ANALYSIS AND INTERPRETATION OF FINANCIAL ANALYSIS

Financial Statement

 To transform data into information , used as basis for better economic decisions and actions.
 Financial statement is not the end of accounting, the next step is Financial Analysis and
Interpretation.

Bankers and Creditors

 Analyzes statements to determine if it is profitable.

Management

 Analyzes statements to determine past performances.

 A means of control and as a guide for future action.

Reasons to Analyze and Interpret Financial Statements:

Investors

 Determine whether to buy, hold or sell their investment in equity ownership in the business.
 Assess the ability of the investee to pay.

Employees

 Determine stability and profitability of employers.

 Determine the ability of the employer to pay salaries and fringe benefits.

Lenders

 Determine the ability of the borrowers to pay the loans granted to them on time.

Suppliers

 Determine the ability of the customer to pay debta as they fall due.
 Determine the ability of the customer to remain as a continuing buyer.

Management

 Planning, organizing, leading, and controlling.

Customer

 Determine the ability of the enterprise to be a continuing source of supply.

 Ability of the company to exist over a period of time.

Public

 Determines the contribution to the economy.

Government Agencies

 Determine the capacity of the enterprise to pay taxes and its compliance.
Statement of Financial Position – presents the assets , liabilities, and owner’s equity of the entity as of
specific date.

Statement of Income – presents the sales, cost of sales, selling expenses, administrative expenses, and
net income for a period of time.

Comparative Analysis:

1. Intracompany- Involves comparison within the entity.

2. Intercomapny- involes comparison of data of one entity with those of another entity.
3. Industry Average- shows the standing of the entity in the industry where it belongs.

Horizontal Analysis

 Is a technique for evaluating a series of financial statement data over a period of time.
 Involves sidewise comparison.

Vertical Analysis

 Is a technique for evaluating financial statement data thet expresses each item in a financial
statement as a percentage of base amounts.

Comparison of Income and Expenses

Income

 Is a result of two kinds of flows which have opposite effects.

Revenue

 Tend to increase income.

Expenses

 Tend to reduce (income).

Ratio Analysis

1. Liquidity Ratios- measures the ability of an entity to pay currently maturing obligations and
meet unexpected cash needs.
2. Profitability Ratios- measures the ability of an entity to earn income over a period of time.
3. Solvency Ratios- measure the ability of an entity to survive a long period of time.

Liquidity Ratios

1. Current Ratio- is the relationship of available current assets to meet payments of current
liabilities. It also called Working capital ratio or Banker’s ratio.

Profitability Ratio

 Refers to the ability of a business to earn profits from its operations.