FINMAN2 REVIEWER Formulas to remember:

Financial Statement Analysis Year X = Base (from)

Peso Change = Analyzed amount – Base Amount Year Y = Analyze (to)
• Financial Statements are periodic reports that gives information for
[Common Question: How much is the increase (decrease) from year x to year y of
decision making.
n account?]
Four (4) Key Financial Statements:
Percent Change = (Peso change ÷ Base Amount) x 100
1. Income Statement
For FS Analysis
2. Balance Sheet [Common Question: By what % did n account change from year x to year y?]
3. Statement of Changes in Equity
4. Statement of Cash flows

Income statement (Statement of financial performance) 2. Vertical Analysis “Common Size”

o Shows comparison of a line item within a statement to another
- The income statement provides a financial summary of the firm’s line item within that same statement. The comparison, in the form
operating results during a specified period. Operating results are of a percentage, reveals each line item as a component
represented by the firm’s income and expenses. percentage of another line item.
Balance sheet (Statement of financial position) o These percentages are considered common size.
o Represents each line item as a percentage of a base figure,
- The balance sheet presents a summary statement of the firm’s financial offering insights onto the proportional, contribution of each
position at a given time. The statement balances the firm’s assets (what it element.
owns) against its financing, which can be either debt (what it owes) or
equity (what was provided by owners). Formulas to remember:

Two (2) Methods of Analysis

Percent of Sales or Revenue = (Analyzed amount ÷ Total sales or Revenue)
1. Horizontal Analysis “Trend Analysis” x 100
o Looks at trends over time on various financial statement line [Applicable for amounts presented in income statement]
items
o Requires comparative financial statements (two or more periods) Percent of Assets = (Analyzed amount ÷ Total assets) x 100
[Applicable for amounts presented in balance sheet]
o Involves percentage changes or absolute variances between
corresponding line items across years.
 Financial Ratios
Vertical Analysis (Multiple-step Income Statement)
Ratio Analysis

- Involves methods of calculating and interpreting financial ratios to

Income Statement
analyze and monitor the firm’s performance. The basic inputs to ratio
Revenue xx analysis are the firm’s income statement and balance sheet. Ratio
Less: Cost of Sales (xx) analysis is not merely the calculation of a given ratio. More important is
Gross Profit xx the interpretation of the ratio value.
Less: Operating expenses (xx)
Operating income/loss Five (5) Categories of Financial Ratios
Less: Non-operating expenses xx
Earnings before Interest & Tax xx 1. Liquidity Pay current
Less: Interest income/expense (xx) liabilities as they Measures Primarily
Earnings before Taxes xx fall due (short term the company’s for the
Less: Income tax expense (xx) obligations) ability to interest
Net loss/income xx 2. Solvency or Pay non-current pay of creditors
Debt liabilities as they
or Leverage fall due (long term
obligations)
Balance Sheet
3. Profitability Relates to Measures return
Asset xx the company’s
Liabilities (xx) 4. Activity operations. Measures risk
along with
Equity xx
Liquidity and
Solvency ratios
5. Market Ratios Looks at external Measures risk Primarily
information’s to and return for the
measure interest
company’s net of investors
worth.
Liquidity Ratios Debt/Solvency/Leverage Ratios

The liquidity of a firm is measured by its ability to satisfy its short-term obligations This ratio indicates the level of debt incurred by a business entity. These ratios
as they come due. provide an indication of how the company’s assets and business operations are
CA – CL = Working Capital financed (using debt or equity).
Formulas:
Formulas:
1. Current Ratio
o Measures the company’s’ ability to pay using current assets. 1. Debt Ratio
o Formula: o Formula:
Current Assets  Current Liabilities Total Liabilities  Total Assets

o Interpretation: o Interpretation:
If 1 = liquid; If 1 = not liquid If 1 = not solvent; If 1 = solvent

2. Quick (Acid) Ratio 2. Debt to Equity Ratio

o Formula: o Formula:
(Current Assets – Inventory)  Current Liabilities Total Liabilities  Total Equity

Cash + Accounts Receivables + Market securities

Current Liabilities 3. Times Interest Earned
o Formula:
Earnings before Interest and Tax 
3. Cash Ratio
Interest Payments
o Uses cash and market securities
o Formula:
(Cash + Marketable securities)  Current Liabilities 4. Equity Ratios
o Formula:
Total Equity  Total Assets
Activity Ratios 3. Average Payment Period
o Formula:
Activity ratios measure the speed with which various accounts are converted
360 days  Accounts Payable Turnover
into sales or cash, or inflows or outflows. In essence, they measure how efficient
a firm operates.

Formulas on Turnover: 4. Total Asset Turnover

o Formula:
1. Inventory Turnover Sales  Total Assets
o Formula:
Cost of goods sold  (Ave.) Inventory
Profitability Ratios

2. Account Receivable Turnover Profitability ratios are a class of financial metrics that are used to assess a
o Formula: business's ability to generate earnings relative to its revenue, operating
Net credit sales  (Ave.) Accounts Receivable costs, balance sheet assets, or shareholders' equity over time, using data
from a specific point in time.

A multiple-step income statement is helpful in computing for profitability

3. Account Payable Turnover
ratios:
o Formula:
Net credit purchases  (Ave.) Accounts Payable

Formulas on Period:

1. Inventory Conversion Period

o Formula:
360 days  Inventory Turnover

2. Average Collection Period

o Formula:
360 days  Accounts Receivables Turnover
The following are the most common profitability ratios:

Margins

1. Gross profit margin = gross profit  total revenue

2. Operating profit margin = operating profit  total revenue
3. Net profit margin = net profit  total revenue

Returns

1. Return on total assets = net profit  total assets

2. Return on equity = net profit  total equity

Market Ratios

Market ratios relate the firm’s market value, as measured by its current share
price, to certain accounting values. These ratios give insight into how investors in
the marketplace believe that the firm is doing in terms of risk and return.

Formulas:

1. Price-earning ratios = Market price per share  Earnings per share

o Earnings per share:
Net income – Dividends paid  No. of shares outstanding

2. Market or Book ratios = Market price per share  Book value per share
o Book value per share:
Book value of equity  No. of shares outstanding