Cash Flow Analysis

One technique in Financial Statement Analysis, Cash flow analysis is a detailed study of the net change in cash as a result of operating, investing, and financing activities during the period.

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The Statement of Cash Flows - the basic financial statement prepared and used in analyzing cash flows. The report includes cash receipts, cash payments and the net change in cash. These are results from operating, investing, and financing activities of the company during a certain period.

Cash Flows - include cash and cash equivalent

Gross Profit Variance Analysis

One technique in the analysis of Financial Statement, Gross Profit Variance Analysis is used to compare actual data (represented here by 200B) with budgeted data, standard data, previous year's data, or base year data (represented here by 200A).

Normally, these involves the Sales Variance and the Cost variance in consideration of the  price and volume or quantity factors.

Discussed here are the four (4) types.

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1.) 4-WAY ANALYSIS

Sales Variance:

• Price factor = difference in selling prices x 200B units
• Volume or quantity factor = difference in units x 200A selling price

Cost Variance:

• Price factor = difference in cost prices x 200B units
• Volume or quantity factor = difference in units x 200A cost price

Price Level Changes and Inflation

The two effects of changing price levels are:

1. Inflation - an increase in the general price level
2. Deflation - a decrease in the general price level

The general price level is inversely related to the purchasing power of money.

The Price Indices used in the calculation of price level changes are:

1. Consumer Price Index (CPI) - measures the price level by a monthly pricing of a specific set of goods/services purchased by a typical urban consumer.
2. Gross Domestic Product Price Index (GDP Deflator) - includes the prices of all goods and services produced in the country. It includes investment, government purchases, exports, as well as consumer goods and services.
3. Producer Price Index - measures the prices of specified commodities at the time of their first commercial sale.

The impact of Inflation on Financial Management are:

Valuation Ratios

One method of Financial Ratio Analysis, Valuation Ratios is a measure of shareholder value as reflected in the price of the firm's stock.

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1. Book Value Per Share

   FORMULA	SIGNIFICANCE
   Equity Shares Outstanding	Measure the amount of net assets available to the share holders of a given type of stock.

   
   
2. Market to Book Ration or Price to Book Ratio

   Market Price per Share Book Value per Share

   Measure how high is the share's market price in relation to book value. Well managed firms should sell at high multiples of their book value.

Growth Ratios

One method of Financial Ratio Analysis, Cost Growth Ratios measurethe change in the economic status of a firm over a period of time

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1. Basic Earnings per Share (BEPS)

   FORMULA	SIGNIFICANCE
   Income Available to Common Stockholders Average Common Shares Outstanding	Reflect the company's earning power (i.e. its ability to generaqte income from normal operations).

Cost Management Ratios

One method of Financial Ratio Analysis, Cost Management Ratios measures how well is the control of the company's cost.

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1. Gross Profit Rate (or Gross Profit Percentage)

   FORMULA	SIGNIFICANCE
   Net Sales - Cost of Sales Net Sales	Measures how much can be spent for marketing, R&D, and administrrative costs while still reaching target income.

Profitability Ratios

Firms or companies' Profitability Ratios measure earnings in relation to some base such as capital, sales or assets.

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There are nine (9) types of ratios covered.

1. Profit Margin on Sales (or Net Profit Percentage)

   FORMULA	SIGNIFICANCE
   Net Income Net Sales	Measures the percentage of net income to sales

Asset Management Ratios

Firms or companies measure on how it uses its asset to generate revenue and income using Asset Management Ratios

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There are eleven (11) types of ratios covered.

1. Finished Goods or Merchandise Inventory Turnover

   FORMULA	SIGNIFICANCE
   Cost of Sales Average Inventory	Shows if the firm holds excessive stocks of inventories that are unproductive and that lessen the company's profitability.

Leverage Ratios

One method of Financial Ratio Analysis, Leverage Ratios measure the company's use of debt to finance its operations and assets.

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• Financial Leverage - also known as trading on the equity, this is the use of debt to finance the company's operations and assets.; It is advisable to trade on equity when earnings from borrowed funds exceed the cost of borrowing.

Liquidity Ratios

One method of Financial Ratio Analysis, Liquidity Ratios provides information about the company's ability to pay its current obligations and continue operations.

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Discussed here are the five (5) different yet complementary types of liquidity ratios including their variations, formula and significance.

Techniques Used in Financial Statement Analysis

This article presents the five (5) general techniques used in the analysis and evaluation of financial statements.

1. Horizontal Analysis
Horizontal analysis involves comparison of figures shown in the financial statements of two or more consecutive periods. The difference of the figures between the two periods is calculated. Using the earlier period as the base, the percentage change is calculated.

Formula (click on the image to zoom):

Financial Statement Analysis and Interpretation

What is Financial Statement (FS) Analysis?
Financial statements contains data that if carefully selected, an assessment and evaluation can be made on firm's past performance, its present condition and business potential in the future.

Its primary purpose is to check and forecast the firm's financial health, its strength and weaknesses and its:

• profitability
• ability to meet obligations
• safety of investment in the bisuness
• management effectiveness in running the firm.

MA Fundamentals Logo

MAFundamentals defines the foundation of Management Accounting from cost concept, classification and analysis. It provides general discussion on COST, VOLUME, PROFIT, VARIANCE and other information necessary for performance measurement, decision making and pricing.