Well-balanced financial structure between borrowed funds and owners’ equity 3.. Vertical analysis which shows the relationships of the items in the same year: also referred to as “static
Trang 1ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS – PART I
I Questions
1 The objective of financial statements analysis is to determine the extent of a firm’s success in attaining its financial goals, namely:
a To earn maximum profit
b To maintain solvency
c To attain stability
2 Some of the indications of satisfactory short-term solvency or working capital position of a business firm:
1 Favorable credit position
2 Satisfactory proportion of cash to the requirements of the current volume
3 Ability to pay current debts in the regular course of business
4 Ability to extend more credit to customers
5 Ability to replenish inventory promptly
3 These tests are:
1 Improvement in the financial position
2 Well-balanced financial structure between borrowed funds and owners’ equity
3 Effective employment of borrowed funds and owners’ equity
4 Ability to declare satisfactory amount of dividends to stockholders
5 Ability to withstand adverse business conditions
6 Ability to engage in research and development in an attempt to provide new products or improve old products, method or processes
4 Some indicators of managerial efficiency are:
1 Ability to earn a reasonable return on its investment of borrowed funds and owners’ equity
2 Ability to control operating costs within reasonable limits
3 No overinvestment in fixed assets, receivables and inventories
5 The techniques used in Financial Statement Analysis are:
I Vertical analysis which shows the relationships of the items in the same year: also referred to as “static measure.”
Trang 2a Financial ratios
b Common-size statements
II Horizontal analysis which shows the changes or tendencies of an item for 2 or more years; also referred to as “dynamic measure.”
a Comparative statements - showing changes in absolute amount and percentages
b Trend percentages III Use of special reports or statements
a Statements of Changes in Financial Position
b Gross Profit / Net Income Variation Analysis
6 Horizontal analysis involves the comparison of items on financial statements between years Analysis of comparative financial statements or the increase/decrease method of analysis and trend percentages are the two techniques that may be applied under horizontal analysis
Vertical analysis involves the study of items on a single statement for a single year, such as the analysis of an income statement for some given year Common-size statement and financial ratios are techniques used in vertical analysis
II Practical Problems
PROBLEM 1
Total Current Assets
Working Capital
Current
2 Equipment is sold at
less than its net book
3 Beverages are sold on
4 A cash dividend is
5 Accrued payroll is
6 Treasury stock is
7 A fully depreciated
Food is assumed to have been sold at a profit.
Cash is increased Assumption: Beverage sold at a profit.
Assumption: No payment yet but liability is set up.
Trang 38 Equipment is
purchased with
9 Utility expenses are
paid (they were not
10 A cash dividend is
PROBLEM 2
Requirement 1:
XYZ Corporation
Balance Sheet
As of December 31
Change
2000 2001
Assets
Prepayments and others 4,800 7,400 2,600 54.17%
Property, Plant & Equipment
- net of depreciation 30,200 73,400 43,200 143.05%
Liabilities and Stockholders’ Equity
Total current liabilities 51,600 123,200 71,600 138.76%
Total shareholders’
Total liabilities and
Assumption: Current liability was set up when dividends were declared.
Trang 4XYZ Corporation
Income Statement
Years ended December 31
(P thousands)
Change
2000 2001
Selling, general and
administrative expenses 35,500 58,400 22,900 64.51%
Requirement 2:
Short-term financial position
1 Current Assets 62.01% Current Liabilities 138.76%
Unfavorable
2 Quick Assets 62.40% Current Liabilities 138.76%
Unfavorable
Unfavorable
Favorable
Leverage
Unfavorable
6 Total Liabilities 138.76% Total Stockholders’ Equity 43.14%
Unfavorable
Profitability
Unfavorable
Trang 58 Net Sales 59.16% Selling, general & administrative
Unfavorable
Unfavorable
Unfavorable
PROBLEM 3
Requirement 1
Revenues P94,749 (k) P 88,412 Cost of goods sold 74,564 65,586 (a)
Other expenses 15,839 13,564 Income before income taxes 4,346 9,262 Income taxes (36.95% in 20x3) 1,606 (l) 1,581 Net income P 2,740
(m) P 7,681 (b)
S TATEMENT OF R ETAINED E ARNINGS
Beginning balance P 1,851 (n) P 9,987 Net income 2,740 (o) 7,681 (c)
Dividends (559) (455) Ending balance P 4,032 (p) P 17,213 (d)
B ALANCE S HEET
Assets:
Cash P 45 (q) P 45 (e)
Property, plant, and equipment 23,894 20,874 Other assets 3,240 (r) 16,900 Total assets P 27,179 (s) P 37,819
Liabilities:
