OBJECTIVE 7-a

To perform vertical and

horizontal analyses of
fi nancial statements of
a single proprietorship.
FINANCIAL STATEMENT ANALYSIS
Reasons to analyze and interpret
financial statements
1. To transform the data in the statements into
information which is interpreted and used as
basis for better economic decisions and
actions.
 Reasons to analyze and interpret
financial statements
2. To determine if it is profitable to lend
money to a particular business.
3. To look for stability of their employer and
decide whether it is reasonable to
demand increases in wages and other
fringe benefits.
 Reasons to analyze and interpret
financial statements
4. To see if the companies are conforming
with government regulations.
5. To determine past performance, as means
of control and as guide for future action.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:
a) Investor – to determine whether to buy, hold
or sell their investments in equity ownership in the
business. To assess the ability of the investee to
pay dividends or to pay return to investor.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:
b) Employees – to determine stability and
profitability of employers.
c) Lenders – to determine the ability of
borrowers to pay on time, the loans granted
to them.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:
d) Suppliers – to determine the ability of the
customer to pay debts.
e) Management – to determine the activities of
the enterprise.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:
f) Customer – to determine the ability of the
enterprise to be a continuing source of
supply. To determine the ability of the
company to exist over a long period of time.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:

g) Public – to determine the activities of the

enterprise. To determine contribution to the
economy.
 The users of financial statements have the
following reasons to analyze and interpret the
financial statements:

h) Government Agencies – to determine

the capacity of the enterprise to pay taxes
and its compliance.
Two Techniques for
Evaluating
Financial
Statement
1. Vertical Analysis - Single period
2. Horizontal Analysis – Series of
period
 Vertical Analysis
A. Composition of Assets and Equities
Main reason to have an analysis of
composition of assets and equities is to
compare it with those of the company at
earlier dates and with those similar
companies at the same time.
 Vertical Analysis
B. Composition of Income and Expenses
Income is the result of two kinds of flows which
have opposite effects: revenue, which tends to
increase income; and expenses, which tends to
reduce it. To enable management to pinpoint
trouble spots or to determine the type of
corrective action to be taken.
 Horizontal Analysis
A. Sidewise comparison – two period
It shows changes from year to year.
When two years are being compared the
earlier year is used as the base year. The
increase or decrease from the base year
to the succeeding year is computed for
each item.
 Horizontal Analysis
A. Sidewise comparison – two period
The amount of change, in terms of increase or
decrease, is divided by the amount of the base
year. The quotient is stated as a percentage. It
should be noted that if a certain item has value in
the base year and none in the next year, the
percentage of decrease is 100 percent.
 Horizontal Analysis
B. Trend Percentage – more than two period
When several years are involved in a
horizontal analysis, the base year is the earliest
year. The base year is 100%. The amount of the
items for succeeding years are divided by the
base year amount. The series of quotients show
the trend in the item.
 EXERCISE
Answer the following questions.
1.What is the purpose of financial statement
analysis?

2. Why do the following users analyze financial

statements? How does the analysis influence
the following financial statement users?
a. Bankers ; b. Investors; c. Government
agencies d. Employees; e. Consuming
Public
3. What decision of the internal user
(management) are influenced by financial
statement analysis?

4. What is the difference between horizontal and

vertical analysis?

