FMGT 85

SPECIAL
TOPICS IN
FINANCIAL
MANAGEMENT
Gladys B. Dialino
Instructor I
College of Economics, Management and
Development Studies
 After completing this course, the students
must be able to:
Analyze and frame • analyze and frame problems in the financial area

Evaluate • evaluate financial management related issues from an ethical perspective

Analyze and reformulate • analyze and reformulate financial statements to identify a firm’s business strategy and value
drivers so as to facilitate forecasting and valuation

Develop • develop analytical skills on investment strategies

Discuss and explain • discuss and explain the workings of banks and other financial institutions with regard to
profitability, liquidity and solvency

Interpret • interpret the tools, techniques, and frameworks commonly used as part of market and industry
assessments, on engagements involving substantial operational and organizational analysis.
ADVANCED
FINANCIAL
ANALYSIS AND
VALUATION

CHAPTER 1
After the completion of the chapter, students will be able to:

01 02 03 04
explain the various weigh the relevance demonstrate vertical compute, analyze, and
information provided and importance of and horizontal interpret financial
by the basic financial financial statement methods of financial ratios in terms of
statements analysis statement analysis liquidity, solvency and
profitability.
Understanding the Basic Financial
Statements
STATEMENT OF
FINANCIAL
POSITION
The Statement of
Financial Position
• Also known as the balance sheet is a
financial snapshot of your business at a
given date in time.
• Provides information about the financial
condition, position, and structure of the
company in terms of its assets, liabilities,
and the difference between the two,
which is the equity or net worth.
• The accounting equation (assets =
liabilities + owner’s equity) is the basis for
the financial position or balance sheet.
The Statement of
Financial Position
• Usually presented in comparative form.

• Comparative financial statements include

the current year’s statement and statement
of one or more of the preceding accounting
periods.

• Notes added to the statement of financial

position provide additional information not
included in the accounts on the financial
statements as well as explanations of
figures presented.
Illustrative Example of the Corporation Statement of Financial
Position

Report Form – the statement

Account Form – the entire
of financial position can be
statement of financial position
presented in vertical format
is normally presented in
known as the report form, with
horizontal layout, with an
the Assets Section above the
Assets page on the left, and a
Equities sections that,
page for Liabilities and Equity.
together, balance it.
Report Form
Account
Form
 Assets
Elements
of the
Balance
Liabilities
Sheet
Owner’s Equity
 An asset is a resource with economic
value that an individual, corporation, or
country owns or controls with the
expectation that it will provide a future
benefit. Assets are reported on a
company's balance sheet and are
bought or created to increase a firm's
value or benefit the firm's operations.
An asset can be thought of as
something that, in the future, can
generate cash flow, reduce expenses, or
improve sales, regardless of whether it's
manufacturing equipment or a patent.
 Within the assets segment,
accounts are listed from top
to bottom in order of their
liquidity – that is, the ease
with which they can be
converted into cash. They
are divided into current
assets, which can be
converted to cash in one
year or less; and non-current
or long-term assets, which
cannot.
Here is the general order of accounts within current assets:

Cash and cash equivalents are the most liquid assets and can include
Treasury bills and short-term certificates of deposit, as well as hard
currency.

Marketable securities are equity and debt securities for which there is
a liquid market.

Accounts receivable refers to money that customers owe the

company, perhaps including an allowance for doubtful accounts since a
certain proportion of customers can be expected not to pay.

Inventory is goods available for sale, valued at the lower of the cost or
market price.

Prepaid expenses represent the value that has already been paid for,
such as insurance, advertising contracts or rent.
Long-term assets include the following:

Long-term investments are securities that will not or cannot be

liquidated in the next year.

Fixed assets include land, machinery, equipment, buildings and

other durable, generally capital-intensive assets

Intangible assets include non-physical (but still valuable) assets

such as intellectual property and goodwill. In general, intangible
assets are only listed on the balance sheet if they are acquired,
rather than developed in-house. Their value may thus be wildly
understated – by not including a globally recognized logo, for
example – or just as wildly overstated.
 Liabilities

Liabilities are the money that a

company owes to outside parties, from
bills it has to pay to suppliers to interest
on bonds it has issued to creditors to
rent, utilities and salaries. Current
liabilities are those that are due within
one year and are listed in order of their
due date. Long-term liabilities are due at
any point after one year.
 current portion of long-term debt

bank indebtedness

interest payable
Current liabilities wages payable
accounts might customer prepayments
include: dividends payable and others

earned and unearned premiums

accounts payable
Long-term liabilities can include:

