Polytechnic University of the PhilippinesCollege of Social Sciences and Development

Department of Cooperatives and Social DevelopmemtMabini Campus, Sta. Mesa, Manila

Analysis and Interpretation of Financial Statement of a Producers Cooperative

(Written Report)

Submitted by:TABOBO, QuennieSABINO, Chesca

GO, WillesaCASTRO, Dave Michael

BUEN, Ma. Hanna LouizeAGOOT, Ma. Regel

Submitted to:Prof. Angelita S. Villaruel

BCFMA3-11st Semester, SY 2013-2014

Management Accounting Reports For Producers/Industrial Cooperatives

FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a process which examines past and current financial data for the purpose of evaluating performance and estimating future risks and potential.

USES OF ANALYSIS TO MANAGEMENT

identify major changes or turning points in trends, amounts, and relationships

assist investors and creditors in finding the type of information they require for making decisions relating to their interests in a particular company (such as risk, return, dividend or interest yield, safety, liquidity, growth, and others)

o Whether to continue or discontinue its main operation or part of its business;

o What to make or to purchase certain materials in the manufacture of its product;

o What to acquire or to rent/lease certain machineries and equipment in the production of its goods;

o Whether to issue stocks or negotiate for a bank loan to increase its working capital;

o What and when to make decisions regarding investing or lending capital;

o Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

yield valuable information about trends and relationships, the quality of a company’s earnings, and the strengths and weaknesses of its financial position

assessment of past performance and current position assessment of future potential and related risk

USERS OF ANALYSIS TO MANAGEMENT

O Corporate- Creditors- Investors- Management- Security Analysts- Bank Lending Officers- Auditors- Taxing authorities- Regulatory Agencies

- Labor Unions- Customers

O Cooperative- Members- Creditors [debt-paying ability]- Management- Bank Lending Officers- Auditors- Taxing authorities

- Regulatory Agencies- Labor Unions

VARIOUS TOOLS NECESSARY IN FINANCIAL STATEMENT ANALYSIS

A. Horizontal Analysis (or Dynamic Analysis)

This is an analysis based on method of operation. Under the horizontal analysis, financial statements are compared with several years and based on that, a firm may take decisions. Normally, the current year’s figures are compared with the base year (base year is consider as 100) and how the financial information are changed from one year to another.

B. Vertical Analysis (or Static Analysis)

This is an analysis based on method of operation. Under the vertical analysis, financial statements measure the quantities

relationship of the various items in the financial statement on a particular period.

It is also called as static analysis, because, this analysis helps to determine the relationship with various items appeared in the financial statement. For example, a sale is assumed as 100 and other items are converted into sales figures.

C. Financial Ratio Analysis

Ratio is a mathematical relationship between one number to another number. Ratio is used as an index for evaluating the financial performance of the business concern. An accounting ratio shows the mathematical relationship between two figures, which have meaningful relation with each other. Ratio can be classified into various types. Classification from the point of view of financial management is as follows:

1. Liquidity Ratio

It is also called as short-term ratio. This ratio helps to understand the liquidity in a business which is the potential ability to meet current obligations. This ratio expresses the relationship between current assets and current assets of the business concern during a particular period. The following are the major liquidity ratio:

Net Working Capital = Current Assets – Current Liabilities

Current Ratio indicates the organization’s ability to meet its current liabilities (those due within a year) with its current assets.

= Current Assets

Current Liabilities Quick Asset (Acid Test) Ratio indicates the organization’s

ability to meet its current liabilities with current assets other than inventory.

= Cash+Marketable Securiy

Current Liabilities

2. Asset Utilization Ratio

This ratio reflects the way in which a business enterprise uses its assets to obtain revenue and profit. One example is how well receivables are turned into cash. The higher the ratio, the more efficiently the business manages its assets.

Accounts Receivable Turnover Ratio indicates the number of times accounts receivables are collected in the year.

= Net Credit Sales

Average Accounts Receivable

Accounts Collection Period = Net Credit Sales

Average Accounts Receivable

No. of Days Sales in Receivable = Average Account ReceivableAverageDaily Credit Sales

Total Asset Turnover Ratio indicates how efficiently the organization is utilizing its assets to make money.

= Net Sales

Average Total Assets

3. Inventory Ratio

This ratio is especially useful when a build-up in inventory exists. Inventory ties up cash; holding large amounts of inventory can result in both lost opportunities for profit and increased storage costs. Before you extend credit or lend money to a business enterprise, you should examine its inventory turnover and average age of inventory.

Inventory Turnover Ratio indicates how often the organization sells and replaces its inventory over a specified period of time.

= Cost of GoodsSoldAverage Inventory

Average Age of Inventory = 365days

Inventory Turnover Ratio

4. Solvency Ratio

It is also called as leverage ratio, which measures the long-term obligation of the business concern. This ratio helps to understand, how the long-term funds are used in the business concern.

Solvency Ratio = NetWorth

Long−termDebt Debt to Total Assets Ratio indicates the proportion of

assets that are financed with debt (short and long-term debt).

= Total LiabilitiesTotal Assets

5. Profitability Ratio

This ratio is used to examine how successful a firm is in using its operating processes and resources to earn income.

Gross Margin (Profit) Rate indicates how much of every dollar of sales is left after costs of good sold.

= GrossMarginNet Sales

Surplus Margin on Sales indicates how much of each dollar of sales is left over after all expenses.

= Net SurplusNet Sales