Accounting is the science that controls economic activities and events in companies, entities and units, in order to present records, offer accurate and reliable information regarding the results of a period and the financial situation of the entity.
These observations are of great importance since they allow evaluating alternatives that facilitate decision-making through the application of techniques, methods, planning procedures, records, calculations, analysis, verification and presentation of the economic and financial situation of the company.
Conceptual bases for the Financial Economic Analysis
Analyze: decompose into constituent elements or parts, separate or discriminate the parts of something in relation to a whole. Analyzing is the primary technique applicable to understand and understand what it is trying to say in the financial statements.
Financial Analysis: It is the study of the financial reality of the company through the Financial Statements, the financial analysis tries to interpret the facts on the basis of a set of techniques that lead to decision-making.
The analysis of financial statements, also known as economic-financial analysis, balance analysis or accounting analysis, is a set of techniques used to diagnose the situation and prospects of the company in order to be able to make appropriate decisions. Oriol Amat.
Economic Analysis: it is the decomposition of economic phenomena into their integral parts and the study of each one in particular. Within the analysis of the Financial Statements, the economic analysis consists mainly of determining the percentage of return on capital invested in the business.
Interpret: relative appreciation of concepts and figures of the content of the Financial Statements based on analysis and comparison.
Techniques to interpret: analyze and compare.
Analyze: decompose the whole into each of its parts in order to study each of its elements.
Compare: secondary technique applicable by the analyst to understand the meaning of the content of the Financial Statements and thus be able to make judgments. It is the simultaneous study of two figures or aspects to determine their points of equality or inequality.
The Financial Statements constitute a structured representation of the entity's financial situation and financial performance; They aim to provide information about the financial situation, performance and changes in the entity's financial position that is useful to a wide range of users when making economic decisions, as well as to show the results of the activity carried out. by the administration, or account for the responsibility in the management of the resources entrusted to it.
The analysis of Financial Statements, also known as Financial Economic Analysis, consists of using a set of techniques that aims to diagnose the situation and perspective of the company, in order to be able to make appropriate decisions.
From an internal perspective, the company's management can make decisions that correct the points of weaknesses that may threaten its future and at the same time take advantage of the strong points so that the company achieves its objectives.
From an external perspective, these techniques are also very useful for all those interested in knowing the situation and foreseeable evaluation of the company.
Balance Sheet: relates all the assets, liabilities and capital of an entity to a given date, usually at the end of a month or a year, which is why it is considered a static Financial Statement. The balance sheet is like a photograph of the entity, which is why it is also known as the Situation Statement.
Income Statement: presents a summary of the income or expenses of an entity during a specific period, it can be a month or a year, which is why it is considered a dynamic Financial Statement. The Income Statement, also called the Statement of Operations, is like a movie of the entity's operations during the period. This state has what is perhaps the most important individual information about a business: its Net Income (Income minus Expenses).
Capital Statement: presents a summary of the changes that occur in the entity's capital during a specific period (one month or one year). Like the Income Statement, it is considered a dynamic Financial Statement.
Ratios as an essential part of Financial Economic Analysis are a vital tool for decision-making, they facilitate analysis, but they are never a substitute for good analytical judgment.
The financial ratios or ratios allow to relate elements that by themselves are not capable of reflecting the information that can be obtained once they are linked with other elements, either from the financial statement itself or from other states that are related to each other, either directly or indirectly, thus showing the development of a certain activity.
The ratios are used to analyze the content of the Financial Statements and are very useful to indicate:
¨ Weak points of a company.
¨ Problems and anomalies.
¨ In certain cases as a basis for formulating a personal judgment.
There is a wide range of financial reasons that are used in our entities when conducting an economic financial analysis, in our case, to analyze the financial situation of the entity under analysis, we will use the following ratios:
¨ Liquidity ratios.
¨ Reasons for activity.
¨ Debt reasons.
¨ Profitability reasons.
Liquidity ratios:
They measure the ability of the company to meet its short-term obligations, they refer to the amount and composition of current liabilities and its relationship with current assets, which is the source of resources that the company has to satisfy its obligations contracted more urgent.