Long-term debt: interest and principal on bonds issued

Pension fund liability: the money a company is required to pay

into its employees' retirement accounts

Deferred tax liability: taxes that have been accrued but will not
be paid for another year (Besides timing, this figure reconciles
differences between requirements for financial reporting and
the way tax is assessed, such as depreciation calculations.)
 Shareholders' Equity
Shareholders' equity is the
money attributable to a
business' owners, meaning
its shareholders. It is also
known as "net assets," since
it is equivalent to the total
assets of a company minus
its liabilities, that is, the debt
it owes to non-shareholders.
 Shareholders' Equity
• Retained earnings are the net earnings
a company either reinvests in the
business or use to pay off debt; the
rest is distributed to shareholders in
the form of dividends.

• Treasury stock is the stock a company

has repurchased. It can be sold at a
later date to raise cash or reserved to
repel a hostile takeover.
 Some companies issue
preferred stock, which will be
listed separately from
common stock under
shareholders' equity.
Preferred stock is assigned an
arbitrary par value – as is
common stock, in some cases
– that has no bearing on the
market value of the shares
(often, par value is just $0.01).
The "common stock" and
"preferred stock" accounts
are calculated by multiplying
Shareholders' Equity the par value by the number
of shares issued.
 Paid-in capital
Additional paid-in capital or capital
surplus represents the amount
shareholders have invested in excess of
the "common stock" or "preferred
stock" accounts, which are based on par
value rather than market price.
Shareholders' equity is not directly
related to a company's market
capitalization: the latter is based on the
current price of a stock, while paid-in
capital is the sum of the equity that has
been purchased at any price.
STATEMENT OF
COMPREHENSIVE INCOME
 Income Statement
• Summarizes a company’s revenue (sales)
and expenses quarterly and annually for its
fiscal year.
• The final net figure, as well as various others
in this statement, is of major interest to the
investment community as it represents the
company’s financial performance for the
current year.
• Also called as “statement of income”,
“statement of earnings”, “statement of
operations”, and “statement of operating
results”. Some professionals call it “P & L”
which stands for profit and loss statement.
 Multi-Step Approach – the statement of
Forms and comprehensive income using the multi-
step approach shows the various
Presentation of the profitability stages from gross profit,
operating profit up to the net profit
Statement of which is essential in terms of cost
control and management.
Comprehensive
Single Step Approach – the service type
Income of statement of comprehensive income
was shown using a single step approach
as it simply identifies the income that
comes from professional fee and all
expenses grouped together to arrive at
net profit.
Overview of Financial
Statement Analysis
Financial Statement Analysis
• The process of identifying financial
strengths and weaknesses of the firm by
properly establishing relationship
between the items of the balance sheet
and the income statement account.

• There are various methods and

techniques that are used in analyzing
financial statement analysis such as
comparative statements, schedule of
changes in working capital, common size
percentages, funds analysis, trend analysis,
and ratios analysis.
Uses of Financial
Statement Analysis

Financial statements are

prepared to meet
external reporting
obligations and also for
decision making
purposes. They play a
dominant role in setting
the framework of
managerial decisions.
Question: What can you look for when
reading financial statement analysis report
and how do you use it?
 Trends – the results given in general cover at least the
previous three full accounting years therefore any

Question: What
fluctuations in any area can be easily pinpointed.

can you look for Benchmarks – the average results for each ratio together wit
the industry profile of the average company in the sector can be

when reading both used as benchmarks to compare individual company

performance.

financial statement Size – all the major companies in the sector are ranked on the

analysis report and basis of sales, profits, total assets, and employee numbers. The
largest and smallest of the key players can be easily identified,
while the relative size of any company can be assessed.

how do you use it? Growth – the average annual growth of each
company’s sales, profits, total assets, and number
of employees over the three-year period being
analyzed is calculated and ranked.
 • The investors get enough idea to decide
about the investments of their funds in the
specific company.
Advantages • Regulatory authorities like International
Accounting Standards Board can ensure
of Financial whether the company is following
accounting standards or not.
Statement • Financial statements analysis can help the
Analysis government agencies to analyze the taxation
due to the company. Moreover, a company
can realize its own performance over the
period of time through financial statements
analysis.
 Comparison of
Limitations of financial data
Financial Statement
Analysis
The need to look
beyond ratios
TOOLS AND TECHNIQUES OF
FINANCIAL STATEMENT
ANALYSIS
 Horizontal Analysis or
Trend Analysis

