Luis Alvaro

Benjohn Espiritu

Ria Mempin

Analyzing Financial Statements involves evaluating three characteristics of an entity: its

liquidity, its profitability and its solvency.

Intracompany Basis - this basis compares an item or financial relationship within an entity in the
current year with the same item or relationship in one or more prior years.

Industry Averages - this basis compares an item or financial relationship of an entity with
industry averages or norms published by financial ratings organizations.

Horizontal Analysis - is a technique for evaluating a series of financial statement data over a
period of time.

Trend Analysis(horizontal analysis) - a technique for evaluating a series of financial statement

data over a period of time.

Vertical Analysis - is a technique for evaluating financial statement data that expresses each item
in a financial statement in terms of a percent of a base amount.

- a method of analyzing financial statements in which you can compare

individual line items to a baseline item.

Ratio Analysis - expresses the relationship among selected items of financial statement data

-compares one indicator to another. Ratios can give you significant insight.

Working Capital - this equation describes the amount of capital used to run day-to-day business
operations. It is necessary to finance an entity's cash conversion cycle.

working capital = current assets - current liabilities

Current Ratio - describes the ability of an entity to meet current debt obligations with assets that
are readily available.

current ratio = current assets/current liabilities

Quick Ratio or Acid-Test Ratio - tells whether the entity could pay all its current liabilities even
if none of the inventory is sold.

quick ratio = quick assets/current liabilities

Accounts Recievable Turnover - measures the entity's ability to collect from credit customers.

accounts recievable turnover = net credit sales/average net accounts recievable

Average Age of Recievables - provides a rough approximation of the average time that it takes to
collect recievables.

average age of recievables = 365 days/accounts recievable turnover

Inventory Turnover - is a measure of the number of times an entity sold its average level of
inventory during the period.

inventory turnover = cost of goods sold/average merchandise inventory

Average Age of Inventory - provides a rough measure of the length of time it takes to acquire,
sell and replace inventory.

average age of inventory = 365 days/inventory turnover

Operating Cycle - this measures the average time period between buying the inventory and
recieving cash proceeds from its sales.

Return on total assets - is a measure of management's efficiency in using its assets to earn profits.

Return on total assets = profit + interest expense/ average total assets

Return on ordinary equity - shows the relationship between profit and ordinary shareholders'
investment in the entity.

Return on ordinary equity = profit - preference dividends/ average ordinary equity

Leverage - trading on the equity

Basic earnings per ordinary share - is a measure of the profit earned on each ordinary share.
 BEPS = profit - preference dividends/ average number of ordinary shares outstanding

Price-Earnings (P/E) Ratio - indicates the degree to which investors value an entity.

Price-Earnings Ratio = market price per ordinary share/basic earnings per ordinary share

Dividend Yield - is the ratio of dividends per share to the share's market price. This ratio
measures the percentage of a share's market value that is returned annually as dividends.

Dividend Yield = cash dividends per ordinary share/market price per ordinary share

Solvency Ratios - measure the ability of the entity to survive over a long period of time.

Times Interest Earned - is a measure of how readily an entity ca meet interest payments with
profit earned from operations.

Times Interest Earned = profit before interest expense and income taxes/annual interest expense

Debt to total assets ratio (debt ratio) - shows the percentage of the entity's assets financed by
debt.

Debt to total assets ratio = total liabilities/total assets

Equity to total assets ratio (equity ratio) - shows the percentage of the firm's assets financed by
shareholders.

Equity ratio = 100% - Debt Ratio

Sample Problems :

You have been assigned the task of evaluating Gumban, Inc.'s management of merchandise
inventory and recievables. You decided that inventory turnover, accounts recievable turnover,
and average age of recievables statistics will prove valuable in your analysis. The following data
are available from Gumban's annual report :

Merchandise Inventory :

Jan. 1 P 245,000

Dec. 31 375,000

Accounts Recievable :

Jan. 1 250,000

Dec. 31 297,000

Cost of Goods Sold 2,480,000

Cash Sales 1,000,000

Total Sales 5,100,000

Gumban's Credit Terms Net 30 days

Required : Calculate inventory turnover, accounts recievable turnover, and average age of
recievables.
The following information was taken from the statement of financial position of Blanche
Corporation :

Cash P 13,250

Accounts Recievable 33,000

Merchandise Inventory 40,000

Prepaid Expenses 9,950

Accounts Payable 25,200

Accrued Payables 1,800

Notes Payable (due in 6 months) 10,000

Required : Calculate the working capital, current ratio and quick ratio.
You have been asked to evaluate the liquidity position of Burgos Fitness Center. The following
data are from Burgos' annual report :

Cash P130,000

Trading Investments 60,000

Accounts Recievable:

Jan.1 156,000

Dec.31 214,000

Merchandise Inventory

Jan.1 252,000

Dec.31 186,000

Current Liabilities 240,000

Cost of Goods Sold 3,000,000

Credit Sales 5,000,000

Required: using these data, calculate Burgos'

1. Working Capital 4. Inventory turnover

2. Current ratio 5. Accounts recievable turnover

3. Quick ratio 6. Average age of recievables