return
on equity, and net profit margin) are commonly
2. One limitation of vertical analysis is that it
used to assess how effectively a company
cannot be used to compare two companies that
generates profit from its operations.
are significantly different in size. F

False
Vertical analysis, particularly in common-size MC THEORIES
statements, is specifically designed to compare
I. Which of the following below generally is the
companies of different sizes by expressing
most useful in analyzing companies of different
financial data as percentages of a base figure.
sizes?
3. The sale of used equipment at book value for
a) comparative statements
cash will increase earnings per share.
b) common-sized financial statements
False c) price-level accounting
d) audit report
If the equipment is sold at book value, there is
e) trend analysis
no gain or loss, meaning it will not affect
earnings and therefore won't impact earnings b) common-sized financial statements
per share (EPS).
Common-sized financial statements express all
4. An increase in the number of shares of items as a percentage of a base figure (such as
common stock outstanding will decrease a sales or total assets), making it easier to
company's price-earnings ratio if the market compare companies of different sizes by
price per share remains unchanged. focusing on the relative proportions rather than
absolute amounts.
False
The price-earnings (P/E) ratio is calculated as 2. A balance sheet that displays only component
the market price per share divided by earnings percentages is called
per share (EPS). Increasing the number of
a) trend balance sheet
shares outstanding will decrease EPS, but the
b) comparative balance sheet
P/E ratio will remain the same as long as the
c) condensed balance sheet
market price and earnings stay constant.
d) common-size balance sheet
5. If a company's acid-test ratio increases, its e) trend analysis
current ratio will also increase.

False
3. In horizontal analysis each item is expressed
The acid-test (or quick) ratio only considers the
as a percentage of the
most liquid current assets (excluding inventory),
while the current ratio includes all current a) base year figure
assets. An increase in the acid-test ratio does b) retained earnings figure
not necessarily mean the current ratio will c) total assets figure
increase, as it depends on changes in non-quick d) net income figure
assets like inventory. e) all of the above
6. Short-term borrowing is not a source of 4. The acceleration in the collection of
working capital. receivables will tend to cause the accounts
receivable turnover to
False
Short-term borrowing increases current a) decrease
liabilities but also increases cash (current b) remain the same
assets), so it is a source of working capital c) either increase or decrease
d) increase
7. Profitability ratios are frequently used as a
basis for management's evaluating operating
effectiveness.
5. A company with P60,000 in current assets 8. Financial ratio, which assess the profitability
and P40,000 in current liabilities pays a P1,000 of a company, includes all of the following
current liability. As a result of this transaction, except:
the current ratio and working capital will
a) Dividend yield ratio
a) both decrease b) Gross profit rate
b) both increase c) Earnings per share
c) increase and remain the same, d) Return on sales
respectively
d) remain the same and decrease,
respectively 9. Kevin Inc. has a current ratio of 0.65 to 1. A
cash dividend declared last month is paid this
Current ratio = Current Assets / Current
month. What is the effect of this dividend
Liabilities
payment on the current ratio and working
Before payment: 60,000 / 40,000 = 1.5 capital respectively?

After payment: (60,000 - 1,000) / (40,000 - a) Rise and decline

1,000) = 59,000 / 39,000 ≈ 1.51 (which is slightly b) Rise and no effect
higher) c) Decline and no effect
d) No effect on both ratios
Working capital = Current Assets - Current
Liabilities Current Ratio = Current Assets / Current
Liabilities
Before payment: 60,000 - 40,000 = 20,000
Paying a dividend reduces cash (a current asset)
After payment: 59,000 - 39,000 = 20,000
but does not affect current liabilities since the
(remains unchanged)
liability for dividends was already recorded
6. Roselyn Corp has a 2 to I current ratio.* This when declared.
ratio would increase if
This reduces current assets, causing the current
a) The company wrote off an uncollectible ratio (which is already below 1) to decline.
receivable
Working Capital = Current Assets - Current
b) The company purchased inventory on
Liabilities
an open account
c) The company sold merchandise on The payment of the dividend only affects
open account that earned a normal current assets, but not current liabilities, so
gross margin working capital will decline as well.
d) A previously declared stock dividend
The correct answer is:
were distributed
c) Decline and no effect
c) The company sold merchandise on open
account that earned a normal gross margin 10. A high receivable turnover ratio indicates
Selling merchandise increases accounts a) Many customers are not paying the
receivable (current assets) by more than it company's receivables
reduces inventory (current assets), so the b) Customers are making payments
current ratio would likely increase. quickly
c) The company's sales have increased
7. A measure of the company's long term debt
d) A large portion of the company's sales
paying ability is
are on credit
a) Return on assets
INCREASE DECREASE NO EFFECT
b) Dividend out ratio
c) Times interest earned ratio 1. Collection of an accounts receivable:
d) Operating cycle - No effect
- Accounts receivable (CA) decreases,
but cash (CA) increases by the same
 amount, so the total current assets - Inventory (CA) decreases, but
remain unchanged. accounts receivable (CA) increases
2. Collection of an accounts receivable by a higher value (due to profit),
within the discount period: increasing total current assets.
- Decrease 10. Sold an inventory for cash:
- Cash (CA) increases, but less than - Increase
the accounts receivable that is - Inventory (CA) decreases, but cash
collected, reducing total current (CA) increases by a higher value
assets. (due to profit), increasing total
current assets.
3. Declaration of cash dividends:
- Decrease
- Dividends payable (CL) increases,
raising current liabilities while
current assets remain the same.

4. Additional stock is sold for cash:

- Increase
- Cash (CA) increases with no impact
on current liabilities.
5. Accounts payable are paid:
- Increase
- Cash (CA) decreases and accounts
payable (CL) decreases, but since
the current ratio is less than 1,
reducing liabilities has a stronger
effect, leading to an increase in the
ratio.
6. Equipment is purchased for cash:
- Decrease
- Cash (CA) decreases, but equipment
is not a current asset, so total
current assets go down, while
current liabilities remain
unchanged.
7. Inventory purchases are made in cash:
- No effect
- Cash (CA) decreases, but inventory
(CA) increases by the same amount,
leaving total current assets
unchanged.
8. Inventory purchases are made on
account:
- Decrease
- Inventory (CA) increases, but
accounts payable (CL) also
increases. Since the current ratio is
less than 1, increasing liabilities
worsens the ratio.

9. Sold an inventory on account:

- Increase