Ch 6 - Analysis Tips

Question 1

For a statement of P&L, what are the steps to conducting a horizontal analysis for two years?

Answer 1

1. Calculate the VARIANCE (latest year - earliest year)
   - e.g. 2023 - 2022 numbers
2. Calculate the variance PERCENTAGE (variance number / earliest year number)
   - e.g. variance/2022 line item
3. State whether it’s FAV or UNFAV (changes depending on whether it’s revenue or expense
4. Explain

Question 2

How do you conduct a vertical analysis?

Answer 2

Divide EVERY single line item (ex. COGS) by REVENUE for that year. It is a PERCENTAGE.

Do it for each reporting period (e.g end-of-year)

Question 3

Whats the formatting to prepare a budgeted financial statement for a certain date?

Answer 3

1. Add another column with budgeted date
2. Add an explanations section

Question 4

When preparing budgeting, what must you do when it says a line item is going to grow at the same rate as the last two years?

Answer 4

1. Find the difference then / 2 to find the growth percentage.
2. Then apply growth percentage to most recent value (ex. 2025 if budgeting for 2026) to get budgeted value.