Before going over this module, the learner must answer the PRE-TEST in order for the teacher to

assess Recognition of Prior Learning (RPL) and pin point specific topics that need emphasis during the
discussion.

PRE-TEST

Jose Masipag, a local CPA, completed the following transaction during January of the current year.

Charts of Accounts- The following chart of accounts should be used:

100 Assets 400 Revenues

101 Cash/Check 401 Fees Earned
102 Accounts Receivable
103 Office Supplies 500 Expenses
104 Office Equipment 501 Communication
Expense
106 Office Furniture 502 Insurance Expense
503 Rent Expense
200 Liabilities 504 Miscellaneous Expense
201 Accounts Payable 505 Utilities Expense
202 Notes Payable 506 Salary Expense
507 Gas and Oil Expense
300 Owner’s Equity 508 Tax and Licenses
301 Jose Masipag, Capital
302 Jose Masipag, Drawing
305 Income Summary

Business Transactions:

January 2 Paid the rent for the month of January, P4, 000.
2 Paid fire insurance for the month of January, P300.
3 Received P750 for services from George Jimenez.
3 Borrowed P45, 000 from the bank giving a 60-day note.
4 Paid membership dues to PICPA, P500.
5 Tomas Buena paid P950 for services rendered to him.
6 Paid business license fee to the city P1000.
8 Received a check from Ben Hardin for services rendered,P850.
9 Billed Susan Saldago P5000 for services rendered.
10 Jose Masipag withdrew P2500 for personal use.
11 Paid gasoline bill paid for cash used in business P600.
12 Received P650 from Wilfred Arrieta P650 for services rendered.
14 Paid the secretary’s salary for January 1 to 15, P2500.
15 Purchased a computer and printer giving a note for P30000.
16 Bought office supplies from Golden Bell Co. on account, P600.
17 Billed Samuel Donate P5200 for services rendered.
18 Collected P3000 from Susan Salgado to apply on her account.
19 Sold an old typewriter at book value, P1,250.
21 Billed Fortune Company P4750 for services rendered.
22 Paid Golden Bell Co. for office supplies purchased on January 16.
23 Jose Masipag made an additional investment of P 10000.
24 Received partial payment of P2500 from Samuel Donate.
25 Paid the note issued on January 15 for computer and printer.
26 Received P7000 from Bell Company for services rendered.
28 Paid for January light and water bill, P1200.
29 Paid the secretary’s salary for January 16 to 31, P2500.
30 Received a bill from Shell Service Station, P1200 for gas and oil.
31 Paid PLDT Co. for telephone bills; P800.

Module 6 – Financial Statement Analysis 1

Learning Outcome(s):

At the end of the lesson, the learner is able to:

1. Define the measurement levels, namely, liquidity, solvency, stability, and profitability,
2. Perform a vertical and horizontal analyses of financial statements of a single proprietorship,
Financial analysts often assess the following elements of a firm:
1. Profitability - its ability to earn income and sustain growth in both the short- and
long-term. A company's degree of profitability is usually based on the income
statement, which reports on the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in
the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;
Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a
business as of a given point in time.
4. Stability - the firm's ability to remain in business in the long run, without having to sustain significant
losses in the conduct of its business. Assessing a company's stability requires the use of the income
statement and the balance sheet, as well as other financial and non-financial indicators. etc.
Financial Statement Analysis

Financial statement analysis is the process of evaluating risks, performance, financial health, and future
prospects of a business using computational and analytical techniques with the objective of making
economic decisions.

Financial statement analysis involves gaining an understanding of an organization's financial situation by

reviewing its financial reports. The results can be used to make investment and lending decisions.

Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements,
each having different objectives in learning about the financial circumstances of the entity.

Horizontal Analysis is known as trend analysis. Horizontal Analysis of Financial Statements is one of the
most important techniques to find out how a company is doing financially. It is used for evaluating
trends year over year (YoY) or quarter over quarter (QoQ).

Through horizontal analysis of financial statements, you would be able to see two actual data for
consecutive years and would be able to compare each and every item. And on the basis of that, you can
forecast the future and understand the trend.

Objective of the analysis is to answer the following questions:

1. What is the behaviour of the account over time? Is it increasing, decreasing or not moving?
2. What is the relative or the percentage change in the balances of the account over time?

