FINANCIAL

STATEMENT ANALYSIS
Abella•Alejo•Arban•Mario•Miguel•Pagba•Umayas •Tabalba•Vidad
 Involves careful selection of data from financial
statements in order to assess and evaluate the firm’s
past performance, its present condition, and future
business potentials.

Financial Statement Its primary purpose is to evaluate and forecast the

company’s financial health.
Analysis Specifically, it will know the firm’s:
 Profitability
 Ability to meet its obligations
 Safety of investment
 Effectiveness of management in running it.

2
 7 TECHNIQUES USED IN FS ANALYSIS

HORIZONTAL GROSS PROFIT

FINANCIAL
ANALYSIS VARIANCE OPERATING
RATIOS
AND
FINANCIAL FINANCIAL
FORECASTING LEVERAGE
VERTICAL USING AFN CASH FLOW
ANALYSIS
ANALYSIS

3
  Used in FS analysis to compare historical data,
such as ratios, or line items, over a number of
accounting periods.
 Can either use absolute comparisons or

HORIZONTA percentage comparisons, where the numbers

in each succeeding period are expressed as a

L percentage of the amount in the baseline year,

with the baseline amount being listed as 100%.

ANALYSIS  Allows financial statement users to easily spot

trends and growth patterns.
 Can be manipulated to make the current
period look better if specific historical periods
of poor performance are chosen as a
comparison.

4
H O W H O R I Z O N TA L A N A LY S I S I S U S E D

It enables analysts to assess It is useful to conduct the Analysis of critical measures

relative changes in different analysis for all of the of business performance,
line items over time and financial statements at the such as profit margins,
project them into the future. same time to see the inventory turnover, and
complete impact of return on equity, can detect
operational results on a emerging problems and
company’s financial strengths.
condition over the review
period.

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COMMON PROBLEM IN HORIZONTAL ANALYSIS

The aggregation of information in the financial statements may have changed over
time, so that revenues, expenses, assets or liabilities may shift between different
accounts and therefore appear to cause variances when comparing account
balances from one period to the next.

Important: A change in accounting policy or occurrence of a one-time event

should also be disclosed in the footnotes to the financial statements.

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  A method of FS analysis in which each line item
is listed as a percentage of a base figure within
the statement.
 A.k.a. common-size financial statements, are
VERTICAL used by many companies to provide greater detail
on a company's financial position.
ANALYSIS  Often incorporate comparative financial
statements that include columns comparing each
line item to a previously reported period.
 Is used in order to gain a picture of whether
performance matrix are improving or
deteriorating.

7
   %
FORMULA

1 2 3

INCOME STATEMENT
BALANCE
STATEMENT OF CASH
SHEET
FLOWS

𝐼𝑛𝑐𝑜𝑚𝑒 𝑆𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝐼𝑡𝑒𝑚 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑆h𝑒𝑒𝑡 𝐼𝑡𝑒𝑚 𝐶𝑎𝑠h 𝐼𝑛𝑓𝑙𝑜𝑤 𝑜𝑟 𝑂𝑢𝑡𝑓𝑙𝑜𝑤

% ∆ × %
100  ∆ = × 100 %
  =
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑜𝑟 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠   ∆ = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑠h 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 × 100

Line items on an income Line items on a balance sheet Vertical analysis of a cash flow
statement can be stated as a can be stated as a percentage of statement shows each cash
percentage of gross sales. total assets or liabilities. inflow or outflow as a
percentage of the total cash
inflows.
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 DISADVANTAGES KEY TAKEAWAYS
 It does not help take a firm decision Vertical analysis makes it easier to understand
owing to a lack of standard percentage the correlation between single items on a
or ratio regarding the components in the balance sheet and the bottom line, expressed in
balance sheet and income statement. a percentage.
 It does not help in measuring the  Vertical analysis can become a more potent
liquidity. tool when used in conjunction with horizontal
 Owing the lack of consistency in the analysis, which considers the finances of a
ratio of the elements , it does not certain period of time.
provide a quality analysis of the
financial statement.

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 Financial ratio analysis is performed by

FINANCIAL comparing two items in the financial statements.

The resulting ratio can be interpreted in a way

RATIOS that is more insightful than looking at the items

separately.

