Financial Statement Analysis 1 (Vertical and Horizontal Analysis).pptx

Adapted from the Teacher's Guide on Accounting, Business and Management 2

1. Analysis and Interpretation of Financial Statements 1

2. Perform vertical and horizontal analyses of financial statements of a single proprietorship. (ABM_FABM12-Ig-h-13)

3. Financial statement (FS) analysis is the process of evaluating risks, performance, financial health, and future prospects of a business by subjecting financial statement data to computational and analytical techniques with the objective of making economic decisions (White et.al 1998).

4. There are three kinds of FS analysis techniques: - Horizontal analysis - Vertical analysis - Financial ratios

5. Horizontal analysis also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time with the purpose of determining the increase or decrease that has taken place (Weygandtet.al 2013).

6. This will reveal the behavior of the account over time. Is it increasing, decreasing or not moving? What is the magnitude of the change? Also, what is the relative change in the balances of the account over time? - Horizontal analysis uses financial statements of two or more periods. - All line items on the FS may be subjected to horizontal analysis. - Only the simple year-on-year (Y-o-Y)grow this covered in this lesson.

7. 2013

8. Vertical analysis also called common-size analysis, is a technique that expresses each financial statement item as a percentage of a base amount (Weygandt et.al. 2013). - For the SFP, the base amount is Total Assets. • Balance of Account / Total Assets. • From the common-size SFP, the analyst can infer the composition of assets and the company’s financing mix.

9. - For the SCI, the base amount is Net Sales. • Balance of Account / Total Sales. • This will reveal how “Net Sales” is used up by the various expenses. • Net income as a percentage of sales is also known as the net profit margin.

10. The use of common-size financial statements allows the comparison of two companies of different sizes. This is because the SFP and SCI comparative information are standardized as a percentage of assets and sales, respectively.

11. PRACTICE