2nd prelim fabm

Its objective is to provide information that will be helpful in decision making.

Accounting

They are able to provide information about the entity's financial position, financial performance, and cash flows.

financial statements

It is important for the owners and managers of the entity to be able to evaluate the results of all their business activities. This analysis can help them:

• Confirm past expectations

• Evaluate present financial results

• Predict future outcomes

Three ways of Financial Statement Analysis:

1. Horizontal Analysis

2. Vertical Analysis

3. Analysis through ratio interpretation

is the method of comparing and analyzing financial results of different accounting periods in each financial statement account and element.

Horizontal Analysis

How to solve for the Amount Change?

Current year less Prior year

How to solve for the Percentage Change?

Amount Change over Base year

is the method of analyzing financial results expressing each financial statement account and element as a component of a base.

Vertical Analysis

determine whether an entity can be able to pay for current liabilities as they become due with the use of current assets.

Liquidity Ratios

Liquidity Ratios: (3)

1. Current Ratio

2. Acid Test Ratio

3. Cash Ratio

formula of Current Ratio

Current Assets divided by Current Liabilities

formula of Acid Test Ratio

Quick Assets divided by Current Liabilities

formula of Cash Ratio

Total Cash divided by Current Liabilities

Interpretations: Current Ratio > 1 means?

entity can pay CL using CA

Interpretations: Current Ratio = 1 means?

CA = CL

Interpretations: Current Ratio < 1 means?

entity cannot pay CL using CA

Interpretations: Acid Test Ratio > 1 means?

entity can pay CL using Quick Assets

Interpretations: Acid Test Ratio = 1 means?

Quick Assets = CL

Interpretations: Acid Test Ratio <1 means?

entity cannot pay CL using Quick Assets

Interpretations: Cash Ratio > 1 means?

entity can pay CL using Total Cash

Interpretations: Cash Ratio = 1 means?

Total Cash = CL

Interpretations: Cash Ratio < 1 means?

entity cannot pay Cl using Total Cash

• determine whether an entity has more ownership rather than debts.

• It is also called leverage ratios.

• These ratios involve comparisons of debt, asset, equity, and interest.

Solvency Ratios

Solvency Ratios: (3)

1. Debt Ratio

2. Debt to Equity Ratio

3. Times Interest Earned Ratio

formula of Debt Ratio

Total Liabilities divided by Total Assets

formula of Debt to Equity Ratio

Total Liabilities divided by Shareholders’ Equity

Interpretation: Debt Ratio < 50% means?

Assets are financed more by Equity

Interpretation: Debt Ratio > 50% means?

Assets are financed more by debt

Interpretation: Debt Ratio is 50% it means?

Assets are financed equally by debt and equity

Interpretation: Debt to Equity Ratio < 1 means?

equity has more weight than debt

Interpretation: Debt to Equity Ratio > 1

debt has more weight than equity

Interpretation: Debt to Equity Ratio = 1

debt is equal to equity

means the company resorts to more debt and more interest expense

rising debt ratio

means the company is shifting more to equity financing

falling debt ratio