Horizontal Analysis uses financial statements of two or more periods. Horizontal Analysis may be
performed on all financial statements, specifically for both SFP and SCI. Changes can be expressed in
monetary value (peso) or percentages computed by using the following formulas:

Peso Change = Balance of Current Year – Balance of Prior Year

Percentage Change = Peso Change

Balance of Prior Year

*How do we interpret these results? Based on the horizontal analysis, sales increased by P 100,000 from CY
2013 levels. Sales grew by 9.09% in CY 2014.
Peso Change = P 1,200,000 – P 1,100,000

Percentage Change = P 1,200,000 – P 1,100,000 = 9.09%

P 1,100,000

Horizontal Analysis

JC Trading Company
Statement of Financial position
As of December 31
(in P thousands) Increase (Decrease)
20D4 20D3 P %

Cash and Cash equivalents P470.31 P519.86

Accounts Receivable, net 660.11 565.17
Inventory 653.06 555.17
Prepaid Expenses 173.74 228.82
Total Current Assets 1,957.22 1,869.32
Property, Plant, and Equipment, net 5,910.53 5,501.66
Intangible Assets 745.20 721.91
Total Assets
P8,612.95 P8,092.89
Current Liabilities P1,273.05 P1,123.70
Long-Term Liabilities 577.58 541.54
Total Liabilities 1,850.63 1,665.24
JC, Capital 6,762.32 6,427.65
Total Liabilities and Owner’s Equity P8,612.95 P8,092.89

JC Trading Company
Statement of Comprehensive Income
For the year ended

Sales Revenue P5,385.86 P4,921.85

Cost of Goods Sold 1,374.79 1,254.86
Gross Profit 4,011.07 3,666.99
Selling and Administrative Expenses 3,406.46 3,127.15
Operating Income 604.61 539.84
Interest Expense 11.82 23.04
Net Income P592.79 P516.80

Solution

JC Trading Company
Statement of Financial position
As of December 31
(in P thousands) Increase (Decrease)
20D4 20D3 P %

Cash and Cash equivalents P470.31 P519.86 P(49.55) 9.53%

Accounts Receivable, net 660.11 565.17 94.95 16.80%
Inventory 653.06 555.17 97.58 17.57%
Prepaid Expenses 173.74 228.82 (55.07) -24.07%
Total Current Assets 1,957.22 1,869.32 87.89 4.70%
Property, Plant, and Equipment, net 5,910.53 5,501.66 408.87 7.43%
Intangible Assets 745.20 721.91 23.30 3.23%
Total Assets
P8,612.95 P8,092.89 P520.06 6.43%
Current Liabilities P1,273.05 P1,123.70 P149.35 13.29%
Long-Term Liabilities 577.58 541.54 36.04 6.66%
Total Liabilities 1,850.63 1,665.24 185.39 11.13%
JC, Capital 6,762.32 6,427.65 334.67 5.21%
Total Liabilities and Owner’s Equity P8,612.95 P8,092.89 520.06 6.43%

JC Trading Company P %
Statement of Comprehensive Income
For the year ended

Sales Revenue P5,385.86 P4,921.85 P464.01 9.43%

Cost of Goods Sold 1,374.79 1,254.86 119.94 9.56%
Gross Profit 4,011.07 3,666.99 344.09 9.38%
Selling and Administrative Expenses 3,406.46 3,127.15 279.31 8.93%
Operating Income 604.61 539.84 64.77 12.00%
Interest Expense 11.82 23.04 (11.22) -48.70%
Net Income P592.79 P516.80 P76.00 14.71%

 Vertical Analysis is the preparation of common-size financial statements. It is a technique that

expresses each financial statement line item as a percentage of a base amount. It is one of the popular
methods of financial statements used as it is simple and also called a common size analysis. Here all the
items in the income statement are stated as a percentage of gross sales. All the items in the balance
sheet are stated as a percentage of the total assets. Whereas the opposite of the vertical analysis of
financial statements is the Horizontal analysis always looks at the amount from the financial statement
over the horizon of many years.
1. A common-size SFP shows each line account as a percentage of total assets. It shows the
composition of assets and the company’s financing mix.
2. A common-size SCI expresses each line as a percentage of net sales.
3. Common-size financial statements show standardized or relative amounts that enable the readers to
make comparison of companies of different sizes.
In the vertical analysis of financial statements, the percentage is calculated by using the below formula:

Vertical Analysis formula = Individual Item / Base Amount *100

Vertical Analysis

JC Trading Company
Statement of Financial position
As of December 31
(in P thousands) Increase (Decrease)
20D4 % 20D3 %

Cash and Cash equivalents P470.31 P519.86

Accounts Receivable, net 660.11 565.17
Inventory 653.06 555.17
Prepaid Expenses 173.74 228.82
Total Current Assets 1,957.22 1,869.32
Property, Plant, and Equipment, net 5,910.53 5,501.66
Intangible Assets 745.20 721.91
Total Assets
P8,612.95 P8,092.89

