Chartered Financial Management Analyst: (Module 3)

CHARTERED FINANCIAL
MANAGEMENT ANALYST
(MODULE 3)
JOHN ANTHONY M. LABAY

CPA, MBA, CAP, CFMA
FINANCIAL STATEMENT ANALYSIS
✓ HORIZONTAL AND VERTICAL ANALYSIS
✓ RATIO ANALYSIS
FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis is defined as the

process of identifying financial strengths and
weaknesses of the firm by properly establishing
relationship between the items of the balance
sheet and the profit and loss account.
TOOLS AND TECHNIQUES OF FS ANALYSIS
1. Horizontal and Vertical Analysis
Horizontal Analysis or Trend Analysis

Comparison of two or more year’s financial data is known
as horizontal analysis, or trend analysis. Horizontal
analysis is facilitated by showing changes between years
in both peso and percentage form.
Vertical Analysis
Vertical analysis is the procedure of preparing and
presenting common size statements. Common size
statement is one that shows the items appearing on it in
percentage form as well as in peso form. Each item is
stated as a percentage of some total of which that item is
a part. Key financial changes and trends can be
highlighted by the use of common size statements.
2. Ratios Analysis
The ratios analysis is the most powerful tool of financial
statement analysis. Ratios simply means one number
expressed in terms of another. A ratio is a statistical
yardstick by means of which relationship between two or
various figures can be compared or measured. Ratios can
be found out by dividing one number by another number.
Ratios show how one number is related to another.
2. Ratios Analysis
- Profitability ratios measure the results of business
operations or overall performance and effectiveness of
the firm
*Gross profit ratio *Return on equity
*Net profit ratio *Dividend yield ratio
*Operating ratio *Dividend payout ratio
*Expense ratio *Earnings per share
*Return on assets *Price earnings ratio
- Liquidity ratios measure the short-term solvency of

financial position of a firm. These ratios are calculated to
comment upon the short-term paying capacity of a
concern or the firm’s ability to meet its current
obligations.
*Current ratio
*Liquidity ratio/Acid Test ratio/Quick ratio
*Net Working Capital
- Activity ratios are calculated to measure the efficiency
with which the resources of a firm have been employed.
These ratios are also called turnover ratios because they
indicate the speed with which assets are being turned over
into sales.
*Inventory turnover
*Day’s inventory on hand (Day’s sales in inventory)
*Accounts receivable turnover
*Day’s sales outstanding ratio (Average collection period)
*Working capital turnover ratio
- Long term solvency or leverage ratios convey a firm’s

ability to meet the interest costs and payment schedules of
its long-term obligations.
*Debt-to-equity ratio
*Times interest earned ratio
ADVANTAGES
1. It simplifies the financial statements.

2. It helps in comparing companies of different size with each
other.
3. It helps in trend analysis which involves comparing a single
company over a period.
4. It highlights important information in simple form quickly.
A user can judge a company by just looking at few numbers
instead of reading the whole financial statements.
LIMITATIONS
1. Different companies operate in different industries each having

different environmental conditions such as regulation, market
structure, etc. Such factors are so significant that a comparison of
two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and
assumptions. Accounting standards allow different accounting
policies, which impairs comparability and hence ratio analysis is less
useful in such situations.
3. Ratio analysis explains relationships between past information
while users are more concerned about current and future
information.
SAMPLE PROBLEMS
13
PROBLEM 1
PROBLEM 1
a. Using horizontal analysis, show the percentage change for each
balance sheet item using 2019 as a base year.
8.33%
PROBLEM 1
b. Using vertical analysis, prepare a common size comparative
balance sheet.
PROBLEM 2
PROBLEM 2
PROBLEM 2
PROBLEM 2
a. Gross margin percentage.
= Gross margin / Sales

= P430,000 / P1,130,000
= 38.1%
PROBLEM 2
b. Earnings per share (of common stock).
= (Net Income - Preferred Dividends) / Average number of

common shares outstanding*
= (P110,000 - P10,000) / {(20,000 shares + 20,000 shares)/2}
= P5.00 per share
*Number of common shares outstanding = Common stock / Par value

= P400,000 / P20 per share
= 20,000 shares
PROBLEM 2
c. Price-earnings ratio.
= Market price per share / Earnings per share

= P98.00 / P5.00
= 19.6
PROBLEM 2
d. Dividend payout ratio.
= Dividends per share* / Earnings per share

= P2.00 / P5.00
= 40.0%
*Dividends per share = Common dividends / Common shares

= P40,000 / 20,000 shares
= P2.00 per share
PROBLEM 2
e. Dividend yield ratio.
= Dividends per share / Market price per share

= P2.00 / P98.00
= 2.04%
PROBLEM 2
f. Return on total assets.
= Adjusted net income* / Average total assets**

= P130,300 / P1,385,000
= 9.41%
*Adjusted net income = Net income + [Interest expense x (1-Tax rate)]

