Methods of Analysis 1 ? ? Tonya Banks ACC281: Accounting Concepts for Health Care Professionals Methods of Analysis Keith Graham March 29, 2010 Methods of Analysis 2 Financial statements are records that provide information of an organization or business financial status and is a measurement of the fiscal or quarterly performance of a company. They are written evidence of reporting obligations and are used for making decisions. There are different methods for examining the financial statement and balance sheet. Vertical analysis, horizontal analysis and financial ratios are part of financial statement analysis.
Horizontal analysis are amounts of trends and changes noted on a financial statements from past years or quarters within a year. The amounts in dollar helps users of financial statements and auditors to understand changes in finances, whether positive or negative. An example for horizontal analysis would be sales from 2008 that total $500,000 and 2009 that total $900,000, sales increased to 180% from 2008 to 2009 an increase of 80%. In a base year the absolute dollar amount of financial statements of consecutive years is changed to a percentage of the base year dollar amount or trends of percentages.
Absolute amounts of a horizontal analysis is a comparison of dollar amounts of operating expenses and other items over a period of time, quarterly or annually. This is a very important method when determining whether a company is spending to much or to little on needed items and if an opposing company has influences on a business such as increasing or reducing on cost of materials. “Percentage analysis involves computing the percentage relationship between two amounts “ (Edmonds), quarterly or annually, another way of horizontal analysis.
In percentage analysis the absolute dollar amount is changed to percentage, 2008 that total $500,000 and 2009 that total $900,000, sales increased to 180%. The percentage analysis of the horizontal method is very helpful in comparing and Methods of Analysis 3 contrasting smaller business’ to larger business’. “Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure“ (Edmonds). A Wal-Mart for example pays $1000 dollars this quarter in advertisements and made a $40000 profit from sales, this Wal-Mart paid 2. % in advertisements for this quarter. The result of every income statement amount being restated as a percentage of sales and ratio is a comparison of percentages or a vertical analysis of an income statement. This restatement of income is also called a common size statement which allows for comparison of a company’s income statement to another company’s income statement or to the average of the industry. Vertical analysis of the balance sheet reports items as percentage of total assets or liabilities and equity.
An example would be cash on hand $10,000 and total assets of $20,000, the cash reported will be 50% of the total assets. “Ratio analysis involves studying various relationships between different items reported in a set of financial statements” (Edmonds). Ratio analysis is used to measure quantities on a financial statement, calculating from current year performance, activity, financing and liquidity, and comparing them to previous years, other companies, the industry, and the economy to see, understand and know the performance, activity, financing and liquidity of the company.
Financial information is useful in making decisions because it provides details of how a business is making efficient use of financial resources. The balance sheet showing detailed information of assets and liabilities and liquidity, sales and purchases of assets and liabilities, trading and accounts with customers and suppliers, Methods of Analysis 4 wages paid to employees, and information about cost.
Business’ are able to make decisions on how to reduce cost, increase their sales, raise their profits, when and where to purchase assets, and the best source of finances and duration. Financial statement information offer important statistics and evidence that informed decisions and plans can be made from. An example of a horizontal analysis: 2007 2008 2009 Sales $225,000 $177,000 $145,000 Base year 22% 22%increase 100% 155% 55% increase Percentage increase or decrease from base year formula Current year amount – Base year amount Base year amount Percent increase in sales $225,000- $145,000 = 55% $145,000 Methods of Analysis 5 Reference: Edmonds, T. , Olds, P. , McNair, F. , & Tsay, B. (2010). Survey of Accounting (2nd ed. ). New York: McGraw-Hill Irwin.