Comparison of two or more

year’s financial data is known as
horizontal analysis, or trend
analysis. Horizontal analysis is
facilitated by showing changes
between years in both peso and
percentage form.
Illustrative Example 1– Horizontal
Analysis (Balance Sheet)
Illustrative Example 2 –
Horizontal Analysis (Income
Statement)
Trend Percentage

Horizontal analysis of financial

statements can also be
carried out by putting trend
percentages. Trend
percentage states several
years’ financial data in terms
of a base year. The base year
equals 100%, with all other
years stated in some
percentage of this base.
To illustrate, let us look at the summary of Kaja Retail Company’s
sales and net income from 2013 to 2018.

• Sales and Net Income in Peso

2013 2014 2015 2016 2017 2018

24,000.0 25,000.0
Sales 15,000.00 18,000.00 19,500.00 0 27,000.00 0

Net
Income 500.00 630.00 720.00 815.00 890.00 1,180.00
The data below show sales and net income in percentages and this is computed as:
Base Year = 2013 = P15,000.00 = 100% for sales and P535.00 = 100% for net income.

• Using the base year, we compute for the succeeding years as:
Year Sales Base Percentage Net Income Base Percentage
Amount Amount

2014 18,000.00 15,000.00 120% 630.00 500.00 126%

2015 19,500.00 15,000.00 130% 720.00 500.00 144%

2016 24,000.00 15,000.00 160% 815.00 500.00 163%

2017 27,000.00 15,000.00 180% 890.00 500.00 178%

2018 25,000.00 15,000.00 167% 1,180.00 500.00 236%

Sales and Net Income in Percentage

2013 2014 2015 2016 2017 2018

Sales 100% 120% 130% 160% 180% 167%

Net
Income 100% 126% 144% 163% 178% 236%
Sales Trend Percentage Chart
 Vertical Analysis
Vertical analysis is the procedure of
preparing and presenting common size
statements. Common size statement is
one that shows the items appearing on
it in percentage form as well as in peso
form. Each item is stated as percentage
of some total of which that item is a
part. Key financial changes and trends
can be highlighted by the use of
common size statements.
 Kaja's Retail Corporation
Common Size Comparative Statement of Financial Position
December 31, 2018 and 2017
(In thousand P)

Illustrative Example 1: Common Size 2018 2017

Common Size %

2018 2017

Comparative Balance Sheet

Assets

Current Assets

Cash 600 1175 3.81% 8.11%

Accounts Receivable 3000 2000 19.05% 13.81%

Inventory 4000 5000 25.40% 34.52%

Prepaid Expenses 150 60 0.95% 0.41%

Total Current Assets 7750 8235 49.21% 56.85%

Non Current Assets

Land 2000 2000 12.70% 13.81%

Buildings, net 3000 2500 19.05% 17.26%
Equipment, net 2000 1000 12.70% 6.90%
Furniture and fixtures, net 1000 750 6.35% 5.18%
Total Non Current Assets 8000 6250 50.79% 43.15%

Total Assets 15750 14485 100.00% 100.00%

Liabiilites and Stockholder's Equity

Current Liabilities
Accounts Payable 2900 2000 18.41% 13.81%
Accrued Payable 450 200 2.86% 1.38%
Notes Payable, short term) 150 300 0.95% 2.07%

Total Current Liabilities 3500 2500 22.22% 17.26%

Non-Current Liaibilities
Mortgage Payable 2750 2000 17.46%
Bonds, payable, 5% 1000 2000 6.35% 13.81%
Total Non-Current Liabilities 3750 4000 23.81% 27.61%

0.00% 0.00%

Total Liabilities 7250 6500 46.03% 44.87%

Stockholder's Equity
Preferred Stock, P100, 6% 1000 1000 6.35% 6.90%
Common Stock, P12 par 3000 3000 19.05% 20.71%
Additional Paid in Capital 500 500 3.17% 3.45%
Total Paid in Capital 4500 4500 28.57% 31.07%
Retained Earnings 4000 3485 25.40% 24.06%
Total Stockholder's Equity 8500 7985 53.97% 55.13%

Total Liabilities and Stockholder's Equity 15750 14485 100.00% 100.00%

Illustrative Example 2:
Common Size Comparative
Income Statement