Far Eastern University

Financial Analysis & Research

Overview of FS Analysis Part 2

Overview of Financial Statement Analysis1 Part 2

Financial Statement Analysis and Business Analysis
Financial statement analysis is a collection of analytical processes that are part of business analysis.
Financial Statement Analysis .>
Business Analysis ....>

Financial Information

BUT, Varying the degrees, for analysis PURPOSEs.

Financial Statement Basis of Analysis

Business Activities PROVIDE a salable PRODUCT and SERVICE and YIELD to a satisfactory RETURN on INVESTMENT. The four (4) business major activities of
the company are PLANNING, FINANCING, INVESTING, and OPERATING.
PLANNING Activities: to implement SPECIAL GOALS and OBJECTIVES. A company goals and objectives are captured in the BUSINESS PLAN (assist the
managers in FOCUSING their EFFORTS and IDENTIFYING expected opportunities and obstacles) that describes the companys PURPOSE, STRATEGY, and
TACTICS.
Business Plan is INFORMATION on Company
Objective and Tactics
Market Demand
Competitive Analysis
Sales Strategy (Pricing, Promotion, Distribution)
Management Performance
Financial Projection
Note: Two (2) important source of information on a companys business plane are: 1) Letter to Shareholder (Chairpersons Letter); and 2) Management Discussion
and Analysis (MD&A)
Financing Activities:
A company requires FINANCING to carry out its Business Plan. FINANCING ACTIVITIES refer to method that companies uses to RAISE the money to pay for theses
needs.
Equity Investor (Owner/Shareholder)
Two (2) main SOURCE of EXTERNAL FINANCING

Creditors (Lenders)
Equity Investor
Shares in the company earning in the form of either EARNING DISTRIBUTION (is the payment of DIVIDEND (cash, stock dividends or indirectly through stock
repurchase) to shareholders. DIVIDENDS PAYOUT refers to the proportion of the earnings distributed. It is often expressed as a ratio or percentage of the net
earnings) or EARNING REINVESTMENT or earning retention (refers to the retained earning within the company for use in its business also called internal financing.
Is often measured by retention ratio or earning retention ratio, reflecting the proportion of earnings retained, is defined as one less dividend payout ratio)
Creditors
Debt Creditors (Creditor Financing a contract agreement established hence requires repayment of loan with interest at specific date)
Directly LEND money to the Company also called Debt Financing occurs through LOANS and Issuance of BONDS (bank, savings and loans, and other financial
and nonfinancial institution)
Operating Creditors to whom the company OWES money as parts of its operation (suppliers, employees, government, other entity to whom the company owes
money)
Investing Activities (Short-term = Current Assets; Long- term = Noncurrent Assets)
Refers to the companys ACQUISITION and MAINTENANCE of INVESTMENTS for purpose of selling and providing services, and for purpose of INVESTING
EXCESS CASH.
OPERATING ASSETS investing in land, building, equipment, legal rights (patent, licenses, copyrights) inventories, human capital (manager and employee),
information systems and similar assets are for the purpose of conducting the companys business operation.
FINANCIAL ASSETS Temporary/Permanent invest excess cash in securities such as other companies equity stock, corporate or government bonds and money
market funds.
Operating Activities
Represent the CARRY OUT of the business plan given its financing and investing activities. Involves at least five (5) possible components like; Research and
Development (R&D), Procurement; Production; marketing; and Administration, the companys PRIMARY SOURCE of EARNINGS.
Financial Information
FINANCING and INVESTING activities at a point in
time, whereas they report on OPERATING activities
for a period of time.
Accounting Equation
ASSETS =
RESOURCES CONTROLLED by the company
Characteristics:
Resources controlled
Result of PAST TRANSACTIONS or

REPORT

Financial Statements
Balance Sheet
Income Statement
Statement of Shareholders Equity
Statement of Cash Flows

LIABILITIES +
CLAIMS of those to WHOM money is OWED

Present obligation of a PARTICULAR ENTITY

Arises from PAST TRANSACTIONS or EVENTS

EQUITY
CLAIMS of OWNERS

Residual interest
Net Assets or Net Worth

1 Financial Statement Analysis, 10 Edition, by K. R Subramanyan, University of South California,

and John J. Wild, University of Wisconsin at Madison.
1

Far Eastern University

Financial Analysis & Research

Overview of FS Analysis Part 2

EVENTS
Providing FUTURE ECONOMIC
Settlement of liability requires an OUTFLOWS of
Total Assets minus Liabilities
BENEFITS
resources
Can be MEASURED reliably
Embodying ECONOMIC BENEFITS
Purpose of any Business is to INCREASE EQUITY by EARNING INCOME
INCREASES IN EQUITY
Owners Investment
Income
Investment by Owner (ASSETS that OWNERS put into Business)
Is the GROSS increase in equity resulting from business activities
entered into for the purpose of EARNING PROFIT
Statement of Comprehensive Income
Present the INCOME and EXPENSES and resulting PROFIT and LOSS for SPECIFIC future time.
Statement of Changes in Equity
Summarizes the changes in equity for a specific period of time (movements in the elements/components of SHE)
Statement of Financial Position
Reports the assets, liabilities and equity at a specific date.
Statement of Cash Flows
Summarizes information about the cash inflows (receipts) and outflows (payments) for specific period of time.

Exercises: (Dividend payout ratio, retention ratio, working caital)

Sales
Sales Return and Allowances
Net Sales
Cost of Goods Sold
Gross Profit
Selling Expenses
Administrative Expenses
Income from Operation
Other Income
Other Expenses (interest)
Income before Income tax
Income tax expenses
Net Income

Pilipinas Corporation
Income Statement
For the Year ended 2016
P5,125,000
125,000
P5,000,000
3,400,000
P1,600,000
650,000
325,000
625,000
25,000
105,000
P545,000
300,000
P245,000

Pilipinas Corporation
Statement of Retained Earnings
For the Year ended 2016
Retained earnings, January 1
P723,000
Add: Net Income for year
245,000
Total
P968,000
Deduction dividends:
On Preferred Stock
40,000
On Common Stock
45,000
Retained earnings, December 31
P883,000
Pilipinas Corporation
Balance Sheet
December 2016
Current Assets:
Cash
Accounts Receivables (net)
Inventories
Temporary Investments
Prepaid expenses
Total Current Assets
Long-term Investments
Property, Plant, and Equipment (net)
Total Assets

P175,000
425,000
720,000
150,000
30,000
P1,500,000
250,000
2,093,000
P3,843,000

Liabilities
Current Liabilities:
Long-term Liabilities:
Mortgage note payable, 10%, due 2019
Bonds payable, 8 %, due 2022
Total Liabilities

P750,000
410,000
800,000
P1,960,000

Shareholders Equity
Preferred 8% stock, P100 par
Common stock, P10 par
Retained earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity

500,000
500,000
883,000
P1,883,000
P3,843,000

Far Eastern University

Financial Analysis & Research

Overview of FS Analysis Part 2