Vertical & Horizontal Analysis Flashcards
Vertical analysis is
Expresses each amount on a financial statement as a percentage of another amount
I/S -> expressed as percentage of sales
B/S -> expressed as percentage of total assets
Cash Flow -> expressed as percentage of total cash
INFLOW
Horizontal analysis is
amounts expressed as a percentage of a base year
- establish base year (say Year 1)
- compare other years against base year
- > Year 2 v. Year 1
- > Year 3 v. Year 1
Vertical analysis is also called
Common-size financial statement analysis
Horizontal analysis is also called
Trend analysis
What does common size (vertical) financial analysis allow you to do?
Allows user to prepare Intracompany analysis (same company; different time periods)
or Intercompany analysis (different company; same time period
What is the purpose of the I/S
reports revenues, expenses, gains and losses, and other factors that have impacted the organization’s profitability for a period of time, such as a month, quarter, or year.
What is the purpose of the Statement of Comprehensive Income
combined with the income statement or prepared as a separate statement immediately following it.
The statement of comprehensive income starts with net income and then reports other items, net of taxes, such as the unrealized gain or loss on available-for-sale securities or the gain or loss on foreign currency translations.
What is the purpose for the statement of changes in equity
reports the changes from one time period to another.
The statement will show the changes to stockholders’ equity by major accounting category such as common stock, additional paid-in-capital, retained earnings, and treasury stock.
Why is Statement of cash flows important
a company can have net income and be profitable, but still go bankrupt if doesn’t have net cash inflows to pay employees, suppliers, and other creditors
What is a vertical intracompany analysis
User compares SAME company over different time periods
- to analyze trends and
- review the organization’s future growth prospects.
What is a vertical intercompany analysis
Allows user to compare the statements of two firms that are different in size
- eliminates the size difference
- able to compare firms against industry averages
Horizontal analysis can be
expressed either as a dollar value or as a percentage
Basic calculations for horizontal analysis
Percent change method:
(Current Period − Prior Period) ÷ Prior Period = Growth Rate
Percent of prior period method: Current Period ÷ Prior Period = Increase or Decrease
Amount of change method: Current Period − Prior Period = Amount of Change
Which statements is horizontal analysis used for
B/S and I/S
What is the purpose of horizontal (trend) analysis
- to determine the trend of various income statement and balance sheet accounts
- to evaluate whether the management is achieving its objectives
- to investigate unexpected increases or decreases in financial statement items.
- to evaluate overall performance of the company
