A.1 Basic Financial Statement Analysis Flashcards
What’s another term for Vertical Analysis?
Common-size financial statements
What type of analysis enables easier comparison of entities of different sizes and business cycle stages?
Vertical Analysis
On which types of financial statements can Vertical Analysis be performed?
Income Statement & Balance Sheet
When performing a vertical analysis on the income statement, all line items are expressed as what?
A percentage of sales
When performing a vertical analysis on the balance sheet, all line items are expressed as what?
A percentage of total assets
The formula for performing Vertical Analysis on an Income Statement is:
(Line item / Sales) * 100
The formula for performing Vertical Analysis on the Balance Sheet is:
(Line item / Total assets) * 100
If total assets are not explicitly stated, how can you determine the base (denominator) for vertical analysis?
Sum total liabilities + stockholders equity
What’s another term for Horizontal Analysis?
Common base-year statements
What type of analysis is used to evaluate growth over time?
Horizontal analysis
The formula for performing Horizontal Analysis on an Income Statement is:
(Line item / Base year line item amount) * 100
The formula for performing Horizontal Analysis on an Balance Sheet is:
(Line item / Base year line item amount) * 100
What type of analysis should be used to evaluate year-over-year growth?
Growth rate analysis
What is the key difference between horizontal analysis and growth rate analysis?
Horizontal analysis uses the earliest year (Year 1) as the base, while growth rate analysis shifts the base year forward by one year, comparing the new year to the previous year.
What is the formula for growth rate analysis?
(Current year value - Prior year value / Prior year value) * 100
What do I do if I’m given the growth rate for the current year and the percentage of the base year for the prior year?
Start with what you know, add growth (plus 1), and multiply.