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 LIQUIDITY RATIOS
Working Capital, Current Ratio, Acid-test Ratio

ASSET MANAGEMENT
Accts. Receivables Turnover, Ave. Collection Period,

KINDS OF Inventory Turnover, Ave. Sale Period, Operating Cycle,

Total Asset Turnover

FINANCIAL DEBT MANAGEMENT

Times Interest-Earning Ratio, Debt-to-Equity Ratio,
Equity Multiplier
RATIOS PROFITABILITY RATIOS
Gross Margin Percentage, Net Profit Percentage, Return
on Total Assets, Return on Equity

MARKET PERFORMANCE
Earnings per Share, Price-earnings Ratio, Dividend
Payout Ratio, Dividend Yield Ratio, Book Value per
Share
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 KINDS OF FINANCIAL RATIOS
1.Liquidity. This refers to how quickly an asset can be  converted to cash.
a. Working Capital
 Measures the company’s ability to repay current liabilities using current assets.
Formula:

b. Current Ratio
 Test of short-term debt-paying ability.
 A declining ratio might be a sign of a deteriorating financial condition, or it might be the result of
eliminating obsolete inventories or other stagnant current assets.
 An improving ratio might be the result of stockpiling inventory, or it might indicate an improving
financial situation.
Formula:
Current Ratio =
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 KINDS OF FINANCIAL RATIOS
c. Acid-Test Ratio  

 Test of short-term debt-paying ability without having to rely on inventory.

 Each peso of liabilities should be backed by ate least 1 peso of quick assets.
Formula:

2. Asset Management
a. Accounts Receivable Turnover
 Measures how many times a company’s accounts receivable have been turned into cash during
the year.
Formula:

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 KINDS OF FINANCIAL RATIOS
b. Average Collection Period  

 Measures the average number of days taken to collect an account receivable.

Formula:
c. Inventory Turnover
 Measures how many times a company’s inventory has been sold during the year.
Formula:
d. Average Sale Period
 Measures the average number of days taken to sell the inventory one time.
Formula:
e. Operating Cycle
 Measures the elapsed time from when inventory is received from suppliers to when cash is
received from customers.
Formula:

 
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 KINDS OF FINANCIAL RATIOS
f. Total Asset Turnover  

 Measures how efficiently assets are being used to generate sales.

Formula:
3. Debt Management
a. Times Interest-Earning Ratio
 Measures the company’s ability to make interest payments.
Formula:

b. Debt-to-Equity Ratio
 Measures the number of assets being provided by creditors for each dollar of assets being
provided by the stockholders.
Formula:

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 KINDS OF FINANCIAL RATIOS
c. Equity Multiplier  

 Measures the portion of a company’s assets funded by equity.

Formula:

4. Profitability
a. Gross Margin Percentage
 Measures profitability before selling and administrative expenses.
Formula:

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KINDS OF FINANCIAL RATIOS
b. Net Profit Margin Percentage  

 A broad measure of profitability.

Formula:
c. Return on Total Assets
 Measures how well assets have been employed by management.
Formula:

d. Return on Equity
 When compared to the return on total assets, measure the extent to which financial leverage is
working for or against common stockholders.
Formula:

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KINDS OF FINANCIAL RATIOS
5. Market Performance  

a. Earnings per share

 Affects the market price per share, as reflected in the price-earnings ratio.
Formula:
 
 
b. Price-Earnings Ratio
 An index of whether a stock is relatively cheap or relatively expensive in relation to current
earnings.
Formula:

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KINDS OF FINANCIAL RATIOS
c. Dividend Payout Ratio  

 An index showing whether a company pays out most of its earnings in dividends or reinvests
the earnings internally.
Formula:
d. Dividend Yield Ratio
 Shows the return in terms of cash dividends being provided by a stock.
Formula:
e. Book Value per Share
 Measures the amount that would be distributed to common stockholders if all assets were sold at
their balance sheet carrying amounts and if all creditors were paid off.
Formula:

