Financial Statement

Analysis,
Balance Sheet, Income
Statement,
Retained Earnings
Statement
GROUP 1
CABAL, John Matthew COLOMA, Christine
DUQUE, Krischenne Jessica PLACENTE, AD Ryan
VILLALON, John Jamielle

THE STOCKHOLDERS
REPORT
The annual report and other reports given to
stockholders to inform them of the companys
financial standing and developments or discusses the
profits and losses of the company.
Also called shareholders report.

Sharehold
ers Report

STOCKHOLDERS REPORT

What goes into a

stockholders report?
CEO's Letter
The chief executive officer of the company greets the
stockholders in an introductory letter setting the tone of the
report.
Financial Well-Being
The annual report contains the consolidated financial
statements regarding the company's income, cash flow
performance, short- and long-term debt and financial position.

Products and Marketing

The marketing strategy for new and existing products
demonstrates the corporation's capacity to discover potential
customers, identify growth markets and begin to offer the
company's products in those new markets.

Research and Development

A company demonstrates financial viability by informing
shareholders about the many new ideas and products currently
being developed and researched.

THE FOUR KEY FINANCIAL

STATEMENTS
1. Balance sheet provides a snapshot of a firms financial

position at one point in time.

2. Income statement summarizes a firms revenues and
expenses over a given period of time.
3. Statement of retained earnings shows how much of
the firms earnings were retained, rather than paid out as
dividends.
4. Statement of cash flows reports the impact of a firms
activities on cash flows over a given period of time.

NOTES TO FINANCIAL
STATEMENTS
Provide

narrative description or disaggregation of items

presented in the financial statements and information about items
that do not qualify for recognition.
Contain information in addition to that presented in the financial
statements.
In other words, notes to financial statements are used to report
information that does not fit in the financial statements in order
to enhance the understandability of the financial statements.
The purpose of the notes to financial statements is to provide
the necessary disclosures required by Philippine Financial
Reporting Standards.

BASICS OF FINANCIAL
STATEMENT ANALYSIS
The balance sheet and income statement are both
basic statements common to most businesses.
Another group of statements are based on the
concept of how funds flow through a business.
Two such statements are the statement of
retained earnings and the statement of cash
flows.

Major sections to consider

1. Company Overview
These factors can prove invaluable in helping to
explain why a company might be a profitable investment
or not.
2. Investment Thesis
Contains research on the firms financial statements,
such as sales and profit growth trends, cash flow generation
strength, debt levels and overall liquidity, and how this
compares to the competition.

3. Valuation
There are three primary valuation techniques: The
first, and arguably most fundamental, technique is to
estimate a companys future cash flows and discount
them back to the future at an estimated discount rate.
This is generally referred to as adiscounted cash flow
analysis.
4. Key Risks
The loss of patent protection for a blockbuster drug
for a pharmaceutical company is a great example of a
factor that can weigh heavily on the valuation for its
underlying stock. Other considerations include the
industry in which the firm operates.

 5. Other Considerations
Sections coveringcorporate governance, the
political environment or nearer-term news flow, might
be worthy of a fuller analysis. Basically, anything
important that can impact the future value of a stock
should exist somewhere within the report.
6. The Bottom Line
Performance of the underlying company is most
certainly to drive the performance of its stock or
bond in the future. Other derivative securities, such
as futures and options, will also depend on an
underlying investment, be it a commodity or a
company.

NEED FOR COMPARATIVE

ANALYSIS
The primary reason for comparative analysis is the
explanatory interest of gaining a better understanding of the
causal processes involved in the production of an event,
feature or relationship. Typically it achieves this by
introducing (or increasing) variation in the explanatory
variable or variables.
The strength of comparative analysis as a research design is
its ability to introduce additional explanatory variables (or to
allow variation in variables which take a fixed value in the
initial case of interest), and to show that relations are more

TOOLS OF ANALYSIS
These financial analysis tools are highly helpful in evaluating the
market and investing in a way so as to maximize the profit from
the investments made. These financial analysis tools are useful
for deciphering both internal and external information related to
a specific business organization. The economic conditions in the
present day market are analyzed by management professionals
with assistance from SWOT analysis. Moreover, financial
analysis tools are really important for any investor for the
companys performance shows direct impact on the price of a
companys stock.

Application of analysis tools

Mainly, the financial analysis tools can be used for SWOT
analysis. The term SWOT is short for:

S Strength
Intern
W Weaknesses al
Factor
O Opportunitiess Exter
nal
T Threats
Factor
s

Types of financial analysis tools

Balanced Scorecardis one tool which can be of good
assistance to gauge the financial position of a company
(can be easily performed usingReady Ratios software).
This financial analysis tool is helpful in subjective as
well as objective measurement of special processes.
Moreover, this financial tool is also helpful in
evaluation of a companys overall return, the operating
income, and the capital financing processes.

 Benchmarking is used for assessing the

intrinsic strengths and weaknesses of a
business organization. Besides, this also sways
the stock price of the company. Also, there are
some professional agencies which use this type
of financial analysis tools to generate advices
for their clients.

