FINANCIAL STATEMENT ANALYSIS
• Financial statement analysis is the process of examining a company's financial
statements to gain insights into its financial performance and position.
• It involves reviewing key financial documents to assess the company's profitability,
liquidity, solvency, and stability of the company.
• The process of identifying financial strengths and weaknesses of the firm by comparing
its income and balance sheet items.
• Techniques or methods used are horizontal analysis, vertical analysis, and ratio
analysis.
• Overall, financial statement analysis provides valuable insights into a company's financial
health and helps stakeholders make informed decisions to support their objectives.
TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
1. HORIZONTAL ANALYIS (Comparative Statement): Comparing financial data of two
years showing the increase or decrease in the account balance with their corresponding
percentages.
2. VERTICAL ANALYSIS (Common-Size Statement): Uses a significant item on the
financial statement as a base value. All other financial items on the statement are
compared with it.
3. RATIO ANALYSIS: This involves calculating ratios using numbers from financial
statements.
RHEA MERCHANDISING ENTERPRISES
HORIZONTAL ANALYSIS OF INCOME STATEMENT
FOR THE YEARS DECEMBER 31, 2017 AND DECEMBER 31, 2018
2018 2017 Difference Percentage
Sales 3,000,000 2,500,000 500,000 20%
Cost of Goods Sold 1,600,000 1,400,000 200,000 14.29%
Gross Profit 1,400,000 1,100,000 300,000 27.27%
Operating Expenses:
Salaries and wages 575,000 450,000 125,000 27.28%
Office rent 180,000 150,000 30,000 20%
Office Supplies 50,000 40,000 10,000 25%
Utilities 130,000 100,000 30,000 30%
Maintenance and Repairs 110,000 90,000 20,000 22.22%
Total Expenses 1,045,000 830,000 215,000 25.90%
Net Profit 355,000 270,000 85,000 31.48%
Formula: Current (Present) Year – Previous (Past) Year x 100
Previous (Past) Year
Simplified: Difference / Previous (Past) Year x 100
RHEA MERCHANDISING ENTERPRISES
HORIZONTAL ANALYSIS OF STATEMENT OF FINANCIAL POSITION
FOR THE YEARS DECEMBER 31, 2017 AND DECEMBER 31, 2018
2018 2017 Difference Percentage
Assets
Cash 235,000 185,000 50,000 27.03%
Accounts receivable 355,000 300,000 55,000 18.33%
Inventory 476,350 343,815 132,835 38.64%
Fixed assets 847,450 900,000 (52,550) 5.84%
Total Assets 1,913,800 1,728,815 184,985 10.70%
Liabilities and Owner’s Equity
Accounts Payable 115,500 177,745 (62,245) (35.02%)
Salaries Payable 17,385 25,155 (7,770) (30.89%)
Notes Payable 800,000 900,000 (100,000) 11.11%
Total Liabilities 932,885 1,102,900 (170,015) 15.42%
Owner’s Capital 980,915 625,915 355,000 56.72%
Total Liabilities & Owner’s Equity 1,913,800 1,728,815 184,985 10.70%
RHEA MERCHANDISING ENTERPRISES
VERTICAL ANALYSIS OF INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2018
2018 Percentage
Sales 3,000,000 100%
Cost of Goods Sold 1,600,000 53.33%
Gross Profit 1,400,000 46.47%
Operating Expenses:
Salaries and wages 575,000 19.17%
Office rent 180,000 6.00%
Office Supplies 50,000 1.67%
Utilities 130,000 4.33%
Maintenance and Repairs 110,000 3.67%
Total Expenses 1,045,000 34.83
Net Profit 355,000 11.83%
RHEA MERCHANDISING ENTERPRISES
VERTICAL ANALYSIS OF STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED DECEMBER 31, 2018
2018 Percentage
Assets
Cash 235,000 12.28%
Accounts receivable 355,000 18.55%
Inventory 476,350 24.89%
Fixed assets 847,450 44.28
Total Assets 1,913,800 100.00%
Liabilities and Owner’s Equity
Accounts Payable 115,500 6.04%
Salaries Payable 17,385 0.91%
Notes Payable 800,000 41.80%
Total Liabilities 932,885 48.75
Owner’s Capital 980,915 51.25
Total Liabilities & Owner’s Equity 1,913,800 100.00%