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 Brickey Electronics
Common-Size Comparative Balance Sheet
(pesos in thousands)
This Year Last Year This Year Last Year
Assets
Current Assets:
Cash ₱ 1,200 ₱ 2,350 3.8% 8.1%
Accounts Receivable, net 6,000 4,000 19.0% 13.8%
Inventory 8,000 10,000 25.4% 34.5%
Prepaid Expenses 300 120 1.0% 0.4%
Total Current Assets 15,500 16,470 49.2% 56.9%
Property and Equipment:
Land 4,000 4,000 12.7% 13.8%
Buildings and Equipment 12,000 8,500 38.1% 29.3%
Total Property and Equipment 16,000 12,500 50.8% 43.1%
Total Assets ₱ 31,500 ₱ 28.970 100.0% 100.0%

Liabilities and Stockholder’s Equity

Current Liabilities:
Accounts Payable ₱ 5,800 ₱ 4,000 18.4% 13.8%
Accrued Liabilities 900 400 2.9% 1.4%
Notes Payable, short-term 300 600 1.0% 2.1%
Total Current Liabilities 7,000 5,000 22.2% 17.3%
Long-Term Liabilities:
Bonds Payable, 8% 7,500 8,000 23.8% 27.6%
Total Liabilities 14,500 13,000 46.0% 44.9%
Stockholder’s Equity:
Common Stock, ₱12 par 6,000 6,000 19.0% 20.7%
Additional paid-in Capital 3,000 3,000 9.5% 10.4%
Total paid-in Capital 9,000 9,000 28.6% 31.1%
Retained Earnings 8,000 6,970 25.4% 24.0%
Total Stockholder’s Equity 17,000 15,970
Total Liabilities and Stockholders’ Equity ₱ 31,500 ₱ 28.970
54.0% 55.1%
100.0% 100.0%
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 Brickey Electronics
Common-Size Comparative Income Statement
(pesos in thousands)
Common-Size Percentages
This Year Last Year This Year Last Year
Sales ₱52,000 ₱48,000 100.0% 100.0%
Cost of Goods Sold 36,000 31,500 69.2% 65.6%
Gross Margin 16,000 16,500 30.8% 34.4%
 
Selling and Administrative Expenses
Selling Expenses 7,000 6,500 13.5% 13.5%
Administrative Expenses 5,860 6,100 11.3% 12.7%
 
Total Selling and
Administrative Expenses 12,860 12,600 24.7% 26.3%
Net Operating Income 3,140 3,900 6.0% 8.1%
Interest Expenses 640 700 1.2% 1.5%
Net Income before Taxes 2,500 3,200 4.8% 6.7%
Income Taxes (30%) 750 960 1.4% 2.0%
Net income 1,750 2,240 3.4% 4.7%

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 EXAMPLE
1.Liquidity  

a.Working Capital

b. Current Ratio

c. Acid-Test Ratio

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 EXAMPLE
2. Asset Management  

a. Accounts Receivable Turnover

b. Average Collection Period

c. Inventory Turnover

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EXAMPLE
d. Average sale period  

e. Operating Cycle

f. Total Asset Turnover

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 EXAMPLE
3. Debt Management  

a. Times Interest-Earned Ration

b. Debt-to-Equity Ratio

  c. Equity Multiplier

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 EXAMPLE
4. Profitability  

a. Gross Margin Percentage

b. Net Profit Margin Percentage

c. Return on Total Assets

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 EXAMPLE
d. Return on Equity  

5. Market Performance
a. Earnings per Share

b. Price-Earnings Ratio

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EXAMPLE
c. Dividend Payout Ratio  

d. Dividend Yield Ratio

e. Book Value per Share

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  Provides information about cash inflows and
outflows during an accounting period.
 Is developed from Balance Sheet and Income
Statement data

CASH FLOW  Is a valuable analytical tool for managers as well

as for investors and creditors, although managers

ANALYSIS tend to be more concerned with forecasted

statement of cash flows that are prepared as part of
the budgeting process.
 It answers questions that cannot be easily answered
by looking at the Income Statement and Balance
Sheet.

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The statement of cash flows can be used to answer crucial
questions such as:

To what extent will the Is the company generating

company have to borrow sufficient positive cash flows from
money in order to make needed ongoing operations to remain
investments? viable?

Will the company be able to

Will the company be able to
pay its usual dividend?
repay its debts?