Current liabilities P 11,454 (t) P 9,973 Long-term debt and other liabilities 11,331 10,120 Total liabilities 22,785 20,093 (f)
Shareholders’ Equity:
Common stock P 229 P 230 Retained earnings 4,032 (u) 17,213 (g)
Other shareholders’ equity 133 283
Trang 6Total shareholders’ equity 4,394 (v) 17,726 Total liabilities and shareholders’ equity P 27,179 (w) P 37,819 (h)
S TATEMENT OF C ASH F LOWS
Net cash provided by operating activities P 2,383 (x) P 2,906 Net cash used in investing activities (3,332) (3,792) Net cash provided by financing activities 987 911 Increase (decrease) in cash 38 25 (i)
Cash at beginning of year 45 (y) 20 Cash at end of year P 83 (z) P 45 (j) Requirement 2
a Operations deteriorated in 20x3 as indicated by the following:
1 Higher percentage of cost of sales to sales
(20x2 – 74.18%) (20x3 – 78.70%)
2 Other expenses likewise increased as a percentage of sales in 20x3
3 Tax rate significantly increased from 17.07% in 20x2 to 36.95% in 20x3
4 Decline in total assets
5 Increase in liabilities as a percentage of total assets
(20x2 – 53.13%) (20x3 – 83.83%)
b The company had increased dividend payment despite the decline in profit
c Total resources or assets, end of 20x3 – P27,179
Total resources or assets, end of 20x2 – P37,819
d Total liabilities, end of 20x2 – P20,093
Total liabilities, end of 20x3 – P22,785
e Major sources of cash in both 20x3 and 20x2 were from operations and financing Cash from operations had declined while cash from financing activities increased This is not favorable The company had been using most its cash in investing activities, particularly for the purchase of property and equipment
PROBLEM 4
Requirement (1)
Comped for valid business reasons (2)
Comped to friends of management (2)
Paid rooms occupied
Rooms available = 5,820*5,000 = 85.9%
Trang 7194 rooms x 30 days
= 5,820 rooms available
Requirement (2)
PROBLEM 5
P25,000
P21,000
Food transfers to the beverage dept 100 500
PROBLEM 6
Requirement (1)
Change
Prepaid expenses 1,400 1,610 210 15.00%
Requirement (2)
Except for Food inventories and Beverage inventories, all other current assets changed by more than 10%, the most notable of which is accounts receivable which decreased by 76.20% The decrease in accounts receivable accompanied by increase
Net Food Cost
Sales = P20,500P60,000 = 34.17%
Rooms occupied by
2 or more guests
Rooms occupied by guests =
3,200 5,000 + 4
= 63.95%
= 3,2005,004
Trang 8in Cash and Credit card receivables could indicate the change in company’s policy of reducing sales open account which may result to a more favorable liquidity position
PROBLEM 7
Foxtail Hotel Comparative Income Statement Years Ended December 31, 2002 and 2003
Change
2002 2003 Peso Percentage
Expenses:
Cost of goods sold P202,000 P188,000 (14,000) ( 6.90)% Selling and general
Income tax expense 42,000 37,000 (5,000) (11.90)% Total expenses 349,000 322,000 (27,000) (7.70)%
Net income decreased by a higher percentage than total revenues in 2003 because cost of goods sold and selling and general expenses decreased by a lower percentage than revenues, thus, decreasing the profit margin Favorable change could be observed in interest expense which decreased by 42.9% and income tax expense by 11.9%
PROBLEM 8
Rainee Restaurant Common-size Balance Sheet December 31, 2003
Common-size Percentages
Assets
Total current assets P 72,000 22.22% Long-term investments 35,000 10.80% Property, plant and equipment, net 217,000 66.98% Total assets P324,000 100.00%
Liabilities
Total current liabilities P 58,000 17.90% Long-term debt 118,000 36.42% Total liabilities P176,000 54.32%
Trang 9Stockholders’ Equity
Total stockholders’ equity 148,000 45.68% Total liabilities and stockholders’ equity P324,000 100.00%
PROBLEM 9
Requirement (1)
Common-size Income Statement Year Ended December 31, 2003
Francisco Hotel Industry Average
Net Sales 100.0% 100.0% Cost of goods sold 63.6 65.8 Gross profit 36.4 34.2 Operating expenses 20.9 19.7 Operating income 15.5 14.5 Other expenses 0.6 0.4 Net income 14.9% 14.1%
Common-size Balance Sheet December 31, 2003
Francisco Hotel Industry Average
Current assets 77.8% 70.9% Fixed assets, net 16.4 23.6 Intangible assets, net 0.9 0.8 Other assets 4.9 4.7 Total 100.0% 100.0% Current liabilities 46.0% 48.1% Long-term liabilities 13.8 16.6 Stockholders’ equity 40.2 35.3 Total 100.0% 100.0%
Requirement (2)
(a) Ratio of gross profit to net sales = 36.4% > 34.2%
(b) Ratio of operating income to net sales = 15.5% > 14.5%
(c) Ratio of net income to net sales = 14.9% > 14.1%
Francisco’s profit performance is better than the industry average in year 2003
Requirement (3)
(a) Ratio of current assets to total assets = 77.8% > 70.9%
(b) Ratio of stockholders’ equity to total assets = 40.2% > 35.3%
Trang 10Francisco’s financial position is better than the industry averages.
