1.
Intended Learning Outcomes (ILOs)
Intended Learning Outcomes (ILOs):
At the end of the topic, the students are expected to be able to
1. Articulate financial statements and the related components;
2. Analyze financial statements using horizontal analysis;
3. Analyze financial statements using trend analysis;
4. Analyze financial statements using vertical analysis.
1.1 Overview
This course provides an advanced study of the interface between modern managerial accounting and the
business functions of strategic planning, marketing, manufacturing, and human resource management. The
accountant’s role in the marketing decision areas is specifically considered.
This course aims to identify the basic conventions and doctrines of managerial and cost accounting and other
generally accepted principles which may be strategically applied across the various functions of a business
organization; discuss several cost and management accounting issues relating to the design and
implementation of strategic, marketing, value analysis and other marketing models in the modern firms, and
identify major contemporary issues that have emerged in business accounting.
1.2.1 Statement of Financial position
The related accounts of Statement of financial position:
1. Current assets - generally, the entity expects to realize these assets within twelve (12) months
after the reporting period or within the entity's normal operating cycle.
2. Noncurrent assets - all assets not classified as current.
3. Current liabilities - generally, the entity expects to settle the liabilities within twelve (12)
months after the reporting period or within the entity's normal operating cycle.
4. Noncurrent liabilities - all liabilities not classified as current.
5. Equity - the residual interest in the assets of the entity after deducting all of the liabilities. Also
called as Net assets (Assets - liabilities).
Get familiar with it, as stated earlier, this is one of our data in doing financial analysis.
1.2 Components of Financial statement
This topic is a recall of financial accounting's end product, which is the financial statement.
But under this module, we will go beyond the preparation of financial statements, rather this time; we will
analyze and interpret it.
But how can we analyze the financial statements, if we do not know it? So let's take a journey back to the
memory lane and revisit financial statements.
Financial statements provide information about the financial position, financial performance, and cash flows
of an entity that is useful to a wide range of users in making economic decisions.
Components of financial statements:
1. Statement of financial position
It comprises permanent accounts such as assets, liabilities, and equity.
It analyzes the entity's liquidity, solvency, and financial leverage.
Liquidity pertains to the company's ability to pay its short-term obligations.
Solvency pertains to the company's ability to pay its obligations including long-term obligations
Financial leverage pertains to the company's ability to uplift its company's position through financing.
2. Income statement / Statement of profit or loss
It comprises temporary accounts such as revenue, expenses, and the computed net income or a net
loss. It analyzes the entity's profitability or performance during the year.
3. The statement of comprehensive income comprises of net income and other comprehensive
income.
4. Statement of changes in equity -summarizes the changes in owner's equity.
5. The cash flow statement is divided into operating, investing, and financing activities of cash inflows
and cash outflows.
6. Notes to the financial statement - It provides a narrative description or disaggregation of items
presented in the financial statements and information about items that do not qualify for recognition.
We will be using the financial statements in performing analyses such as horizontal analysis, vertical analysis,
trend analysis, and ratio analysis.
1.2.2 Income Statement
The Income statement reports the entity's profitability or performance during the year.
Under this statement, we will compute for the entity's net income or net loss for a certain period.
Additional data is provided to show other details of the Income statement
Other companies would have other comprehensive income (OCI) in their transaction. Whenever a company
has OCI, they need to prepare a Statement of Comprehensive Income.
The Statement of Comprehensive income composes of net income and other comprehensive income to come
up with a total comprehensive income of the entity.
1.2.3 Statement of changes in equity
Statement of changes in shareholders' equity for Corporation shows changes on each shareholder’s equity
accounts such as common stock, preferred stock, and retained earnings.
After revisiting the components of financial statements, let us now start with the analysis portion.
1.3 Horizontal analysis
The horizontal analysis shows the changes between years in the financial data in both peso and percentage
form.
This analysis focus on increase or decrease from last year's data.
We then draft the 60% in the table below.
Can you continue answering and find out which asset account had the most significant increase?
Much better we to prepare it in an MS Excel sheet, compute and analyze it. This will serve as your practice
note.
Overall, the biggest percentage increase is cash which had a 60% increase from last year.
But more so of percentage computation, a CPA should also analyze the reason behind the increase or
decrease in a certain account.
I have questions below and give me a logical reason why a certain account increases or decreases from last
year.
Questions:
1. Is it okay to have a decrease in accounts receivable and why?
2. What could have been the reason why there is such an increase in Accounts receivable?
3. Why inventory increases from the prior year?
4. What could have been the reason why Property, plant and equipment decrease from the prior year?
1.4 Trend analysis
Trend Analysis states several years’ financial data in terms of a base year. The base year or the most previous
year is equal to 100 percent.
Under trend analysis, financial statements are presented on a percentage basis.
1.5 Vertical analysis
The vertical analysis focuses on the relationships among financial statement items at a given point in time.
It is also known as a "common-size financial statement".
In an income statement, the base amount is Net sales, in the absence of which, we use Sales.
We solve using the income statement of One Sweet Day Corporation:
That's it; we are determining to perform certain analysis. Now we are ready to have our 1st critical thinking
activities.
We now compute for the profitability of One Sweet Day Corporation:
1.6 Summary
1. Financial statements provide information about the financial position, financial performance, and cash
flows of an entity that is useful to a wide range of users in making economic decisions.
2. The horizontal analysis shows the changes between years in the financial data in both peso and
percentage form.
3. Under trend analysis, financial statements are presented on a percentage basis. The base year or the
most previous year is equal to 100 percent.
4. The vertical analysis focuses on the relationships among financial statement items at a given point in
time. It is also known as a "common-size financial statement".