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 Accrual-based accounting requires reporting
revenues when earned and expenses when incurred-
not when cash is exchanged.

IMPORTANCE
Explains the reasons for the change in cash.
STATEMENT OF
CASH FLOWS
Reconciles net income with cash flows from
operations.

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4 PARTS OF
Cash

Operating Activities

Investing Activities
STATEMENT OF
CASH FLOWS Financing Activities

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CASH
CASH- includes cash and cash equivalents

CASH EQUIVALENTS- consists of shorter, highly liquid

investments such as:
 Treasury Bills Maturing within 90 days or less
 Commercial Paper
 Money Market Funds
 Investments Funds
 Checking Account

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 O P E R AT I N G A C T I V I T I E S
OPERATING ACTIVITIES - cash flows related to selling goods and rendering services;
that is, the principle business of the firm.
- the cash effects of transactions and other events that enter into the determination of
income.
CASH CASH
OPERATING ACTIVITIES
INFLOWS OUTFLOWS
Collecting cash from customers through sale of goods or
x  
services rendered.
Paying suppliers for inventory purchase   X
Paying bills to insurers, utility providers, etc.   X
Paying wages and salaries to employees   X
Paying taxes to government bodies   X
Paying interest to lenders   X
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 INVESTING ACTIVITIES
INVESTING ACTIVITIES- acquiring/disposing of securities that are not cash equivalents.
- Cash flows related to the acquisition of non-current assets.
- Lending money
- Collecting loans

CASH CASH
INVESTING ACTIVITIES
INFLOWS OUTFLOWS
Buying property, plant, and equipment   X
Selling property, plant, and equipment X  
Buying stock and bonds as a long-term investment   X
Selling stock and bonds held for long-term investment X  
Lending money to another entity   X
Collecting the principal on a lon to another entity X  

35
 FINANCING ACTIVITIES
FINANCING ACTIVITIES- borrowing from creditors
- Repaying the principal
- Obtaining resources from owners
- Providing owners with a return on investment

CASH CASH
FINANCING ACTIVITIES
INFLOWS OUTFLOWS
Borrowing money from creditor X  
Repaying the principal amount of debt   X
Collecting cash from the sale of common stock X  
Paying cash to repurchase your own common stock   X
Paying a dividend to stockholders   X

36
COMPONENTS OF THE STATEMENT OF CASH FLOWS

37
CALCULATING CASH FLOWS FROM OPERATING ACTIVITIES

Firms may use one of the two methods prescribed by the IAS-FASB:

DIRECT METHOD AND INDIRECT METHOD

-the two methods yield identical figures for net cash flow from
operating activties because underlying accounting concepts are the
same.

38
CALCULATING THROUGH DIRECT METHOD
DIRECT METHOD
Under Direct Method, Income Statement items are converted to cash
flows individually.

DIRECT METHOD SHOWS

• Cash collections from customers
• Interest and dividends collected
• Other operating cash receipts
• Cash paid to the suppliers and employees
• Interest paid
• Taxes paid
• Other operating cash payments
39
CALCULATING THROUGH DIRECT METHOD

40
CALCULATING THROUGH INDIRECT METHOD
INDIRECT METHOD
 Net Income or Loss is adjuested for accruals such as Accounts Receivable
and Payable and for Non-Cash Expense such as Depreciation.
 Reconciliation of the accrul-based and cash based accounting
INDIRECT METHOD STARTS WITH NET INCOME AND ADJUST FOR
1. Deferrals
2. Accruals
3. Non-cash items, such as depreciation and amortization
4. Non-operating items, such as gains and losses on asset sales

41
CALCULATING THROUGH INDIRECT METHOD

42
USES OF CASH FLOW ANALYSIS
EXTERNAL USES
 To assess the ability of a firm to manage cash flows
 To assess the ability of a firm to generate cash through its operations
 To assess the company’s ability to meet its obligations and its dividend policy
 To provide information about the effectiveness of the firm to convert its revenues
cash
 To provide information to estimate or anticipate the company’s need for additional
financing

INTERNAL USES
 To assess liquidity
 To determine dividend policy
 To evaluate the investment and financing decisions

43
LIMITATIONS OF CASH FLOW ANALYSIS

 Non-cash transactions are ignored.

