Financial Statement

Analysis

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Warren
Reeve
Duchac
Horizontal Analysis

• The analysis of increases and decreases in the amount

and percentage of comparative financial statement
items is called horizontal analysis.
o Each item on the most recent statement is compared with
the same item on one or more earlier statements in terms of
the amount of increase or decrease and the percent of
increase or decrease.
• When comparing statements, the earlier statement is
normally used as the base year for computing
increases and decreases.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Vertical Analysis

• The percentage analysis of the relationship of each

component in a financial statement to a total within
the statement is called vertical analysis.
• In a vertical analysis of the balance sheet, the
percentages are computed as follows:
o Each asset item is stated as a percent of the total assets.
o Each liability and stockholders’ equity item is stated as a
percent of the total liabilities and stockholders’ equity.
• In a vertical analysis of the income statement, each
item is stated as a percent of sales.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Horizontal Analysis of an Income Statement

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Vertical analysis of an Income Statement

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Vertical Analysis of a Balance Sheet

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FAQ’s on Horizontal Analysis

1. Do I need to add up the results (percent and

amounts)?
No. Each line account is computed independently and
has no relationship to other line accounts.
2. What if the more recent year has no value (zero) and
the older year has (and vice versa)?
For example, for years 2017 and 2018, we have values
of zero and P1,000,000 respectively. The computed
percent for that matter will be 100%. If 2017 has a value
of P1,000,000 and 2018 has none (zero), the computed
percent will be zero.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Common-Sized Statements

• In a common-sized statement, all items are

expressed as percentages, with no dollar amounts
shown.
• Common-sized statements are useful for comparing
one company with another or comparing a company
with industry averages.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Liquidity and Solvency Analysis
(slide 1 of 2)

• All users of financial statements are interested in the

ability of a company to do the following:
o Maintain liquidity and solvency
o Earn income, called profitability
• The ability of a company to convert assets into cash is
called liquidity, while the ability of a company to pay
its debts is called solvency.
• Liquidity, solvency, and profitability are interrelated.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Liquidity and Solvency Analysis
(slide 2 of 2)

• Liquidity and solvency are normally assessed using the following:

o Current position analysis
 Working capital
 Current ratio
 Quick ratio
o Accounts Receivable analysis
 Accounts receivable turnover
 Number of days’ sales in receivables
o Inventory analysis
 Inventory turnover
 Number of days’ sales in inventory
o The ratio of fixed assets to long-term liabilities
o The ratio of liabilities to stockholders’ equity
o The number of times interest charges are earned

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Current Position Analysis

• A company’s ability to pay its current liabilities is

called current position analysis.
• Current position analysis is a solvency measure of
special interest to short-term creditors and includes
the computation and analysis of the following:
o Working Capital
o Current ratio
o Quick ratio

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profitability Analysis

• Common profitability analyses include the following:

o Ratio of sales to assets
o Rate earned on total assets
o Rate earned on stockholders’ equity
o Rate earned on common stockholders’ equity
o Earnings per share on common stock
o Price-earnings ratio
o Dividends per share
o Dividend yield

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Summary of Analytical Measures
(slide 2 of 2)

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Summary of Analytical Measures
(slide 1 of 2)

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.