Let's assume you compare the returns of your stock portfolio, which is a
broadly diversified collection of small-cap stocks and is managed by
Company XYZ, with the Russell 2000 index, which you feel is an accurate
universe of feasible alternative investments. If Company XYZ's portfolio
returns 5.5% in a year but the Russell 2000 (the benchmark) returns 5.0%,
then we would say that your portfolio beat its benchmark. Benchmarks
help an investor communicate his or her wishes to a portfolio manager. By
assigning the manager a benchmark with which to compare the portfolio's
performance, the portfolio manager will make investment decisions with
the eci's performance in mind. The most commonly used benchmarks are
market indexes such as the Dow Jones Industrial Average, the S&P 500, or
the Russell 2000. However, there are dozens of other market indexes out
there that focus on specific industry sectors, security classes, or other
market segments. Investors also use other portfolios, mutual funds, or
even pooled accounts to construct benchmarks. LIBOR is one of the most
widely used benchmarks for short-term interest rates, and the Fed controls
another common interest benchmark known as the Fed Funds rate. A good
benchmark should appropriately reflect the portfolio's investment style

For example, the Russell 2000 may be an appropriate benchmark

for a portfolio investing exclusively in small-cap domestic stocks,
but it may be inappropriate for a portfolio investing in bonds and
international REITs. Comparing a portfolio to an inappropriate
benchmark could yield misleading information. The portfolio may
look fantastic compared to one benchmark but lag considerably
behind another. It is difficult to benchmark some portfolios
effectively, especially real estate portfolios, where each asset is
unique. Further, it is important to compare a portfolio with its
benchmark over a long period of time. Portfolio managers vary in
their benchmark strategies. For example, passive managers seek
to replicate their benchmarks. This is the strategy behind index
mutual funds, which replicate broad market indexes or indexes of
securities with special characteristics. Actively managed portfolios
on the other hand, seek to beat benchmark returns but generally
require added risk and expertise to do so. Venture capitals
frequently receive incentive fees if their portfolios exceed the

HORIZONTAL ANALYSIS
Analysis of the financial statements can be done
comparatively to show performance and financial
condition in prior years as compared to the current year.
It reveals if the profitability and the financial condition of
the firm are improving or not.
This comparison usually reveals trend; the reason why it is
sometimes referred to as trend analysis.
Also regarded as dynamic analysis.

Trend Analysis
It is an important tool of horizontal analysis.
Under this analysis, ratios of different items of the
financial statements for various periods are
calculated and the comparison is made accordingly.
The analysis over the prior years indicates the trend
or direction.
Trend analysis is a useful tool to know whether the
financial health of a business entity is improving in
the course of time or it is deteriorating.

Comparative Financial
Statements
It is an important method of analysis which is used to
make comparison between two financial statements.
Being a technique of horizontal analysis and
applicable to both financial statements, income
statement
and
balance
sheet,
it
provides
meaningfulinformationwhen
compared
to
the
similar data of prior periods.

 The comparative statement of income

statements
enables
to
review
the
operational performance and to draw
conclusions,
whereas
the
balance
sheets,presentinga change in the financial
position during the period, show the effects
of operations on the assets and liabilities.
Thus, the absolute change from one period
to another may be determined.

Illustration #1

2009 Revenue, $108,000 / 2008

Revenue, $100,000 = 108%
2010 Revenue, $120,000 / 2008
Revenue, $100,000 = 120%

Illustration #2

 2009:
= Revenue Increase $108,000 $100,000 /
2008 (previous year) $100,000
= $8,000 / $100,000 = 8.0%
2010:
= Revenue Increase $120,000 ?$108,000 /
2009 (previous year) $108,000
= $20,000 / $108,000 = 11.1%

VERTICAL ANALYSIS
Refers to the type of analysis where one number
is compared to another to identify significant
relationships.
It is performed when financial ratios are to be
calculated for one year only.
There are two types of vertical analysis :
common-size
statement
or
percentage
analysis & ratio analysis.
Also called as static analysis.

Ratio Analysis
The most popular way to analyze the financial statements
is computing ratios. It is an important and widely used
tool of analysis of financial statements.
It highlights the key performance indicators, such
as,liquidity, solvency and profitabilityof a business
entity.
The tool of ratio analysis performs in a way that it makes
the process of comprehension of financial statements
simpler, at the same time, it reveals a lot about the

Common-size Statements
The

figures of financial statements are

converted to percentages.
It is performed by taking the total balance
sheet as 100. The balance sheet items are
expressed as the ratio of each asset to total
assets and the ratio of each liability to total
liabilities.
Thus, it shows the relation of each component
to the whole - hence, the name common size.

Illustration #3

BALANCE SHEET
Snapshot of a firms positionand a report that
summarizes all of an entity's assets, liabilities,
and equity at a specific point in time.
Typically used by lenders, investors, and creditors
to estimate the liquidity of a business.
also known as thestatement of financial position.

