REVIEW OF FINANCIAL

STATEMENT,
PREPARATION, ANALYSIS
AND INTERPRETATION

MS. ALYSSA VILLORENTE

OLC
LESSON OBJECTIVES:

Calculate Calculate horizontal, or trend, analysis

Calculate Calculate vertical, or common size, analysis

Understand the implications of these types of analyses on analyzing

Understand business performance
FINANCIAL STATEMENT ANALYSIS

Is the process of reviewing analyzing a

company’s financial statements to make better
economic decisions.
TWO TYPES OF FINANCIAL ANALYSIS

Horizontal Analysis

Vertical Analysis
WHAT IS HORIZONTAL ANALYSIS?
Also called Trend Analysis
An analysis of the year to year change in each financial statement.
Refers to the studying the behavior of individual financial statement items over several
accounting periods.
It helps determine a companies’ growth and financial position versus competitors.
The horizontal analysis technique uses a base year and a comparison year to determine a
company’s growth.
 INDEX ANALYSIS
An index analysis is a percentage analysis of financial
statements where all figures are expressed for a base year equal
100 percent and subsequent financial statement items are
expressed as percentages of the values in the base year.
 PURPOSE OF HORIZONTAL
ANALYSIS
The purpose of Horizontal Analysis is to determine how each
item changed, why it changed, and whether the change is
favorable or unfavorable.
It’s a way for analysis to compare accounts or performance
metrics over time to see if the company is improving or
declining.
 CALCULATIONS USING HORIZONTAL
ANALYSIS
Changes can be shown in peso amounts or percentages.
Peso amounts are simply calculated by subtracting the original
period amount from the current period amount.
Percentages are calculated by dividing the peso amount of
change by the amount in the original period, and then
multiplying the answer by 100.
FORMULA OF HORIZONTAL ANALYSIS

Horizontal Analysis (%) = Amount in CURRENT YEAR- Amount in PREVIOUS YEAR

______________________________________________________________________________________________ X 100
Amount in PREVIOUS YEAR
 XYZ SUPERSTORE
COMPARATIVE YEAR END BALANCE SHEETS
2019 2020 PESO CHANGE % CHANGE
ASSETS

CASH P90,000 P110,000 P20,000 22%

ACCOUNTS 20,000 30,000 10,000 50%

RECEIVABLE
INVENTORY 35,000 40,000 ?
P5,000 ?
14%

SHORT-TERM 15,000 20,000 ? ?

INVESTMENTS P5,000 33%

TOTAL CURRENT 160,000 200,000 ? ?

ASSETS P40,000 25%
EQUIPMENT 40,000 50,000 ? ?
P10,000 25%
TOTAL ASSETS P200,000 P250,000 ?
P50,000 ?
25%
 XYZ SUPERSTORE
COMPARATIVE YEAR END BALANCE SHEETS
2019 2020 PESO CHANGE % CHANGE
LIABILITIES

ACCOUNTS P60,000 P75,000

PAYABLE P15,000 25%
UNEARNED 10,000 25,000
REVENUE P15,000 150%
TOTAL CURRENT 70,000 100,000
LIABILITIES P30,000 43%
NOTES PAYABLE 40,000 50,000
P10,000 25%
TOTAL 110,000 150,000
LIABILITIES P40,000 36%
 XYZ SUPERSTORE
COMPARATIVE YEAR END BALANCE SHEETS
2019 2020 PESO CHANGE % CHANGE
STOCKHOLDERS
EQUITY
COMMON STOCK 75,000 80,000 P5,000 7%
ENDING 15,000 20,000
RETAINED P5,000 33%
EARNINGS
STOCK HOLDER 90,000 100,000 P10,000 11%
EQUITY
TOTAL P200,00 250,000 P50,000 25%
LIABILITIES AND
STOCK HOLDER
EQUITY
 IMPLICATIONS OF HORIZONTAL
ANALYSIS
If management expected Net Income to increase by 20% and it only
increased by 10%, management will need to look whether Sales could
have decreased or if Expenses could have increased .
If Accounts Receivable decreased by 30% from year to the next , either
the existing credit accounts are being paid off by the customers or new
customers could be paying in cash as opposed to credit.
 WHAT IS VERTICAL ANALYSIS?
Vertical analysis is also called common‐size analysis.
Vertical analysis shows a comparison of a line item within a statement to another line item
within that same statement. 
Vertical analysis of financial statements is a technique in which the relationship between
items in the same financial statement is identified by expressing all amounts as a percentage
a total amount.
 PURPOSE OF VERTICAL ANALYSIS
To gain insight into the relative importance or magnitude of
various items on the financial statements.
Vertical analysis is applicable for internal performance review
as well as comparison to peers and bench-marking.
Comparisons allow management and accounting staff at the
company to isolate the reasons and take action to fix the
problem.
 CALCULATIONS USING VERTICAL
ANALYSIS
Calculated by dividing the individual amount by a base
amount, then multiplying by 100.
On the Balance Sheet, Total Assets, Total Liabilities, or Total
Stockholder’s Equity are typically used as the base amounts.
On the Income Statement, Total Sales is typically the base
amount.
FORMULA OF VERTICAL ANALYSIS
 XYZ SUPERSTORE
COMPARATIVE YEAR END BALANCE SHEETS
2019 2020 PRIOR YEAR CURRENT YEAR
ASSETS

CASH P90,000 P110,000 45% 44%

ACCOUNTS 20,000 30,000 10% 12%

RECEIVABLE
INVENTORY 35,000 40,000 ?
18% ?
16%

SHORT-TERM 15,000 20,000 ? ?

INVESTMENTS 8% 8%

TOTAL CURRENT 160,000 200,000 ? ?

ASSETS 80% 80%
EQUIPMENT 40,000 50,000 ? ?
20% 20%
TOTAL ASSETS P200,000 P250,000 100%
? ?
100%
 XYZ SUPERSTORE
COMPARATIVE YEAR END INCOME STATEMENT

2019 2020 PRIOR YEAR CURRENT YEAR

NET SALES P100,000 P120,000 100% 100%

COST OF GOODS 50,000 60,000 50% 50%

SOLD
GROSS PROFIT 50,000 60,000 50% 50%

RENT EXPENSE 5,000 5,500

5% 5%
DEPRECIATION 2,500 3,600
EXPENSE
3% 3%
SALARIES 3,000 5,400
EXPENSE 3% 5%

UTILITY 1,500 2,500 ?2% ?2%

EXPENSE
IMPLICATIONS OF VERTICAL ANALYSIS

If Accounts Receivable represents a large percent of Total

Assets(that percentage would have to be established by
management),management may want to tighten its credit
policies.
If the Cost of Goods Sold is an especially high percent of
Sales or Revenue, more sales will be necessary to cover the
costs.
REFERENCES

• Lesson Plan Horizontal and Vertical Analysis  Financial Analysis  Finance (studylib.net)

• Horizontal and Vertical Analysis | Accounting (slideshare.net)
• Horizontal Analysis - Overview, Key Metrics, Example (corporatefinanceinstitute.com)