Current Liabilities P1,273.05 P1,123.70

Long-Term Liabilities 577.58 541.54
Total Liabilities 1,850.63 1,665.24
JC, Capital 6,762.32 6,427.65
Total Liabilities and Owner’s Equity P8,612.95 P8,092.89

JC Trading Company
Statement of Comprehensive Income
For the year ended

Sales Revenue P5,385.86 P4,921.85

Cost of Goods Sold 1,374.79 1,254.86
Gross Profit 4,011.07 3,666.99
Selling and Administrative Expenses 3,406.46 3,127.15
Operating Income 604.61 539.84
Interest Expense 11.82 23.04
Net Income P592.79 P516.80

Solution

JC Trading Company
Statement of Financial position
As of December 31
(in P thousands)
20D4 % 20D3 %

Cash and Cash equivalents P470.31 5.5 P519.86 6.4

Accounts Receivable, net 660.11 7.7 565.17 7.0
Inventory 653.06 7.6 555.17 6.9
Prepaid Expenses 173.74 2.0 228.82 2.8
Total Current Assets 1,957.22 22.7 1,869.32 23.1
Property, Plant, and Equipment, net 5,910.53 68.6 5,501.66 68.0
Intangible Assets 745.20 8.7 721.91 8.9
Total Assets
P8,612.95 100 P8,092.89 100
Current Liabilities P1,273.05 14.8 P1,123.70 13.9
Long-Term Liabilities 577.58 6.7 541.54 6.7
Total Liabilities 1,850.63 21.5 1,665.24 20.6
JC, Capital 6,762.32 78.5 6,427.65 79.4
Total Liabilities and Owner’s Equity P8,612.95 100 P8,092.89 100

JC Trading Company
Statement of Comprehensive Income
For the year ended

Sales Revenue P5,385.86 100.0 P4,921.85 100.0

Cost of Goods Sold 1,374.79 25.5 1,254.86 25.5
Gross Profit 4,011.07 74.5 3,666.99 74.5
Selling and Administrative Expenses 3,406.46 63.2 3,127.15 63.5
Operating Income 604.61 11.2 539.84 11.0
Interest Expense 11.82 0.2 23.04 0.5
Net Income P592.79 11.0 P516.80 10.5

FUNDAMENTAL of ACCOUNTANCY, BUSINESS and MANAGEMENT 2 Book by Dani Rose C. Salazar. 1 st Edition

KEY POINTS
 Financial statement analysis is the process of evaluating risks, performance, financial health,
and future prospects of a business using computational and analytical techniques with the
objective of making economic decisions.
 Horizontal Analysis is known as trend analysis. Horizontal Analysis of Financial Statements is one of
the most important techniques to find out how a company is doing financially.
 Vertical Analysis is the preparation of common-size financial statements. It is a technique that
expresses each financial statement line item as a percentage of a base amount. It is one of the
popular methods of financial statements used as it is simple and also called a common size analysis.

References: https://en.wikipedia.org/wiki/Financial_analysis#:~:text=Stability%20%2D%20the%20firm's
%20ability%20to,financial%20and%20non%2Dfinancial%20indicators.
https://www.accountingtools.com/articles/2017/5/14/financial-statement-analysis
https://www.wallstreetmojo.com/vertical-analysis-formula/
https://www.wallstreetmojo.com/vertical-analysis-formula/

Activity
TRUE OR FALSE: Read each sentence carefully and determine whether
the statement is True or False.

1. Financial statement analysis uses computational and analytical techniques to evaluate the company’s
risk, performance, financial health, and future prospects with the objectives of making economic
decisions.
2. Horizontal analysis is the financial analysis technique that compares the balances of two accounts in
one reporting period.
3. Horizontal analysis can be performed with the Statement of Financial Position and the Statement of
Comprehensive Income.
4. A common-size Statement of Comprehensive Income presents accounts expressed as a percentage of
net income.
5. A common-size Statement of Financial Position presents accounts expressed as a percentage of total
liabilities and equity.

POST-TEST: The aggregated Statement of Financial Position of Jenny

Company is presented below:

12/31/10S4 12/31/20S3
Current Assets P500,000.00 P400,000.00
Property, Plant, and Equipment, net 1,584,000.00 1,320,000.00
Current Liabilities
364,000.00 280,000.00
Long-Term Liabilities 532,000.00 380,000.00
Owner’s Capital 1,188,000.00 1,060,000.00
Required:

1. Perform horizontal analysis for 20S4 using 20S3 as base year.

2. Perform vertical analysis for 20s4 and 20S3 Statement of Financial position.