Summary

Financial Analysis : The Accountants Tool

Financial Analysis can make a difference

between the success and failure of a
business.
The key to success in financial analysis is
to first assess the interest and needs of
management by talking to them or by
asking management questions.
By understanding the answers to these
questions , you will be able to determine
the type of analysis they would like.

Management Questions

What do they want from their business?

What services are they hoping youll provide?
What type of information do they expect to receive?
Are they interested in ideas that will improve
profitability?
Do they want to be warned of troublesome trends?
What financial comparisons , if any , would they like?
Are there industries , or other companies , what they
wish to benchmark with?
Are they planning on budgeting/forecasting?

HORIZONTAL ANALYSIS
The most common and simplest.
Simply comparing the same item in a companys
financial statements from two or more
comparable periods , and then calculating the
difference.
Example: Sales current year = $531,275
Sales previous year= $ 552,715
Reduction in sales = $ 21,440
Management would want to know WHY?
To understand the reason for the change in sales
and tackle about it.

VERTICAL ANALYSIS
Illustrates the relationship of certain
components compared to the whole
or the financial stability of a
company.
There are several different types of
ratios or indexes that help us
determine where the company
currently stands in relationship to
where it wants to go

Types of Vertical analysis

Percentages- most common form of vertical
analysis to show one accounts from another.
Example: In a column of the Income Statement
showing each cost and expense and the resulting
Gross profit & net income as a percentage of total
revenue.
Few more list:
Working capital =Current assets - current liabilities
Current ratio = current assets /current liabilities
More list on page 139

The resulting numbers and ratios are

used to have something to compare
them to.
Effective use of these calculations is to
compare them horizontally to identify
improvements or failures in the
companys system.
An additional source of information
would be to compare one companys
results with those from another
company or industry average.

VOCABULARY
PROFITABILITY
EQUITY
COMPLIMENTARY