5. Are analyses the answers to the problems of

the business? Explain.
 OBJECTIVE 7-b

To perform vertical and

horizontal analyses of
fi nancial statements of
a single proprietorship.
FINANCIAL STATEMENT ANALYSIS
Vertical analysis
-also called common-size analysis,
is a technique that expresses each
financial statement item as a
percentage of a base amount
FINANCIAL STATEMENT ANALYSIS
Vertical analysis
- is an analytical tool that
determines the size or proportion of an
item in the financial statements in
relation to the total.
 For the SFP, the base
amount is
Total Assets.
- Balance of Account /
Total Assets.
For the SCI, the
base amount is
Net Sales.
 The following guidelines may be
observed in the preparation of
common-size financial statement:
1. Convert the absolute peso amount of the
items in the financial statements into
percentage by dividing each item by the
base. The base shall be equal to
100%.
 The following guidelines may be
observed in the preparation of
common-size financial statement:
2. Use the following as a base:
a. Total assets for statement of financial position
b. Total or net sales for statement of
comprehensive income
c. Total cash available for statement of cash
flows
 The following guidelines may be
observed in the preparation of
common-size financial statement:
3. Make a conclusion on the allocation and
indications of possibilities.
EXAMPLE
NO. 1
EXAMPLE
NO. 2
EXAMPLE
NO. 3
SOLUTION
EXERCISE
A. Prepare a vertical analysis statement of
comprehensive income of JENNY
Merchandising for December 31, 2019.
 OBJECTIVE 7-c

To perform vertical and

horizontal analyses of
fi nancial statements of
a single proprietorship.
FINANCIAL STATEMENT ANALYSIS
Horizontal analysis
-also called trend analysis, is a technique
for evaluating a series of financial statement
data over a period of time with the
purpose of determining the increase or
decrease that has taken place
FINANCIAL STATEMENT ANALYSIS
Horizontal analysis
- is an analytical tool that evaluates the
present performance of an entity compared to
last year’s. The analysis reflects the differences
in absolute amount and in percentage between
two periods only, namely the present year and
the previous year.
FINANCIAL STATEMENT ANALYSIS
Horizontal analysis
The primary objective of horizontal
analysis or comparative analysis is to
determine the present status of the
business particularly in terms of financial
position, result of operation, and cash flow
against last year’s only.
FINANCIAL STATEMENT ANALYSIS
Horizontal analysis is conducted on
financial statements with the same day
and
month (of different years). It uses financial
statements of two or more periods. -All line
items on the FS may be subjected to
horizontal analysis.
FINANCIAL STATEMENT ANALYSIS
Changes can be expressed in monetary
value (peso) and percentages computed
by using the following formulas:
Peso change=Balance of Current Year-Balance
of Prior Year
Percentage change= (Balance of Current Year-
Balance of Prior Year)/(Balance of Prior years)
 Two Methods of Performing
horizontal or comparative
analysis
1. Absolute amount comparison
2. Percentage comparison
 The following simple guidelines may
be observed in the horizontal analysis:
1. Present the current year and previous year’s
financial statement in comparative forms.
2. Compute the absolute amount of change or
difference. The difference could either be
increase or decrease.
3. Express the difference in percentage by
dividing the amount change by the base.
 The following simple guidelines may
be observed in the horizontal analysis:
4. The computation of percentage of
change will not apply if the base amount is
negative or zero.
5. Interpret the change of an item by
relating it with the change or movement of
other related items
EXAMPLE
NO. 1
EXAMPLE
NO. 2
EXERCISE
 OBJECTIVE 7-d

To perform vertical and

horizontal analyses of
fi nancial statements of
a single proprietorship.
FINANCIAL STATEMENT ANALYSIS
Horizontal analysis
when several years are involved it is a
trend percentage, the base year is the earliest
year. The base year is 100%. The
amount of items for succeeding are divided
by the base year amount. The series of
quotients show the trend in the item
 To illustrate, consider the following
trend in the net income of Peso Company.
 In the above illustration the base year is 2012,
which is 100%. In 2013 net income of
₱2,205,000 is divided by 2012 or the base year’s
net income of₱2,100,000 to produce 105%. In
2014 net income of ₱2,310,000 is divided
by2012 net income of ₱2,100,000 to arrive at
110%. The computation indicate upward trend in
net income. An upward trend in net income may
be an indication of progressive business.
EXAMPLE
NO. 1
EXAMPLE
NO. 2
EXERCISE
DIRECTIONS:
N u m b e r 1 - 1 0 o n y o u r p a p e r. S h o w y o u r
work and answer the following
questions.
1.

56+33=
10.

77-31
ANSWERS:
• 89 6. 64
• 44 7. 97
• 89 8. 37
• 43 9. 56
• 78 10.46
ADDITION &
SUBTRACTION
FLUENCY QUIZ
( Wi t h i n 1 0 0 )