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Financial statement analysis building blocks
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Recommended: Financial statement analysis building blocks
The four basic financial statement analysis procedures are horizontal, percentage, vertical, and ratio (Edmonds, Tsay, & Olds, 2011).
The first basic financial statement analysis procedure is horizontal analysis or also referred to as trend analysis. Horizontal analysis is used to study the behavior of individual financial statement items over several accounting periods. Likewise, horizontal analysis is the comparison of financial information of a company with past financial information of the same company over a number of reporting periods (Edmonds, Tsay, & Olds, 2011). Furthermore, this analysis focuses on trends in either absolute dollar amounts for the item or in percentages. Moreover, the absolute dollar amounts may be used to evaluate the amounts reported for research and development costs to judge whether a business is spending unnecessarily or conservatively. Thus, users utilizing this analysis are concerned with how amounts change over time. “An example given indicates that a user may
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This is conducted on financial statements for a single time period only. As with horizontal analysis, it compares items over many time periods. In contrast, vertical analysis only compares many items within the same time period. Likewise, vertical analysis of an income statement or also called a common size statement involves converting each income statement component into a percentage of sales. Additionally, while every item on a balance sheet is expressed as a percentage of total assets held by the company.Moreover, vertical analysis utilizes percentages to compare individual components of financial statements to a key statement figure. Vertical analysis entails changing each income statement element to a percentage of sales. Furthermore, vertical analysis recommends analyzing only one period, however, it can be quite beneficial to compare common size income statements for several
The analytical procedures is yet another way to detect the fraud. Through analytical procedures the relationship between different figures is develop that support the increase or decrease effect on the balance sheet and the income statement. The following procedures to be performed:
Horizontal analysis involves comparing line items in financial statements over time, seeking to identify trends or items of interest. For Lifepoint Hospitals, the horizontal analysis will be conducted on both the balance sheet and the income statement, focusing on measures that are critical to the company’s success.
The analytical formats used in response to question number 3 are threefold; 1) trend analysis, 2) common size analysis and 3) percentage change analysis. The rationale for this three-fold approach is that all other ratio analysis is derived from these three. The utilization of trend analysis aids in giving clues as to the financial status of the company is likely to improve or deteriorate. Likewise, the common size analysis relates to the fact that all income statement items are divided by
Financial statement analysis: theory, application and interpretation / Leopold A Bernstein and John J. Wild 6th edition Mc Graw Hill 1998
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
The data enables easier visualization of the proportions of separate accounts. Vertical analysis results in common-size financial statements that enable easy comparisons of financial data among companies and the industry sector. Overall, Costco’s vertical analysis is rather uneventful. No percentage moved further than 0.1% when comparing the years of 2013 & 2014. While uneventful, there are still a few areas I would like to analyze.
An important part of financial planning for corporations is the annual report. Publically held companies are required to submit an annual report to the SEC and private companies, even though not required, can use an annual report to gauge the performance of the company for the past year and use the report to plan for the future. The financial statements that make up an annual report are the income statement, the balance sheet, and the statement of cash flows. (Melicher, 2014) Once all of the financial information has been compiled and the three statements that make up the annual report have been completed a corporation can then start to analyze the data. There are several different categories of financial ratios
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group.
Vertical analysis presents an opportunity to evaluate a company’s make-up and reveals information about its year-to-year changes by comparing each lin...
Financial benchmarking is the process of “running a financial analysis [report] and making a comparison of the results [to] assess a company’s overall competitiveness, efficiency and productivity” (Debitoor, 2018). These analyses are often altered between ratio and financial trend. Ratio analysis or also known as financial ratio analysis “is a quantitative analysis of information contained in a company’s financial statements [and it] is used to evaluate various aspects of a company operating and financial performance such as its efficiency, liquidity, profitability and solvency” (Momoh, 2017). Financial trend analysis “[are] often used to make projections and assessments of [an organization] financial health … Analysts [typically]examine the past performance of their company, along with current financial conditions, to determine how their company will perform in the future” (Lewis, 2011).
The vertical analysis can also be used to show the percentage different revenue line items that make up total sales. This analysis will show if there is an increase or decrease for each item in a percent form. For some people, when you see a percent form, it’s easier to read the results on how the company is doing financially.
Financial analysis is a process of studying the financial condition and main results of a company's financial activity in order to identify reserves to increase its market value and ensure further effective development. Also Financial analysis is used to understand the financial aspects of an investment and solutions.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.
Accounting aids the government and organisations in decision making for their financial stability. This numerical data helps solve real life problems and contributes to how the economy and businesses perform.