CASH FLOW ANALYSIS

Financial Statement AnalysisPresented by:Elemos, Pia AngelaFeliciano, Kathlene MaeRamos, Christianne NicoleTumbaga, Katrina MaeZamora, Patricia Nicole

WG Corporation Comparative Financial Statement201020112012AssetsCash and Cash Equivalent 148,000 100,000 90,000Accounts Receivable283,000410,000394,000Inventory 322,000616,000696,000Other Current Assets10,00014,00015,000Total Current Assets 763,000 1,140,000 1,195,000Property, Plant & Equipment (net)460,000904,000974,000TOTAL ASSETS1,223,000 2,044,000 2,169,000Liabilities and EquityNote Payable 290,000 295,000 290,000Accounts Payable81,00094,00094,000Accrued Expenses28,000116,000116,000Total Current Liabilities 399,000 505,000 500,000Non-Current Liabilities150,000453,000530,000Total Liabilities 549,000 958,000 1,030,000Equity674,0001,086,0001,139,000Total Liabilities and Equity 1,223,000 2,044,000 2,169,000

Net Sales 1,235,000 2,106,000 2,211,000Cost of Goods Sold849,0001,501,0001,599,000Gross Profit 386,000 605,000 612,000Operating Expenses180,000383,000402,000Operating Income 206,000 222,000 210,000Interest Expense20,00051,00059,000Earnings before tax 186,000 171,000 151,000Income tax expenses74,00069,00060,000Earnings after tax 112,000 103,000 91,000Cash Dividend 50,000 50,000;50,000

HORIZONTAL TREND ANALYSIS

Horizontal or Trend AnalysisA type of time-series analysis of evaluating what has occurred over a period of time in relation to a particular starting point.The main goal is to evaluate the progress and changes in the firms resources and claims to such resources.Items are expressed as a percentage of a base year or the starting point of the evaluation.

Trend Percentage Formula

COMMON SIZE FINANCIAL STATEMENT ANALYSIS

Common Size Financial Statement Analysis (Vertical Analysis)It expresses each balances of account as a percentage of total assets, total liabilities & equity, and total sales.It can be a useful tool for gaining insight about the structure of a firms assets, liabilities, equity, and expenses.In using this tool, analyst will be able to ascertain what are the areas of wherein the firm focuses its efforts since it will reveal what are the majority compositions of a particular account balances.

201020112012AssetsCash and Cash Equivalent148,00012%100,0005%90,0004%Accounts Receivable283,00023%410,00020%394,00018%Inventory 322,00026%616,00030%696,00032%Other Current Assets10,0001%14,0001%15,0001%Property, Plant & Equipment (net)460,00038%904,00044%974,00045%TOTAL ASSETS1,223,000100%2,044,000100%2,169,000100%Liabilities and EquityNote Payable290,00024%295,00014%290,00013%Accounts Payable81,0007%94,0005%94,0004%Accrued Expenses28,0002%116,0006%116,0005%Non-Current Liabilities150,00012%453,00022%530,00024%Equity674,00055%1,086,00053%1,139,00053%Total Liabilities and Equity1,223,000100%2,044,000100%2,169,000100%

Net Sales1,235,000100%2,106,000100%2,211,000100%Cost of Goods Sold849,00069%1,501,00071%1,599,00072%Operating Expenses180,00015%383,00018%402,00018%Interest Expense20,0002%51,0002%59,0003%Income tax expenses74,0006%69,0003%60,0003%Earnings after tax112,0009%103,0005%91,0004%

RATIO ANALYSIS

Ratio AnalysisA method or process by which the relationship of items or group of items in the financial statements are computed, and presentedUsed to interpret the financial statements so that the strengths and weaknesses of a firm, its historical performance and current financial condition can be determined.

Profitability Evaluation

Profitability Evaluation

Du Pont AnalysisThe analysis focuses on the three types of business activities, the operating activities represented by the Sales Margin, the investing activities represented by the Asset Turnover and the financing activities represented by the Capital Multiplier.

Formula

Risk Evaluation

Activity RatiosAlso called as efficiency ratios or turnover ratios. These ratios show the relationship between sales and various assets of a firm.

CASH FLOW ANALYSIS

CASH FLOW ANALYSISCash flow measures recognize inflows when cash is received but not necessarily earned, and they recognize outflows when cash is paid but the expenses not necessarily incurred.Cash flow analysis helps in assessing liquidity, solvency and financial flexibility.Liquidity is the nearness to cash of assets and liabilities.Solvency is the ability to pay liabilities when they mature.Financial flexibility is the ability to react and adjust to opportunities and adversities.

