This document discusses techniques for analyzing financial statements, including:
- Horizontal (trend) analysis examines changes in account balances over multiple periods in monetary values and percentages.
- Vertical (common-size) analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the statement of financial position or net sales for the statement of comprehensive income.
- Examples demonstrate calculating percentage and monetary changes for horizontal analysis of sales from one period to the next, and expressing statement of financial position line items as percentages of total assets for vertical analysis.
The learning objectives are to perform vertical and horizontal analyses of financial statements for a single proprietorship. Practice exercises are provided to apply these techniques
This document discusses techniques for analyzing financial statements, including:
- Horizontal (trend) analysis examines changes in account balances over multiple periods in monetary values and percentages.
- Vertical (common-size) analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the statement of financial position or net sales for the statement of comprehensive income.
- Examples demonstrate calculating percentage and monetary changes for horizontal analysis of sales from one period to the next, and expressing statement of financial position line items as percentages of total assets for vertical analysis.
The learning objectives are to perform vertical and horizontal analyses of financial statements for a single proprietorship. Practice exercises are provided to apply these techniques
This document discusses techniques for analyzing financial statements, including:
- Horizontal (trend) analysis examines changes in account balances over multiple periods in monetary values and percentages.
- Vertical (common-size) analysis expresses each financial statement item as a percentage of a base amount, such as total assets for the statement of financial position or net sales for the statement of comprehensive income.
- Examples demonstrate calculating percentage and monetary changes for horizontal analysis of sales from one period to the next, and expressing statement of financial position line items as percentages of total assets for vertical analysis.
The learning objectives are to perform vertical and horizontal analyses of financial statements for a single proprietorship. Practice exercises are provided to apply these techniques
Accountancy, Business and Management Analysis and Interpretation of Financial Statement 1 Learning Competency
• Perform vertical and horizontal analyses of financial
statements of a single proprietorship. Financial Statement Analysis
Financial statements inform the readers of a company's financial position, results
or operations, cash flows and changes in equity. However, these information are not sufficient to help readers make decisions about the business. Let us look at the succeeding scenario to understand this point. For example, two companies asked you to invest in them as part Owner. However, you can only afford to give money to one company. We want to know which of the two companies (Company A or Company B) is the better choice. Both of them are in the same industry. Company A and Company B generated net income in the past year of P1,000,000 and P900,000, respectively. Looking at the Statement of Financial Position (SFP), you found out that Company A and Company B has reported total assets of P10,000,000 and P8,000,000, respectively. Based on these information, which company will you choose? Will it be Company A because the company reported higher assets and net income? As future investors, you should be interested in the return on your investment. You want to have an indication which of the two companies can give better returns for your money. You may also be interested in the stability of returns. However, it is not enough to know total assets and reported net income in order to address your concerns. This means that reading the financial statement is inadequate. We need tools or techniques that we can use on the financial statement numbers in order to have a better understanding of the business. 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).
There are three kinds of FS analysis techniques:
- Horizontal analysis - Vertical analysis - Financial ratios Horizontal analysis also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time to determine the increase or decrease that has taken place (Weygandtet.al 2013). 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.
- - Changes can be expressed in monetary value (peso) and percentages computed by using the following formulas: • Peso change=Balance of Current Year-Balance of Prior Year • Percentage change= (Balance of Current Year - Balance of Prior Year) (Balance of Prior Year) EXAMPLE:
2014 2013
Sales P 250,000 P 175,000
✓Peso change = P250,000 - P175,000 = P75,000
✓Percentage change = (P250,000 - P175,000) / P175,000 = 42.86% ✓ Sales increased by P75,000. This represents a growth of 42.86% from 2013. 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. Example: - 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. • Example PRACTICE EXERCISES: Prepare a horizontal & vertical analysis for C & F Store’s SFP & SCI. ASSIGNMENT: A. Prepare a common-size Statement of Comprehensive Income for 2014 and 2013 for Abakada Trading Company B. Prepare a horizontal analysis for Abakada Trading Company