GENERAL
CATEGORIES
Assets: Cash, marketable
securities, accounts receivable,
inventory, and fixed assets
Liabilities: Accounts payable,
accrued liabilities, taxes
payable, short-term debt, and
long-term debt (ex. Pension
fund liability, Deferred tax
liability)
Shareholders' equity: Stock,
retained earnings, and treasury

Several additional points about balance sheet should be noted:

Cash versus other assets

Working Capital
Other sources of funds
Depreciation
Market Values versus book values
Time dimension

INCOME STATEMENT
A report summarizing a firms revenue,
expenses, and profits during a reporting period,
generally a quarter or a year.
The income statement is sometimes referred to
as the profit and loss statement (P&L),
statement of operations, or statement of income.

Elements:
A. Revenues and Gains
Revenues from primary activities
Revenues from secondary activities
Gains

B. Expenses and Losses

Expenses involved in primary activities
Expenses involved in secondary activities
Losses

Revenues from primary activities

Operating income earnings from

operations before interest and taxes
(EBIT)

Earnings per share (EPS) the bottom line. It is the portion

of a company's profit allocated to each outstandingshare of
commonstock.
Earnings per share (EPS) =

Net Income

Common Shares Outstanding

Dividend per share(DPS) the totaldividendspaid out over

an entire year (including interimdividends but not including
specialdividends) divided by the number of outstanding
ordinarysharesissued.
Dividends per share (DPS) = Dividends paid to common stockholders
Common Shares Outstanding

Book value per share (BVPS) - it is used to calculate the per

share value of a company based on its equity available to
common shareholders.

OTHER COMPONENTS:
Depreciation The charge to reflect the cost of
assets used up in the production process.
Amortization A noncash charge similar to
depreciation except that it is used write off the
costs of intangible assets.
EBITDA Earning before interest, taxes,
depreciation, and amortization.

Retained Earnings Statement

Stockholders Equity
represents the amount that
stockholders paid the company
when shares were purchased
and
the
amount
of
the
company has retained since its
origination.

Stockholders
Equity = Paid-in
Capital +
Retained
Earnings

Retained Earnings
It represents the corporation's cumulative earnings that have not
been distributed to its stockholders. A negative amount of retained
earnings is reported asdeficitoraccumulated deficit. (Accounting
Coach)
Retained earnings refer to the percentage ofnet earningsnot paid
out asdividends, but retained by the company to be reinvested in
its core business, or to pay debt. It is recorded
undershareholders equityon thebalancesheet. (Investopedia)
They represent the cumulative total of all earnings kept by the
company during its life.
Recorded in the corporations Balance Sheet under Stockholder
Equity section.

Retained Earnings Account

details:

Beginning Retained Earnings

Profit/Loss of the Corporation
Dividends Declared
Appropriated Retained Earnings
Unappropriated or Free Retained Earnings

 Appropriated retained earnings is a

separate account from the standard
retained earnings account that is used for
special projects to inform shareholders of
the funding issues with these projects. In
other words, amount of retained earnings
that are reserved for a special purpose.
Unappropriated retained earningsare
profits that are not set aside for a specific
purpose. (Accounting Tools)
The formula for ending retained earnings
is: Beginning retained earnings +

Are retained earnings an asset?

Generally, theamountof a corporation'sretained

earningsis the cumulativenet incomesince the
corporation began minus all of thedividendsthat
the corporation has declared since it began. The
amounts are recorded in the Retained Earnings
account, which is reported in thestockholders
equitysection of the corporation'sbalance sheet.

For example, let's assume that you start a corporation to

provide website consulting services. You invest $500 in the
corporation, and immediately find a client who pays you
$4,000 for your services. Your corporation's Cash is now
$4,500 which equals the Paid-in Capital of $500 plus the
Retained Earnings of $4,000. On the next day, you spend
$3,500 to acquire a computer and other equipment for
your corporation plus $300 of supplies. Right after these
items are purchased, your corporation will report $700 of
Cash + $300 of Supplies + $3,500 of Equipment =
Stockholders' Equity of $4,500of which $4,000 is
Retained Earnings.

 While the amount of retained

earnings is reported in the
stockholders' equity section of the
balance
sheet,
the
retained
earnings are probably invested in
assets that are also reported on the
balance sheet.

 The

Retained
Earningsamountis
clearly
reported
as
part
of
Stockholders' Equity, but the amount is
usually invested in assets or used to
reduceliabilities. Rarely will the
retained earnings be entirely in cash.
The retained earnings need to be
invested in income producing assets or
in the reduction of liabilities in order to
earn a return for the stockholders, who

When evaluating the amount of retained

earnings that a company has on its
balance sheet, consider the following
points:
Age of the company. An older company will have had
more time in which to compile more retained earnings.
Dividend policy. A company that routinely issues
dividends will have fewer retained earnings.
Profitability. A high profit percentage eventually
yields a large amount of retained earnings, subject to
the two preceding points.

End of Presentation
Thank You!