 Not a substitute for income statement.
 Not a test of total financial position.
 Historical in nature.

44
  Used to evaluate and improve company’s
performance
 The analysis answers three questions:
GROSS PROFIT a) Why did this variance occur?
b) What caused the decrease or increase of profit
VARIANCE over the previous year?
c) Why the actual profit differed from the

ANALYSIS budgeted or original expectation?

 The significant variances are analyze so that their
root causes can be eliminated or replicated.
 The emphasis should be on highlighting superior
and unsatisfactory results.

45
VARIANCE
ANALYSIS CYCLE Prepare performance
1 report.

Conduct next period’s Analyze variances.

operations. 6 2

Take actions. Raise question.

5 3

Identify root causes.

4
46
C A U S E S O F P R O F I T VA R I A N C E

Change in unit sales price

Change in the volume of products sold
Change in sales mix or variation of goods
Change in the purchase price of materials
Change in the amount of direct labor

47
PROFIT VARIANCES FOR SINGLE-PRODUCT FIRMS
An unfavorable profit variance can be broken down into four components: a sales price
variance, a cost price variance, a sales volume variance, and a cost volume variance.

SALES PRICE COST PRICE SALES VOLUME COST VOLUME

VARIANCE VARIANCE VARIANCE VARIANCE
It measures the impact of It is simply the summary IT indicates the impact on It has the same
changes in the unit selling of price variances for the firm’s profit of changes interpretation with the
price in the firm’s materials, labor, and in the unit sales volume. sales volume variance.
contribution margin (or overhead.
gross profit).
SVV= (Actual sales – CVV=(Actual sales –
CPV= (Actual cost – Budget sales) x Budget Budget Sales) x Budget
SPV= (Actual price – Budget cost) price cost per unit
Budget price)
48
PROFIT VARIANCES FOR MULTI-PRODUCT FIRMS
 In a multi product firm, actual sales volume can differ from that budgeted in
two ways.
 This variance arises when different products have different contribution
margins.
 In addition, the mix of the products actually sold may not be proportionate to
the target mix.
 Each of these two different types of changes in volume is reflected in a separate
variance.

49
EXAMPLE 2 01 9 2 02 0
Sa le s (u n it s) 9 7 ,5 0 0 1 1 0 ,0 0 0
Se llin g P ric e 9 .0 0 8 .8 0
Sa le s Re v e n u e 8 7 7 ,5 0 0 9 6 8 ,0 0 0

The controller of the ABC Co. prepared the

C O G S 5 8 5 ,0 0 0 7 0 4 ,0 0 0
G ro ss P ro fit : 2 9 2 ,5 0 0 2 6 4 ,0 0 0

An a ly ze th e d e c lin e in g ro ss p ro fit b e t w e e n
2 0 1 9 a n d 2 0 2 0 b y c a lc u la t in g :
a . Sa le s P ric e Va ria nc e
2 0 2 0 Ac t u a l Sa le s 9 6 8 ,0 0 0

following comparative statement of

2 0 2 0 Bu d g e t e d 9 9 0 ,0 0 0
2 2 ,0 0 0
b . C o st P ric e Va ria n c e
2 02 0 C O G S 7 0 4 ,0 0 0
2 0 2 0 Ac t u a l Sa le s
@ 2 0 1 9 c o st p e r u n it 6 6 0 ,0 0 0

operations in 2019 and 2020.

4 4 ,0 0 0

*2 0 1 9 c o st p e r u n it = 5 8 5 ,0 0 0 / 9 7 ,5 0 0

c . Sa le s Vo lu m e Va ria n c e
2 0 2 0 a c t u a l v o lu m e
@ 2 0 1 9 p ric e 9 9 0 ,0 0 0
2 0 1 9 a c t u a l v o lu m e
@ 2 0 1 9 p ric e 8 7 7 ,5 0 0
1 1 2 ,5 0 0