Cash flow analysis helps to address the following:

How much cash is generated from or used in operations?What expenditures are made with cash from operations?How are dividends paid when confronting an operating loss?What is the source of cash for debt payments?How is the increase in investments financed?What is the source of cash for new assets?Why is cash lower when income increased?What is the use of cash received from new financing?

Free Cash FlowFree cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Positive free cash flows reflect the amount available for business activities after allowances for financing and investing requirements to maintain productive capacity at current levels.

Other Definitions1. Free Cash Flow = Cash flow from operations Net capital expenditure required to maintain productive capacity Dividends on preferred stock and common stock.2. Free cash flow = Net operating profit after taxes Increase in net operating assets (dividends not considered as they are financing activity).3. EBIT (1-t) + Depreciation Change in net working capital Capital expenditure

Cash flow Ratios

Cash flow RatiosNote:Investment in receivables is omitted because they are financed primarily by short-term credit.Only additions to inventories are includedA ratio of 1 indicates the company exactly covered these cash needs without a need for external financing. A ratio below 1 suggests internal cash sources were insufficient to maintain dividends and current operating growth levels.

Cash Reinvestment Ratio

Profit Variance AnalysisDeals with how to analyze the profit variance that constitutes the departure between actual profit and the previous years income or the budgeted figure.Important to the management because by analyzing the change in gross profit they will be able to assess the effectiveness of their policies such as purchasing, pricing, mark up and investment policies.

Increase (decrease) in Gross profit:Quantity factor:Sales this year at last years pricesPxxLess: Sales last year (xx) Increase (Decrease) in salesPxxMultiplied by: Gross profit rate last year % Increase (Decrease) in Gross profit PxxTechniques in analyzing gross profit variation analysis:If a firm manufactures or buys and sells only one product, the analysis may show the impact of change in volume, selling price and unit cost on the gross profit.

Price factor:Sales this yearPxxLess: Sales this year at last years prices (xx) Increase (Decrease) in Gross profitPxxCost factor:COS this yearPxxLess: COS this year at last years cost (xx) Increase (Decrease) in Gross profitPxxNet increase (decrease) in GPPxx

If unit selling price, unit cost and quantity sold for the current and previous years available, this simplified format may be used:

Increase in SalesQuantity factor = change in quantity x selling price last yearPxxPrice factor = change in price x quantity sold last year xxQuantity/Price factor = change in quantity x change in selling price xxTotal PxxLess: Increase in COSQuantity factor = change in quantity x unit cost last yearPxxPrice factor = change in price x quantity sold last year xxQuantity/Price factor = change in quantity x change in unit cost xxTotal Pxx Net increase (decrease) in GPPxx

When two or more products whose gross margins are not the same, sales mix factor also known as gross profit rate factor shall also be presented aside from the analysis of quantity, cost and price factor.

USE OF COMPUTER IN FINANCIAL ANALYSIS

Use of Computers in Financial Analysis With computers, the graphical approach and the mathematical approach to financial analysis are easy to use The users of the analysts report will appreciate trend analysis through a line graph that literally highlight the change of each line itemSince common size financial statement presents the composition of the base account, the best way to present such analysis is through the usage of a pie chart that will literally present the portion being composed of a particular account in as far as the base account is concern which will aid in the immediate determination of the firms focus.

Information Weakness in Financial Statement Analysis

Strong financial statement analysis does not necessarily mean that the organization has a strong financial futureOther factors like bankruptcy of major supplier and customers, or the fast pace change in the products life cycle of the firm or the sudden breakdown of equipments and machineries requiring immediate replacement, or the untimely withdrawal of an investor might cause cash flow problems. Hence, in making a conclusion as to the over-all result of the financial statement analysis, caveats should be given to readers as to the areas in which possible cash flow crisis might occur.

Financial statement analysis might look good but there may be other factors that can cause an organization to collapse. The problem lies in the constant changes in the business environment. This would mean that any actions performed in the previous operating period may not be applicable to the current situations and scenarios. Also, after evaluating the risk and profitability of a firm, an analyst might conclude that the firm will be able to face the current business environment in relation to the estimated change in the environment. A change in the countrys political stability, or bankruptcy of a major financial institution can cause the collapse of a firm.

BUSINESS VALUATION

Business ValuationAn examination conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time Valuation is an art rather than exact scienceIt is nothing more than an expression of informed opinion which is based on fact and judgment Valuations are not precise rather they are generally stated as range in values

What is Being Valued It is business interest that is being valued. However, a valuator can be requested to provide an estimation or opinion only on goodwill or other intangible assets or the value of a specific division of the business.

Approaches in Determining Value Empirical ApproachFair Market Value is best determined by reference to open market transactions involving similar businesses Investment ApproachFair Market Value is best determined by reference to detailed investment analysis using the techniques of financial statement analysis