Defines and describes various financial analysis methods, such as vertical and horizontal analysis.
Financial analysis is the process by which an analyst will evaluate budgets, projects, business, and other finance-related entities to find out their act and fitness. The study is done by focusing strictly on the balance sheet, income statement, and cash flow statement.
The ratio investigation method is calculated to compare similar ratios derived for a previous period to determine whether the company’s performance is in harmony with the expectations set by this company (Subramanyan et al. 2014).
Horizontal analysis is sometimes referred to as a trend analysis because of the similarities they share. This technique highlights changes in the financial statements over a period. The earliest period is usually used as a base period and the items on the reports for all later periods are compared with things on the statements on the base period.
Benefits of Financial Analysis
Horizontal analysis method contrasts financial information over a progression of reporting durations while vertical analysis studies financial information proportionally. Each line entry on a business account is recorded as a ratio of another article. This implies that each line item is quantified as a ratio of gross sales on an earnings statement and each item line on a balance sheet is quantified as a ratio of total assets (Petersen, & Plenborg, 2012).
Ratio analysis can be generalized into liquidity, activity, leverage and profitability ratios. Majority of the rates in a commercial setting are within set expectations while the remaining will focus on potential issues.
Trend analysis is an extension of horizontal analysis, and it entails having to review statements of three or more periods. Users will assess reports for incremental adjust patterns, which will show that there is a decreased expense or an increased income.
Similarities and differences between horizontal and trend analysis
Trend analysis requires that ratios be calculated over several business years, which is similar to horizontal analysis. As much as they share similarities, they differ in the sense that parallel study will evaluate as a sequence of reports. A series suggests that it follows a specific routine. As for trend analysis, it does not support any protocol (Monahan, 2018).
Using the financial statements for your case, examine how at least one of the methods can be used.
The vertical analysis involves looking at different components of the returns statement and dividing them by revenue to put across them as a percentage. This analysis can be used as a system for evaluating financial information.
The vertical analysis uses a balance sheet, which gives the stakeholders essential information about a company’s financial position. The balance sheet provides data derived from giving accounting data at a specific moment. It is simple to understand, ready to lend a hand for time series analysis, and assessment can be prepared at a glance and lastly, it is useful in analyzing structural composition.
Monahan, s. T. E. V. E. N. J. (2018). Financial statement analysis and earnings forecasting. S.l.: now publishers Inc.
Petersen, C. V., & Plenborg, T. (2012). Financial statement analysis: Valuation, credit analysis, executive compensation. Harlow, England: Financial Times/Prentice Hall.
Subramanyam, K. R., Wild, J. J., & Halsey, R. F. (2014). Financial statement analysis. New York, NY: McGraw-Hill Education.