d . C o st Vo lu m e Va ria n c e
2 02 0 a c t u a l v o lu m e
2 019 2020 @ 2 0 1 9 c o st
Sa le s (u n it s) 9 7 ,5 0 0 110,000 2 01 9 a c t u a l v o lu m e 6 6 0 ,0 0 0
@ 2 0 1 9 c o st 5 8 5 ,0 0 0
Se llin g P ric e 9 .0 0 8 .8 0
7 5 ,0 0 0
Sa le s Re v e n u e 8 7 7 ,5 0 0 968,000
COGS 5 8 5 ,0 0 0 704,000
G ro ss Pro fit : 2 9 2 ,5 0 0 264,000 Sa le s (u n it s )
2
9
0 1 9
7 , 5 0 0
2
1
0 2 0
1 0 , 0 0 0
Se llin g Pr ic e 9 . 0 0 8 . 8 0
Sa le s R e v e n u e 8 7 7 , 5 0 0 9 6 8 , 0 0 0
C O G S 5 8 5 , 0 0 0 7 0 4 , 0 0 0
G r o s s Pro f it : 2 9 2 , 5 0 0 2 6 4 , 0 0 0

An a ly ze th e d e c lin e in g ro ss p ro fit b e tw e e n
2 0 1 9 a n d 2 0 2 0 b y c a lc u la tin g :
a . Sa le s Pr ic e V a r ia n c e

An a lyze t h e d e c lin e in g ro ss p ro fit b e t w e e n

20 2 0 Ac tu a l Sa le s 9 6 8 , 0 0 0
20 2 0 Bu d g e te d 9 9 0 , 0 0 0
2 2 , 0 0 0
b . C o s t Pr ic e Va ria n c e
20 2 0 C O G S 7 0 4 , 0 0 0
20 2 0 Ac t u a l Sa le s
@ 2 0 1 9 c o st p e r u n it 6 6 0 , 0 0 0

2 0 1 9 a n d 2 0 2 0 b y c a lc u la t in g :
4 4 , 0 0 0

*20 1 9 c o s t p e r u n it = 5 8 5 , 0 0 0 / 9 7 , 5 0 0

c . Sa le s Vo l u m e Va ria n c e
20 2 0 a c tu a l v o lu m e
@ 2 0 1 9 p ric e 9 9 0 , 0 0 0

a . Sa le s Pric e Va ria n c e
20 1 9 a c tu a l v o lu m e
@ 2 0 1 9 p ric e 8 7 7 , 5 0 0
1 1 2 , 5 0 0

d . C o s t Vo lu m e Va ria n c e
20 2 0 a c tu a l v o lu m e

2 0 2 0 Ac t u a l Sa le s 968,000
@ 2 0 1 9 c o s t
20 1 9 a c tu a l v o lu m e 6 6 0 , 0 0 0
@ 2 0 1 9 c o s t 5 8 5 , 0 0 0
7 5 , 0 0 0

2 0 2 0 Bu d g e t e d 990,000
2 2 ,0 0 0
2019 20 2 0
b . C o st P ric e Va ria n c e
Sa le s (u n it s) 9 7 ,5 00 11 0 ,00 0
2 020 C O G S 704,000
Se llin g P ric e 9 .0 0 8.8 0
2 0 2 0 Ac t u a l Sa le s Sa le s Re v e n u e 8 7 7 ,50 0 96 8 ,00 0
@ 2 0 19 c o st p e r u n it 660,000 C OG S 5 8 5 ,00 0 70 4 ,00 0
4 4,0 0 0 G ro ss P ro fit : 2 9 2 ,50 0 26 4 ,00 0

*2 0 1 9 c o st p e r u n it = 5 8 5 ,0 0 0 / 9 7 , 5 0 0 An a lyze t h e d e c lin e in g ro ss p ro fit b e t w e e n

2 0 1 9 a n d 20 2 0 b y c a lc u la t in g :
a . Sa le s P ric e Va ria n c e
c . Sa le s Vo lu m e Va ria n c e
2 02 0 Ac t u a l Sa le s 96 8 ,00 0
2 0 2 0 a c t u a l v o lu m e 2 02 0 Bu d g e t e d 99 0 ,00 0
@ 2 01 9 p ric e 990,000 22 ,0 00
2 0 1 9 a c t u a l v o lu m e b . C o st P ric e Va ria n c e
@ 2 01 9 p ric e 877,500 2 02 0 C O G S 70 4 ,00 0
112,500 2 02 0 Ac t u a l Sa le s
@ 2 0 1 9 c o st p e r u n it 66 0 ,00 0
4 4 ,0 00