PROBLEM 10
Change July August Peso Percentage
Beverage inventories 2,220 1,887 (333) (15.00%)
PROBLEM 11
Common-size Percentages July August July August
Beverage inventories 2,220 1,887 13.20% 10.94%
PROBLEM 12
Year Ave Rm Rate Index
PROBLEM 13
Sales Revenue Guests Ave Check
PROBLEM 14
Changes Year 2003 Year 2004 Pesos %
Cost of sales revenue 9,208 9,438 + 230 + 2.5%
Direct costs 10,202 11,622 + 1,420 + 13.9%
Indirect costs 2,477 2,403 – 74 – 3.0% Operating income P 1,615 P 1,149 – 466 – 28.9%
Trang 11Operating income decreased inspite of the increase in sales because of the substantial increase in direct costs
PROBLEM 15
Condensed Income Statement
PROBLEM 16
Changes ASSETS Year 2003 Year 2004 Peso Percent Current Assets
Prepaid expenses 3,900 4,100 200 5.13%
Total Current Assets P 38,600 P 53,100 P 14,500 37.56%
Property, Plant &
Equipment
-Accumulated depreciation (315,500) (335,800) 20,300 6.43% Glassware, linen
inventories 12,200 15,300 3,100 25.41%
Total Property &
Equipment (net) P710,400 P740,100 29,700 4.18%
Total Assets P749,000 P793,200 P 44,200 5.90%
LIABILITIES &
STOCKHOLDERS’
EQUITY
Current Liabilities
Current Portion, Mortgage
Payable 13,600 11,200 (2,400) (17.65%)
Trang 12Total Current Liabilities P 39,300 P 43,800 4,500 11.45%
Long-term Liabilities
Mortgage Payable 423,500 412,300 (11,200) (2.64%) Total Liabilities P462,800 P456,100 (6,700) (1.45%)
Stockholders’ Equity
Retained Earnings 161,000 191,900 30,900 19.19%
Total Stockholders’
Equity P286,200 P337,100 50,900 17.78%
Total Liabilities &
Stockholders’ Equity P749,000 P793,200 P 44,200 5.90%
1 Significant increases could be observed in Cash, Credit card receivables and Accounts receivable The increase in receivable could be due to the company’s change in policy in granting credit and an indication of inefficiency in the collection of receivables
2 Furnishings and glassware, linen inventories likewise showed significant increases This can be viewed favorably because restaurants should keep up with the demands of new atmosphere as well as provide for the normal wear and tear of their supplies
3 Total liabilities declined a little but with significant increases in accounts payable, accrued expenses payable and taxes payable The company should exercise care in increasing more liabilities that it can handle
4 The increase in stockholders’ equity accompanied by a decrease in total liabilities can be viewed favorably because it indicates strengthening of the company’s financial position This could also mean
a) lesser reliance on borrowed capital,
b) infusion of equity capital, and
c) profitable operations as reflected in the increase in retained earnings
PROBLEM 17
Direct Costs
Indirect Costs
Trang 13Rent Expense 4% 4%
Other Indirect Expenses 2% 7% 2% 8%
While “B” reports higher revenue, “A” has been more profitable for two main reasons:
1 Direct costs as a percentage of revenue is only 41% as against 45% of B
2 Indirect costs is also lower by 1% in A as compared with B
“B” however has an advantage over “A” as far as cost of sales is concerned
In conclusion, “B” should try to control their operating expenses, direct and indirect,
to realize higher profit