Financial Statement Analysis Notes

Financial Statement Analysis

  • Process of selecting related data from financial statements to evaluate past performance and predict future outcomes.

Objectives

  • Liquidity: Ability to pay current maturing financial obligations.

  • Solvency: Ability to settle long-term debt and remain stable.

  • Profitability: Ability to earn an income equal to or above the industry average.

Horizontal Analysis

  • Also known as comparative analysis and helps analyze increases/decreases in balance sheet and income statement accounts.

  • Steps:

    1. Prepare comparative financial statements for two consecutive years.

    2. Add columns for the increase/decrease amount and percentage.

    3. Calculate percentage change using the formula: (CurrentYear–BaseYear)÷BaseYear×100(CurrentYear–BaseYear)÷BaseYear × 100

Vertical Analysis

  • Also known as common-sized analysis and helps analyze components of total assets, liabilities, and owner's equity.

  • Steps:

    1. Prepare comparative financial statements for two consecutive years.

    2. Add a column to the right of each year for percentage calculations.

    3. For the balance sheet, express each account as a percentage of total assets.

    4. For the income statement, express each account as a percentage of net sales.

  • Examples of calculations:

    • % of current asset=725.82,592.2×100%=28%\% \text{ of current asset} = \frac{725.8}{2,592.2} \times 100\% = 28\%

    • % of non-current liabilities=1,822.42,592.2×100%=70.3%\% \text{ of non-current liabilities} = \frac{1,822.4}{2,592.2} \times 100\% = 70.3\%

    • % of cost of goods sold=1,032.12,213.3×100%=46.6%\% \text{ of cost of goods sold} = \frac{1,032.1}{2,213.3} \times 100\% = 46.6\%