d . C o st Vo lu m e Va ria n c e
*20 1 9 c o st p e r u n it = 5 8 5 ,0 00 / 97 ,50 0
2 0 2 0 a c t u a l v o lu m e
@ 2 01 9 c o st c . Sa le s Vo lu m e Va ria n c e
2 0 1 9 a c t u a l v o lu m e 660,000 2 02 0 a c t u a l v o lu m e
@ 2 01 9 c o st 585,000 @ 2 01 9 p ric e 99 0 ,00 0
7 5 ,0 0 0 2 01 9 a c t u a l v o lu m e
@ 2 01 9 p ric e 87 7 ,50 0
11 2 ,50 0

2 01 9 20 20 d . C o st Vo lu m e Va ria n c e
Sa le s (u n it s) 9 7 ,5 0 0 1 1 0 ,0 0 0 2 02 0 a c t u a l v o lu m e
Se llin g P ric e 9 .0 0 8 .8 0 @ 2 01 9 c o st
Sa le s Re v e n u e 8 7 7 ,5 0 0 9 6 8 ,0 0 0 2 01 9 a c t u a l v o lu m e 66 0 ,00 0
C OG S 5 8 5 ,0 0 0 7 0 4 ,0 0 0 @ 2 01 9 c o st 58 5 ,00 0
G ro ss P ro fit : 2 9 2 ,5 0 0 2 6 4 ,0 0 0 20 1 9 75
2 02,0000
Sa le s (u n it s) 97 ,5 0 0 1 1 0 ,0 0 0
An a ly ze t h e d e c lin e in g ro ss p ro fit b e t w e e n Se llin g P ric e 9.00 8 .8 0
2 0 1 9 a n d 2 0 2 0 b y c a lc u la t in g : Sa le s Re v e n u e 87 7 ,5 00 9 6 8 ,0 0 0
C OGS 58 5 ,0 00 7 0 4 ,0 0 0
a . Sa le s P ric e Va ria n c e
G ro ss P ro fit : 29 2 ,5 00 2 6 4 ,0 0 0
2 0 2 0 Ac t u a l Sa le s 9 6 8 ,0 0 0
2 0 2 0 Bu d g e t e d 9 9 0 ,0 0 0
An a lyze t h e d e c lin e in g ro ss p ro fit b e t w e e n
2 2 ,0 0 0
20 1 9 a n d 2 0 20 b y c a lc u la t in g :
b . C o st P ric e Va ria n c e a . Sa le s P ric e Va ria n c e
20 20 C O G S 7 0 4 ,0 0 0 2 0 2 0 Ac t u a l Sa le s 9 6 8 ,0 0 0
2 0 2 0 Ac t u a l Sa le s 2 0 2 0 Bu d g e t e d 9 9 0 ,0 0 0
@ 2 0 1 9 c o st p e r u n it 6 6 0 ,0 0 0 2 2 ,0 0 0
4 4 ,0 0 0 b . C o st P ric e Va ria n c e
2020 C O G S 7 0 4 ,0 0 0
*2 0 1 9 c o st p e r u n it = 5 8 5 ,0 0 0 / 9 7 ,5 0 0 2 0 2 0 Ac t u a l Sa le s
@ 2 0 1 9 c o st p e r u n it 6 6 0 ,0 0 0
c . Sa le s Vo lu m e Va ria n c e 44 ,00 0
2 0 2 0 a c t u a l v o lu m e
*2 0 1 9 c o st p e r u n it = 5 8 5 ,0 0 0 / 9 7 ,5 0 0
@ 2 0 1 9 p ric e 9 9 0 ,0 0 0
2 0 1 9 a c t u a l v o lu m e
c . Sa le s Vo lu m e Va ria n c e
@ 2 0 1 9 p ric e 8 7 7 ,5 0 0 2 0 2 0 a c t u a l v o lu m e
1 1 2 ,5 0 0 @ 2 0 1 9 p ric e 9 9 0 ,0 0 0
2 0 1 9 a c t u a l v o lu m e
@ 2 0 1 9 p ric e 8 7 7 ,5 0 0
d . C o st Vo lu m e Va ria n c e 1 1 2 ,5 0 0
2 0 2 0 a c t u a l v o lu m e
@ 2 0 1 9 c o st
2 0 1 9 a c t u a l v o lu m e 6 6 0 ,0 0 0 d . C o st Vo lu m e Va ria n c e

