Name: Rachel Ann P.

Razonable
Year/Course/Section: BSBA FM 2-B

ANALYSIS OF FINANCIAL STATEMENTS

Reflection paper
After I watched the video, the insights I’ve gained are what financial statement analysis
means and the three ways of Financial Analysis but on the video only the two ways have been
discussed.
Financial statement analysis is the process of analyzing a company's financial statements
for decision-making purposes. Truly enough, financial statements are able to provide information
about the entity’s financial position, financial performance and cash flows. Horizontal, vertical,
and ratio analysis are three techniques analysts use when analyzing financial statements.
The difference between vertical analysis and horizontal analysis of financial statements is
that Horizontal Analysis or trend analysis is where ratios or line items in a company's financial
statements are compared over a certain period of time by choosing one year's worth of entries as
a baseline, while every other year represents percentage differences in terms of changes to that
baseline. For example, in the video I’ve watched, the amount of cash reported on the balance
sheet on 2019 and 2020 is expressed as a percentage of the year 2019, amount. Instead of dollar
amounts, you see 25, -35, 30, 20 and 0. This shows that the amount of cash at the end of 2020 is
25% of the amount it was at the end of 2019. By doing the same analysis for each item on the
balance sheet and income statement, one can see how each item has changed in relationship to
the other items.
On the other hand, vertical analysis also called common size analysis is a method of
analyzing financial results expressing each financial statement account and element as a
component of a base. Vertical analysis makes it much easier to compare the financial statements
of one company with another, and across industries. This is because one can see the relative
proportions of account balances. It also makes it easier to compare previous periods for time
series analysis, in which quarterly and annual figures are compared over a number of years, in
order to gain a picture of whether performance metrics are improving or deteriorating. For
example, by showing the various expense line items in the income statement as a percentage of
sales, one can see how these are contributing to profit margins and whether profitability is
improving over time. It thus becomes easier to compare the profitability of a company with its
peers.