= P110,000 + [P29,000 x (1-0.30)] = P130,300
**Average total assets = (P1,400,000 + P1,370,000) / 2 = P1,385,000
PROBLEM 2
g. Return on common stockholders' equity.
= (Net income - Preferred dividends) / Average common

stockholders' equity*
= (P110,000 - P10,000) / P700,000
= 14.29%
*Average common stockholders' equity = (P730,000 + P670,000) / 2

= P700,000
PROBLEM 2
h. Book value per share.
= Common stockholders' equity / Number of common shares

outstanding*
= P730,000 / 20,000 shares
= P36.50 per share
*Number of common shares outstanding = Common stock / Par value

= P400,000 / P20 per share
PROBLEM 2
i. Working capital.
= Current assets - Current liabilities

= P620,000 - P250,000
= P370,000
PROBLEM 2
j. Current ratio.
= Current assets / Current liabilities

= P620,000 / P250,000
= 2.48:1
PROBLEM 2
k. Acid-test ratio.
= Quick assets* / Current liabilities

= P380,000 / P250,000
= 1.52:1
*Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= P180,000 + P0 + P200,000 + P0
PROBLEM 2
l. Accounts receivable turnover.
= Sales on account / Average accounts receivable*

= P1,130,000 / P195,000
= 5.79
*Average accounts receivable = (P200,000 + P190,000) / 2

= P195,000
PROBLEM 2
m. Average collection period.
= 365 days / Accounts receivable turnover

= 365 days / 5.79
= 63.0 days
PROBLEM 2
n. Inventory turnover.
= Cost of goods sold / Average inventory*

= P700,000 / P140,000
= 5.00
*Average inventory = (P140,000 + P140,000) / 2

= P140,000
PROBLEM 2
o. Average sale period.
= 365 days / Inventory turnover

= 365 days / 5.00
= 73.0 days
PROBLEM 2
p. Times interest earned.
= Net operating income / Interest expense

= P186,000 / P29,000
= 6.41
PROBLEM 2
q. Debt-to-equity ratio.
= Liabilities / Stockholders' equity

= P470,000 / P930,000
= 0.51
PROBLEM 3
PROBLEM 3
PROBLEM 3
PROBLEM 3
a. The acid-test ratio at the end of the current year would be

computed by dividing
P120,000 by P100,000.
b. The inventory turnover for the year would be computed by dividing
P350,000 by P125,000.
c. The debt-to-equity ratio at the end of the current year would be
P175,000 by P375,0000.
PROBLEM 3
d. The earnings per share of common stock would be computed by

dividing
P45,000 by 10,000 shares.
e. The accounts receivable turnover for the year would be computed
by dividing
P650,000 by P100,000.
f. The times interest earned for the year would be computed by
dividing
P100,000 by P10,000.
PROBLEM 3
g. The return on common stockholders' equity for the year would be

P45,000 by P307,500.
h. The dividend yield would be computed by dividing

P1.00 by P30.00.
GOODLUCK &
GODBLESS!!!
jalcpa

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CHARTERED FINANCIAL

JOHN ANTHONY M. LABAY

Financial Statement Analysis is defined as the

1. Horizontal and Vertical Analysis

Horizontal Analysis or Trend Analysis

- Liquidity ratios measure the short-term solvency of

- Long term solvency or leverage ratios convey a firm’s

1. It simplifies the financial statements.

1. Different companies operate in different industries each having

= Gross margin / Sales

= (Net Income - Preferred Dividends) / Average number of

*Number of common shares outstanding = Common stock / Par value

= Market price per share / Earnings per share

= Dividends per share* / Earnings per share

*Dividends per share = Common dividends / Common shares

= Dividends per share / Market price per share

f. Return on total assets.

= Adjusted net income* / Average total assets**

*Adjusted net income = Net income + [Interest expense x (1-Tax rate)]

g. Return on common stockholders' equity.

= (Net income - Preferred dividends) / Average common

*Average common stockholders' equity = (P730,000 + P670,000) / 2

h. Book value per share.

= Common stockholders' equity / Number of common shares

*Number of common shares outstanding = Common stock / Par value

= Current assets - Current liabilities

= Current assets / Current liabilities

= Quick assets* / Current liabilities

*Quick assets = Cash + Marketable securities + Accounts receivable +

l. Accounts receivable turnover.

= Sales on account / Average accounts receivable*

*Average accounts receivable = (P200,000 + P190,000) / 2

m. Average collection period.

= 365 days / Accounts receivable turnover

= Cost of goods sold / Average inventory*

*Average inventory = (P140,000 + P140,000) / 2

o. Average sale period.

= 365 days / Inventory turnover

p. Times interest earned.

= Net operating income / Interest expense

= Liabilities / Stockholders' equity

a. The acid-test ratio at the end of the current year would be

d. The earnings per share of common stock would be computed by

g. The return on common stockholders' equity for the year would be

h. The dividend yield would be computed by dividing

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