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@ 2 0 1 9 c o st 5 8 5 ,0 0 0 2 0 2 0 a c t u a l v o lu m e
@ 2 0 1 9 c o st
7 5 ,0 0 0
2 0 1 9 a c t u a l v o lu m e 6 6 0 ,0 0 0
@ 2 0 1 9 c o st 5 8 5 ,0 0 0
7 5 ,0 0 0
EXAMPLE
e. Total Volume Variance
Sales Volume Variance 112,500
Cost Volume Variance 75,000 The decline in gross profit of Php 28,500 can be
37, 500 explained as:

f. Sales Mix Variance = 0 since the company only Gain due to favorable sales
produces one product volume variance 112,500

Losses due to:

g. Sales Quantity Variance Unfavorable Sales Price variance 22,000
2020 Avolume 110,000 Unfavorable Cost price variance 44,000
2019 Bvolume 97,500 Unfavorable cost volume variance 75,000
Difference 12,500 28,500
2019 GP/u *3
Variance 37,500 The decrease in gross profit is thus accounted for:
112,500 - 141,000 = 28,500
*SP – Cost = Php9 – Php6 = Php3

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  Forecasting is the iterative process both in way
financial statements are generated and financial
is developed.
FINANCIAL  AFN refers to the additional resources that will
be needed for a company to expand its
FORECASTING USING operations.
ADDITIONAL FUNDS  Financial forecasting using AFN is a way of
calculating how much new funding will be
NEEDED (AFN) required, so that the firm can realistically look
at whether or not they will be able to generate
the additional funding and therefore be able to
achieve higher sales.

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 FORMULA OF AFN- can be used to initial rough estimate of financial requirements.
 

A*= Assets that are tied directly to sales, hence must increase if sales are to increase. Note that A designates total assets
and A* designates those assets that must increase if sales are to increase. When the firm is operating at full capacity, as is
the case here, A*=A.
S= Sales during last year
A*/S= Percentage of required assets to sales, which also shows the required amount increase in assets per amount
increase in sales
L*= Liabilities that increase spontaneously. L* is normally much less than total liabilities. Spontaneous liabilities include
accounts payable and accruals, but not bank loans and bonds.
L*/S=Liabilities that increase spontaneously as a percentage of sales, or spontaneously generated financing per amount
increase in sales
S= Total sales projected for next year
∆S= Change in sales
M= Profit margin
RR= Retention ratio, which is the percentage of net income that is retained. The payout
ratio is the percentage of net income paid out to shareholders.

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  Operating leverage measures a company’s fixed
costs as a percentage of its total costs. It is used

OPERATING to evaluate the breakeven point of a business.

 The degree of operating leverage (DOL) is used
to measure the extent of the change in operating
AND income resulting from change in sales.
 Financial Leverage measures the sensitivity in
FINANCIAL fluctuations of the company’s overall profitability
to the volatility of its operating income caused
LEVERAGE by changes in its capital structure.
 The degree of financial leverage (DFL) is one of
the methods used to quantify a company’s
financial risk .

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DEGREE OF OPERATING LEVERAGE

FORMULAS EXAMPLE
   The
 management of ABC corp. wants to
determine the company’s current DOL.
The company sells 10,000 product units at
an average price of ₱ 50. The variable
cost per unit is ₱12 while the total fixed
WHERE: costs are ₱100,000.
Q- #of units V- Variable Cost Per Unit
P- Price Per Unit F- Fixed Costs
Every 1% change in the sales will change
the operating income by 1.38%.

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DEGREE OF FINANCIAL LEVERAGE

FORMULAS EXAMPLE
   ABC
 Corp. is planning a new project that
will require substantial financing. The
company’s management wants to determine
whether it can safely issue a significant
amount of debt to finance the new project.
Currently, the company’s EBiT is ₱500,000,
and interest payments are ₱100,000.

A1% change in the leverage will change the

company’s OI by 1.25%.

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