Analysis and

Interpretations of
Financial Statements
• Horizontal Analyses
• Vertical Analyses
 OBJECTIVES:
AT THE END OF THE UNIT LESSON, THE
LEARNERS WILL BE ABLE TO:

• Explain why managers analyze financial

statements.
• Perform horizontal and vertical analysis of
balance sheets and income statements.
1. What are the different types
of financial statements.

2. What the contents are of the

financial statements.
REVIEW THE PREVIOUS LESSONS
MOTIVATION
• Is ABC, Inc.
profitable?

• Is the
company’s
financial
performance
improving based
on the two year
data presented?

• Is the company
heavily financed
by debt or
equity?
• Compute the
percentage
share of each
Balance Sheet
account vis a
vis total assets

• Compute the
percentage
share of each
Income
Statement vis
a vis Net Sales
 ANALYSIS AND INTERPRETATIONS
OF FINANCIAL STATEMENTS
Financial Statement analysis is undertaken to
serve the following purposes (objectives):
• To assess the current profitability and
operational efficiency of the firm as a whole as
well as its different departments so as to judge
the financial health of the firm.
• To ascertain the relative importance of different
components of the financial position of the firm.
• To identify the reasons for change in the
profitability/ financial position of the firm.
• To judge the ability of the firm to repay its debt
and assess the liquidity and solvency position of
the firm
VERTICAL ANALYSIS OR COMMON SIZE ANALYSIS

Vertical Analysis of a Balance Sheet

For the Statement of Financial Position or Balance Sheet, all
accounts are presented as a percentage of total asset
 VERTICAL ANALYSIS OR COMMON SIZE ANALYSIS

Vertical Analysis of an Income Statement

For the statement of Profit or Loss or Income Statement,
all accounts are presented as a percentage of net sales.
 HORIZONTAL ANALYSIS / TREND ANALYSIS
To compute:
Amount of change = Current year amount – Base
(earlier) year amount
Percent of change = Amount of change/Base (earlier)
year amount
Some of the more important accounts to monitor when
doing trend analysis are the following:
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
Horizontal Analysis of a Balance Sheet
Horizontal Analysis of an Income Statement
CHECK UNDERSTANDING: GROUP WORK
Compute for the horizontal and vertical analyses of ABC
Inc’s financial statement:
ANSWER: VERTICAL ANALYSIS
ANSWER: VERTICAL ANALYSIS
ANSWER: HORIZONTAL ANALYSES
ANSWER: HORIZONTAL ANALYSES