PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY

Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418

Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

CHAPTER 6

FINANCE DEPEARTMENT STRATEGIES AND ANALYSIS

Objectives

• Financial Statement Analysis

• Financial Ratio Analysis
• Horizontal and Vertical Analysis of Financial Statement
• Budget Management Analysis
• Time Value Money and Interest Rate
• Depreciation
• Credit and Collection (C&C)
• Acquisition, Merger, Consolidation, Joint Venture and Amalgamation

Financial Statement Analysis

Financial statement analysis is the process of analyzing a company’s financial statements for
decision-making purposes.
Financial statement analysis involves a comprehensive examination of a company’s financial
statements, including the income statement, balance sheet, and cash flow statement. Analysts
assess revenue, earnings, assets, liabilities, and cash flow to gauge financial health and
performance.
Four types of Financial Statement Analysis
Balance sheet - which presents an organization's assets, liabilities, shareholder's equity at a
given time.
Income statement - which summarizes an organization's revenues, net income or loss, and
expenses over a specific time.
Cash flow statement - which monitors the inflows and outflows of cash.
Statement of shareholders' equity - which outlines the shareholders' equity changes over a
period.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

Financial Ratio Analysis

Ratio analysis is a method of examining a company's balance sheet and income statement to
learn about its liquidity, operational efficiency, and profitability. It doesn't involve one single
metric; instead, it is a way of analyzing a variety of financial data about a company.

Types of Ratios for Ratio Analysis

1. Liquidity Ratios
Liquidity ratios measure a company's ability to pay off short-term debts as they become due,
using the company's current or quick assets.

2. Solvency Ratios
Also called financial leverage ratios, solvency ratios compare a company's debt levels with its
assets, equity, and earnings. These are used to evaluate the likelihood of a company staying
afloat over the long haul by paying off both long-term debt and the interest on that debt.

3. Profitability Ratios
These ratios convey how well a company can generate profits from its operations.
4. Efficiency Ratios
Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets
and liabilities to generate sales and maximize profits.
5. Coverage Ratios
Coverage ratios measure a company's ability to make the interest payments and other
obligations associated with its debts.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

Horizontal and Vertical Analysis of Financial Statement

Horizontal Analysis

In horizontal analysis, also known as trend analysis or time series analysis, financial analysts
look at financial trends over periods of time—especially quarters or years. Typically, financial
analysts perform horizontal analysis before vertical analysis, and it is usually the most useful for
companies that have been operating for a long period of time.

Follow these three steps to perform a simple horizontal analysis:

1. Gather financial statements.
Because horizontal analysis is conducted on financial statements across periods of time, start
by gathering financial statements from different quarters or years.

2. Compare the statements.

After gathering your statements, choose which line items to analyze. Compare the same line
items from different statements to determine how the amounts have changed over time, and
express the changes as percentages or dollar amounts.

3. Identify patterns and trends in the data.

Analyze the data to look for potential problems or opportunities for the company. This can help
the company plan for the future and develop strategies to succeed. You can also come up with
recommendations for the company based on your analysis.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

VERTICAL ANALYSIS
Vertical analysis, which is also known as common-size analysis, is similar to horizontal analysis
and can be performed on the same financial documents. However, financial analysts perform
vertical analysis vertically inside of a column rather than horizontally across time periods.
You can use these steps to perform a vertical analysis:

• Choose a financial statement.

To begin your vertical analysis, locate the financial statement that you would like to analyze.
Typically, vertical analysis is used on the current year's statement, but you could also analyze
previous years.

• Analyze amounts located in the same column of the statement.

Next, choose the appropriate column of the statement and look at the numbers that are located
vertically within the column.

• Calculate each amount as a percentage of a base figure.

Finally, take the amounts from the column and calculate each amount as a percentage of the
base figure, which has a value of 100%. Review the ratios to determine the company's financial
state, and make recommendations as necessary.

• Budget Management Analysis

- is the process of comparing a company’s actual financial performance to its budgeted financial
plan. This helps businesses monitor whether they are staying within their financial targets and
allows them to identify and correct any variances early on.

Key Elements of Budget Management Analysis:

1. Budget Preparation
- Planning: First, a company creates a detailed budget, which is essentially a financial plan for
a specific period (usually one year). It includes projected revenue, expenses, and profit goals.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

- Setting Goals: These goals are based on previous performance, industry standards, or
strategic initiatives.

2. Tracking Actual Performance

- As the business operates, the actual financial performance (e.g., actual sales, costs, and
expenses) is recorded over time.

3. Variance Analysis
- This is a key part of budget management analysis. Variance refers to the difference between
what was planned (the budget) and what actually happened.
- Positive Variance: When actual performance is better than the budget (e.g., higher revenue
or lower expenses).
- Negative Variance: When actual performance falls short of the budget (e.g., lower sales or
higher costs).

