2. Financial statements are sources of important financial
information for a business.This information, however, is not
yet to achieve its purpose until it is interpreted and used in
the decision making of the stakeholders. Financial
statements give clear figures in which managers analyze
rather than mere guesses on crucial financial decisions or
plans.
3. The Computation Phase- involves looking for
differences, percentages, or ratios
The Interpretation Phase-a crucial part of the
analysis as it provides meaningful and
relevant decisions based on the results of the
computation
4. Horizontal Analysis -compares the same account in the financial statement of
two periods (current and past year), determining the amount of changes, and
computing its percentage change using a base year as a comparison. It is useful
only to businesses that have 2 or more years of operation.
5. Vertical Analysis-shows a relationship among the elements of a
financial statement where each item is represented in a percentage.
6. Trend Analysis-compares not only two years but covers three, four or
five years’ financial statements. It determines the trends in the industry
7. Financial Ratios
- can be used to compare a company’s current financial
position and performance to be able to identify their
strengths and weakness. Ratios can be used to compare
your status, not only within your operations but also with
other companies. Financial ratios have four categories,
namely, liquidity, solvency, profitability, and valuation.
8. Horizontal analysis (also called comparative
analysis) helps management analyze the statement
of financial position and statement of comprehensive
income’s increase and decrease in accounts. As the
name implies, accounts are compared horizontally
between two periods.
9. The illustration below shows the steps in performing horizontal analysis:
1. Prepare financial statements of 2 consecutive periods.
2. Get the amount of increase/decrease in the third column.
a. Select a base year. It is usually the initial or the previous year.
b. Deduct the current year from the base year.
3. Compute for the percentage of increase or decrease by using the formula
below:
10. In this phase, the users of financial information may have a different perspective on the figures.
By interpreting, they will be able to decide objectively based on the results of the computation.
The interpretations vary, for every user of financial information, on which way would the
horizontal analysis be of use to them.There are a lot more to see on the computations and below
were examples:
Statement of Financial Position
1. Total assets increased by 42.1% due to the purchase of PPE which reflects a 65.5% increase.
However, current assets have only 2% growth compared to noncurrent assets which may
indicate that liquidity is very small.
2. Total liabilities increased by 37.8% due to a 49.8% increase in non-current liabilities. It
reflects that PPE could have been financed by a loan.The owner’s equity, on the other hand,
increased 57.9% from the previous year.This may be due to additional investments made by
the owner to the business.
11. Statement of Comprehensive Income
1. Almost all accounts in the SCI increased. It could be because of increased PPE from the SFP
that could have boost the selling process. It s understood that with greater sales, COGS are
parallel, as well as operating expenses and taxes. It is noticeable that interest decreased by
8% which could mean that loans acquired by the business may have longer period payments.
12. SFP Vertical Analysis (also called common-size analysis) helps the
management analyze the components of the total assets, total liabilities, and owner’s
equity. It analyzes the financial statements in a vertical manner, as its name implies.
Here are some questions to help you understand how SFP vertical analysis goes.
a. Of the total assets, how much percentage is classified as current? Noncurrent?
b. Of the total assets, how big/small is merchandise inventory? Accounts
receivable? Or other accounts?
c. Of the total liabilities, how much percentage is classified as current? Noncurrent?
d. Of the total liabilities and owner’s equity, how much percentage are liabilities?
Owner’s equity?
Answering these questions will lead to disclosing the percentages of the
components that occupy the total assets, liabilities, and owner’s equity. It may lay
some problems that needed to be addressed and you can recommend solutions.
13. SCI Vertical Analysis, on the other hand, helps the management analyze the
components to the overall sales. Here are some questions to help you understand
how SCI vertical analysis goes.
a. Of the net sales, how much percentage does the cost of sales occupy? Gross
profit? Operating expenses?
b. Of the operating expenses, how big/small is the percentage of administrative
expenses? Selling expenses?
c. Compare the percentages of net income to net sales.
14. The illustration below shows the steps in performing vertical analysis.
1. Prepare the financial statements of two consecutive periods.
2. Add a column on each year of comparison.
3. Express each component account as a percentage of the total assets, liabilities
and owners (for SFP) or to the Net sales (for SCI). Use the formula below in
getting the percentage:
15. In comparing vertically and horizontally, this phase can be done to fully
analyze the position of the company and its results of operation. Doing both analyses
entails a holistic approach in addressing the possible problems and planning the
necessary actions. As always, interpretations may vary depending on the purpose of
the user financial information.
Statement of Financial Position
1. The current asset of 2019 is 27% of the total assets. However, comparing from
2018, current assets are more liquid at 37%.
2. Of the total liabilities and OE, 76% is the total liabilities and 24% is the owner’s
equity.This could be the result of investing through loans than the owners
making the additional investment.
16. Statement of Comprehensive Income
1. Net income is 27% from net sales. Of all the expenses deducted after gross profit,
income tax comprises the biggest percentage at 12%.The company should spread
the impact of incurring expenses by getting better sales performance.