For its analysis it will be determined:
1. Net working capital.
2. Solvency ratio.
3. Immediate liquidity index or acid test.
1 . Net working capital:
It is defined as the funds or resources with which a company operates in the short term, after covering the debts and obligations that expire in that short term, that is, it expresses the financial means that an entity has to pay the obligations (debts) in the short term. term; This ratio should always be positive, since when the company will have no income and thus support the most urgent operations, its current assets must always be greater than its current liabilities.
Calculation method:
Working capital = Current assets - Current liabilities
Express:
The working capital of an entity.
2. Solvency ratio:
It determines the possibility that an entity has to meet its short-term payments, indicating the capacity of the entity to cover its short-term obligations from its current assets, which the company expects to become cash in a period more or less short.
Calculation way:
Solvency ratio = Current assets / Current liabilities
Express:
The amount of current assets that an entity has to cover each peso of short-term debts.
Optimal:
Two pesos of current assets for each peso of short-term debt.
3. Immediate liquidity index or acid test:
Indicates an entity's ability to pay, discounting the less liquid items of current assets, that is, inventories.
Calculation method:
Immediate liquidity index = Current assets - Inventories / Current liabilities
Express:
How much pesos of current assets does an entity have to face each peso of its most urgent debts, without counting inventories
Activity reasons:
They measure how efficiently the company uses resources with incidence on sales, inventories, accounts receivable as well as accounts payable.
Of these reasons, the following will be calculated:
1. Accounts receivable rotation.
2. Rotation of accounts payable.
3. Rotation of inventories.
Accounts receivable rotation (R. C x C)
Determine every how many days and how many times collections are made in a given period, the faster we are collecting, the faster cash will enter to carry out its operations.
Calculation method:
R. C x C = Net sales / Average accounts receivable = Times
Express:
The times that customers have been charged in a certain period.
In order to know how often the cash recovery is made, the accounts receivable are made, the average term or collection cycle must be calculated.
Calculation way:
Collection cycle = Number of days in the period / RC x C = Days
Express:
Every how many days collections are made to customers.
Note. In our country it is legislated by the Ministry of Finance and Prices that the collection of obligations is every 30 days, except in cases where an agreement is made between the participating entities.
Accounts payable rotation (R. C x P)
They reflect every how many days they make payments to suppliers, that is, short-term debts are canceled.
Note. In our country, it is legislated by the Ministry of Finance and Prices that the payment of the obligations is every 30 days, except in cases where an agreement is made between the participating entities.
Calculation way:
R. C x P = Net purchases / Average accounts payable = Times.
It expresses:
The times that the debts have been paid to the providers in a certain period.
Payment cycle:
Calculation method:
Payment cycle = Number of days in the period / RC x P = Days
Express:
Every how many days payments are made to suppliers.
Inventory rotation (RI)
It tells us how efficiently the inventories have been consumed, we can analyze the rotation of inventories of raw materials, production in process and finished products.
Calculation way:
RI = Cost of Merchandise / Average Inventory
Express:
The times that inventories have been consumed in the period, that is to say that a slow rotation would cause storage expenses, idle products in the warehouses as well as unnecessary expenses in purchases.
Average inventory term.
Calculation way:
Average inventory term = Number of days in the period / RI = Days
Express:
Inventories rotate every how many days.
Debt reasons:
They measure the ratio of the funds provided by the company to the creditors, as this indicator increases, the company will be in greater financial difficulties.
Calculation way:
Debt ratio = Total liabilities / Total assets
Express:
With how many pesos, or with what percentage of debts, an entity finances its total assets.
Leverage Ratios
These reasons are used to diagnose on the structure, quantity and quality of the debt that the company has, as well as to check to what extent the sufficient profit is obtained to bear the financial cost of the debt.
Profitability Reasons.
Allows you to relate what is generated through the Statement of Income, with what is required of assets and sale to carry out the business activity, relating the profit or profit before tax and interest with the total assets, in order to evaluate the profit that the entity has.
Conclusions
The analysis and interpretation of the Financial Statements constitutes a very useful tool for decision making in the company; which is constituted by the valuation of various reasons and indicators that measure the effectiveness of the economic management of any entity, but it must be taken into account that for a correct interpretation the interaction of several indicators must be analyzed, since one by itself does not allow determine the financial situation of it.
Bibliography
Demestre Catañeda, A, Castells del Río, C González Torres, A 2002. Techniques for analyzing financial statements.
Havana, Grupo Editorial PubliCentro.