4. Adjusting the Plan

- Based on the variances, the company might need to revise its operations or the budget itself.
For example, if sales are lower than expected, they might need to reduce expenses to stay
profitable.

5. Monitoring and Reporting

- Continuous monitoring helps the company stay on track. Regular budget reviews allow for
timely adjustments to strategy and operations.
- Reports are usually prepared monthly, quarterly, or annually to compare actual results
against the budget and make decisions moving forward.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

Time Value of Money (TVM)

The time value of money (TVM) refers to the idea that money available now is worth more than
the same amount in the future. This is because money can be invested and has the potential to
grow over time. The concept of TVM takes into account the amount of money, its future value,
the potential earnings from investing it, and the time period involved.
Example:

If you have P1000 today and invest it at 10% interest, in one year it will be worth P1100. The
extra P100 represents the interest earned, illustrating that money today is more valuable than
money in the future.

Interest Rate

An interest rate is the percentage of an amount of money charged or earned for borrowing or
lending money. When you deposit money into a high-yield savings account, the bank pays you
interest in exchange for keeping your money with them. The interest you earn over time helps
your money grow.

Example:
If you deposit P1,000 in a savings account with a 10% annual interest rate, at the end of the
year, you will have P1,100. The P100 is the interest you earned by keeping your money in the
bank.

Depreciation
Depreciation is the method used in accounting to spread the cost of a tangible asset, such as
machinery, cars, or equipment, over its useful life. Instead of recording the entire cost of an
asset at once, businesses record a portion of the cost each year. This helps businesses track
how much of the asset’s value has been used up and can also provide tax benefits.
Example:
A company buys a machine for P10,000 and expects it to last 10 years. Instead of recording the
full P10,000 as an expense in one year, the company records P1,000 each year as depreciation.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

Credit and Collection (C&C)

Credit and Collection systems help businesses manage what customers owe them and ensure
that payments are made on time. If customers fail to pay, the system alerts the company to take
action, such as sending reminders or disconnecting services. The process helps businesses
maintain cash flow and minimize losses from unpaid debts.
Example:

If a customer does not pay their phone bill, the company may send them a reminder. If the
customer still does not pay, their phone service might be suspended until the bill is settled.

Merger
A merger occurs when two companies combine to form a single legal entity. The goal is often to
improve competitiveness, increase market share, or reduce costs by pooling resources. Mergers
usually happen between companies of similar size.
Types of Mergers:
-Vertical Merger: When companies in different stages of the supply chain merge to improve
efficiency and lower costs.
Example: A car manufacturer merging with a tire supplier.
-Congeneric Merger: When companies in the same or related industries but selling different
products merge to increase market share and product offerings.

Example: A camera company merging with a lens manufacturer.

Amalgamation
Amalgamation is a specific type of merger where two or more companies combine to form a
completely new entity. The aim is usually to create a larger, more competitive company. This
process often happens between companies of similar size.
Example:
Two airlines merging to form a new, larger airline with improved services and market presence.
 PHILIPPINE COLLEGE OF SCIENCE AND TECHNOLOGY
Old Nalsian Road, Nalsian, Calasiao, Pangasinan, Philippines 2418
Tel. No. (075)522-8032/Fax No. (075)523-0894/Website: www.philcst.edu.ph
ISO 9001:2015 CERTIFIED, Member: Philippine Association of Colleges and Universities (PACU),
Philippine Association of Maritime Institutions (PAMI)

Acquisition
An acquisition is when one company buys another and integrates the acquired company into its
operations. Unlike a merger, where both companies combine as equals, in an acquisition, one
company takes control of the other.
Types of Acquisitions:
- Unfriendly Acquisition: When the target company’s management does not agree to the
takeover, but the acquiring company proceeds by purchasing enough shares to gain control.
Example: A large corporation buys out a smaller company’s shareholders even though the
smaller company’s management opposes it.

- Friendly Acquisition: When both companies agree to the acquisition because it benefits both
parties.
Example: A tech company buys a startup to integrate its innovative technology into its existing
products, and both boards of directors approve the deal.
Joint Venture

A joint venture is a partnership between two or more businesses to work on a specific project or
venture. Each party contributes resources and shares the profits or losses. In a joint venture, the
companies remain separate legal entities but work together for a common goal.
Example:

Two companies in the automobile industry create a joint venture to develop electric cars, with
each company contributing technology and resources. They share the profits from selling the
new cars.
Conclusion

In conclusion, understanding the time value of money, interest rates, depreciation, and various
business restructuring techniques is crucial for financial success. Money today is worth more
than in the future due to its earning potential. Depreciation helps businesses manage the cost
of assets over time, and restructuring through mergers, acquisitions, and joint ventures allows
businesses to grow, diversify, and compete effectively in the marketplace.