Financial Analysis

and Management
(ETM 510)
DR. ROBERTO C. BUENAFLOR
Professor VI

JERISSE J. PARAJES
PhEdD. student
 UNIT IV:
Evaluating Operating and
Financial Performance
Chapter:

1.Understanding Financial Statements

2. Analysis of Financial Statements
3. Cash Flow Analysis
4. Operating and Financial Leverage
Understanding Financial Statements
……….Imagine you are a Credit Analyst:
Question:
How do you assess and communicate
an investment appraisal or credit risk
report?
How business activities are reported?
Understand the company’s business
activities through financial statements.

Financial Statements:
■ report on a company’s performance
and financial condition and reveal
executive management’s privileged
information and insights.
General Objectives of Financial Statements:
1. Providing Information for Economic
Decisions
- ultimately determines the capacity of
an enterprise to pay its employees and
suppliers, meet interest payments, repay
loans and make distributions to its owners.
2. Providing Information About
Financial Position

►Predicting the ability of the

enterprise to generate cash and cash
equivalents
►Predicting future borrowing needs
and how future profits and cash flows
will be distributed
► Predicting how successful the enterprise
in raising further finance

► Predicting the ability of the enterprise to

meet the financial commitments as fall due

Liquidity – refers to the availability of cash in the

near future after taking account of financial
commitments.
Solvency – refers to the availability of cash over
the longer term to meet financial commitments as they
fall due
3. Providing Information About
Performance of an Enterprise

►predicting the capacity of the enterprise

to generate cash flows from its existing
resource base
4. Providing Information About
Changes in Financial Position

►useful in order to assess its investing,

financing and operating activities
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
1. Managers and Employees
►need accounting information on the
financial condition, profitability and
prospects of their companies
► serve as a basis for executive
remuneration and bonuses
► for wage negotiations
► meet disclosure requirements
Remunerate (pay for services rendered or work done)
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
2. Investors and Analysts
►decide whether to buy or sell equity shares
► company’s ability to borrow money at
favorable terms
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
3. Creditors and Suppliers
►banks and other lenders need financial
accounting information to help determine loan
terms, loan amounts, interest rates and required
collateral
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
4. Shareholders and Directors
►needed by owners and directors of the
company to assess its profitability and risks
►evaluate managerial performance
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
5. Regulatory and Tax Agencies
► SEC, BIR, BSP and other legal institutions
demand financial accounting information to
monitor business firms compliance with laws for
public protection , price setting and setting tax
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
6. Customers and Potential Strategic
Partners

► customers need accounting information to

evaluate a company’s ability to provide products
and services
► strategic partners would wish to estimate the
firm’s profitability to assess the fairness of
returns on mutual transactions and strategic
alliances
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION
7. Other decision makers

► assessing damages for environmental abuses

to making policy decisions involving economic,
social, taxation and other initiatives
Sources of Information About Business Enterprise

1. The audited annual report that includes the four

financial statements
√ Statement of Financial Position
√ Statement of Comprehensive Income
√ Statement of Stockholder’s Equity
√ Statement of Cash Flow
2. The audited quarterly or interim reports that
include summary version of the four financial
statements and limited additional disclosure
Benefits of Disclosure

● extend to a company’s capital, labor,

input and output markets
● about its products, processes and other
business activities enable them to better
compete in capital, labor, input and output
markets

Disclose (make secret or new information known)

Costs of Disclosure

♥ Companies are apprehensive that

disclosures of their activities such
as product or segment successes
or failures, strategic initiatives,
technological or systems
innovations could harm their
competitive advantages.
Constraints on Relevant and Reliable Information

1. Timeliness
Management may need to balance the
relative merits of timely reporting and the
provision of reliable information
2. Balance Between Benefit and Cost
pervasive constraint (limitation)
Constraints on Relevant and Reliable Information

3. Balance Between Qualitative Characteristics

4. True Fair View or Fair Presentation

true fair view of the financial position,
Linkage of Financial Statements
ORANGE INC.
Retained Earnings Reconciliation
For the Year Ended September 30, 2011
(peso in millions)

Retained earnings, September 30, 2010 P 5.607

Add: Net Income 3.496
Less: Dividends (0)
Other Adjustments (.002)
Retained earnings, September 30, 2011 P 9.101
 Statement of Financial Position
Statement of Financial Position
- reports a company’s financial position
at a point in time, the company’s resources
(assets) namely, what the company owns
and also the sources of asset financing:
1.Owner financing – can raise money from
shareholders
2. Non-owner financing – can also raise
money from the banks and other creditors
and suppliers
 Blue Company
Report amounts at Statement of Financial Position
a point in time December 31, 2011
(pesos in millions)

Investing
THANK YOU…