Copy of ENT_PS_Unit14_Lesson4_Final.pptx

Entrepreneurship
Senior High School Applied - Academic
Unit 14: Financial Management
Lesson 4
Production and Interpretation of
Financial Statements

ENGAGE EXPLORE EXPLAIN EXTEND
EVALUAT
What method of
bookkeeping is best
suited for your proposed
business?
How did you say so?
2

Learning
Objectives
EVALUAT
At the end of the
lesson, you should
be able to do the
following:
3
● Interpret different financial
statements accurately.
● Recognize the relevance and
usefulness of financial
statements.
3

EVALUAT
1. Which of the financial statements you have
studied do you think is the most important and
why?
2. Are financial statements enough in analyzing
the financial performance of a business?
3. Why is there a need to interpret the data
reflected in financial statements?
4

EVALUAT
Interpretation of Financial Statements
refers to the method of
reviewing, analyzing, and
assessing the financial
reports of a business to
be able to gauge its past,
present, and projected
performance
5

EVALUAT
6
By accurately interpreting the financial
statements of a business, an entrepreneur
would find it easier to make financial forecasts
for his or her business.

EVALUAT
7
The main purpose of interpreting financial
statements is to pinpoint the strengths and
weaknesses of the business.

EVALUAT
Objectives of Interpreting Financial Statements
8
● to determine the profitability of the
business concerned
● to assess the operational efficiency of
business operations
● to monitor the earning capability of the
business

EVALUAT
Objectives of Interpreting Financial Statements
9
● to evaluate the managerial performance of
the individuals in charge of various business
activities
● to determine the short-term and long-term
solvency of the business

Remember
10
Users of different financial
statements can be classified into
two groups: the internal and
external users.

EVALUAT
Balance Sheet Interpretation
11
1. Balance Sheet Quick Ratio
This ratio gauges the ability of the business
to meet its obligations without selling off the
inventory. The formula for this ratio is:
(Current Assets - Inventories) / Current Liabilities

EVALUAT
Example: Pedro and Juan, Inc.’s Balance Sheet
12

EVALUAT
Example: Pedro and Juan, Inc.’s Balance Sheet
13
= (Current Assets - Inventories) /
Current Liabilities
= (P690,000 - P330,000) / P295,000
= P360,000 / P295,000
= 1.22

EVALUAT
14
2. Balance Sheet Current Ratio
This ratio in balance sheet accounts is a test
of the business’s short-term liquidity using
the formula of:
Current Assets / Current Liabilities

EVALUAT
15
3. Balance Sheet Debt-to-Equity Ratio
This is crucial to the long-term creditors of
the business because this is used to
measure the aggressiveness of the business.
This ratio is solved using the formula:
Total Debt / Total Equity

EVALUAT
Income Statement Interpretation
16
1. Gross Profit Margin
Gross profit margin is computed using the
formula of:
[Sales - Cost of Goods Sold (COGS)] / Sales

EVALUAT
Example: Gross Profit Margin
17
Situationer:
Pedro and Juan, Inc. earned a total of P100,000
from selling motorbike parts and accessories.
The cost of acquiring those accessories
amounted to P30,000.
Determine its gross profit margin.

EVALUAT
18
Gross Profit Margin = (Sales - COGS) / Sales
= P70,000 /
P100,000
= 0.70
or 70%

EVALUAT
19
In interpreting the gross profit margin, a lower
percentage could indicate that the business is
underpricing its products and services. On the
other hand, a higher margin indicates that the
business is making huge profits and can be
maintained so long as the overhead costs are
reasonable and in control.

Tip
20
The cost of goods sold (COGS) is
what it costs the business to buy or
create the products it sells to the
customers.

EVALUAT
21
2. Operating Profit Margin
Operating profit margin is computed using
the formula Operating Income / Total
Sales. It is used to gauge the operational
efficiency of the business.

EVALUAT
22
3. Net Profit Margin
Net profit margin is computed using the
formula Net Income / Total Sales
Revenue. This metric measures the amount
of each peso of sales that a business has
after paying all of its expenses.

EVALUAT
Cash Flow Interpretation
23
The cash flow statement basically provides
how a business has been able to raise its
money or capital and how those funds have
been spent during a certain period of time.

Tip
24
Interpreting the cash flow
statement provides details as to
how well the business deals and
manages its cash position and how
capable it is in generating cash to
pay its obligations.

EVALUAT
25
1. Cash from Business Operations
It refers to the earnings of the business
before interests and taxes. While the exact
formula varies for every type of business,
this is primarily calculated by getting the net
income, non-cash items, and changes in
working capital.

EVALUAT
26
2. Cash from Investing
Often, there are businesses that will invest
in other industries and business operations.
This mainly refers to cash that is utilized in
new investments as well as those that were
obtained from previous investments.

EVALUAT
27
3. Cash from Financing Activities
Cash from financing refers to the flow of cash from the
financing activities of the business that include
transactions involving debt, equity, and dividends. This is
the part that discloses to the investors the financial
strength of a business as well as the management of its
capital structure.

EVALUAT
28
A positive number for cash flow from financing
activities would mean that more cash is flowing into
the business than flowing out, which consequently
increases the assets of the business.

EVALUAT
Activity
Cite the purposes and importance of
interpreting various financial statements.
29

EVALUAT
EVALUAT
Questions
Part A. Answer the following questions briefly
and concisely.
1. What is financial statement interpretation?
2. How is financial statement interpretation
related to entrepreneurship?
30

EVALUAT
EVALUAT
Questions
3. Who are the users of different financial
statements?
4. What is a balance sheet quick ratio?
5. What is a cash flow statement?
31

EVALUAT
EVALUAT
Questions
Part B. Read the situation below and answer the
question that follows.
After careful evaluation, Chapman Industries is
able to conclude that it has been able to make
P0.50 before interest and taxes for every peso of
sales. It is now planning to adopt a strategy to be
able to increase the value to P1.00.
32

EVALUAT
EVALUAT
Questions
What suggestions and/or recommendations can
you give to Chapman Industries for it to be able
to reach its target of P1.00?
33

Wrap Up
34
The interpretation of financial statements
refers to the method of reviewing, analyzing,
and assessing the financial reports of a
business to be able to gauge its past,
present, and projected performance.

Wrap Up
35
The following are the primary objectives of
interpreting financial statements:
● to determine the profitability of the business
concerned,
● to assess the operational efficiency of business
operations,
● to monitor the earning capability of the business,
● to evaluate the managerial performance of the
individuals in charge of various business activities, and
● to determine the short-term and long-term solvency of
the business.

Bibliography
Barringer, Bruce R. Preparing Effective Business Plans: An Entrepreneurial Approach. Boston:
Pearson, 2015.
Clark, Paul. Business Management. Oxford: OSC Publishing, 2016.
P., Van der Nest D. Accounting Fundamentals. Pretoria: Tshwane University of Technology, 2005.
Price, Robert W, Entrepreneurship. Dubuque, Iowa: McGraw-Hill/Dushkin, 2006.
Strydom, J. W. Principles of Business Management. Southern Africa: Oxford University Press, 2011.
37

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