Chapter 2 Flashcards
to provide information that allows decision makers to understand and evaluate the results of business decisions
Goal of accounting
it is to provide information in order to make decisions
Goal of accounting
they analyze financial statements to evaluate past financial performance and make future decisions
managers
Levels of analysis
Vertical analysis (common size financial statements)
horizontal analysis
it focuses on important relationships between items on the same financial statement. these items are compared vertically, from one account balance against another, and are typically expressed as percentages to reveal the relative contributions made by each financial statement item
vertical analysis(common size financial statements)
line items on this are generally expressed as a percentage of total assets
balance sheet
line items on the balance sheet are generally expressed as a percentage of
total assets
line items of this are generally expressed as a percentage of net sales
income statement
line items on the income statement are generally expressed as a percentage of
net sales
it is conducted to help financial statement users recognize important financial changes that unfold over time
horizontal analysis
it compares information horizontally, from one period to the next, with the general goal of identifying significant sustained changes
horizontal analysis
formula of horizontal analysis
current year - base year /base year
conducted to understand relationships among various items reported in one or more of the financial statements
ratio analysis
it shows the evaluation of the companys performance given the level of other companys resources
ratio analysis
these are best compared with both historical and industrial averages
ratios
