DESS financial Analysis
17-1
CHAPTER 17
ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
Methods of
Financial Statement Analysis
Horizontal
Vertical
Analysis
Analysis
Common-Size
Trend
Ratio
Statements
Percentages
Analysis
17-2
17-3
Horizontal Analysis
Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next
17-4
Vertical Analysis
For a single financial statement, each item is expressed as a percentage of a significant total,
e.g., all income statement items are expressed as a percentage of sales
17-5
Common-Size Statements
Financial statements that show only percentages and no absolute dollar amounts
17-6
Trend Percentages
Show changes over time in given financial statement items
(can help evaluate financial information of several years)
17-7
Ratio Analysis
Expression of logical relationships between items in a financial statement of a single period
(e.g., percentage relationship between revenue and net income)
17-8
Horizontal Analysis Example
The management of Clover Company provides you with comparative balance sheets of the years ended December 31,
1999 and 1998. Management asks you to prepare a horizontal analysis on the information. 17-9
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Assets
Current assets:
Cash
$
12,000
$
23,500
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
3,000
1,200
155,000
164,700
40,000
40,000
120,000
85,000
160,000
125,000
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
$
315,000
$
289,700
Incre
Amo
17-10
Horizontal Analysis Example
Calculating Change in Dollar Amounts
Dollar
Change
=
Current Year
CHAPTER 17
ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
Methods of
Financial Statement Analysis
Horizontal
Vertical
Analysis
Analysis
Common-Size
Trend
Ratio
Statements
Percentages
Analysis
17-2
17-3
Horizontal Analysis
Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next
17-4
Vertical Analysis
For a single financial statement, each item is expressed as a percentage of a significant total,
e.g., all income statement items are expressed as a percentage of sales
17-5
Common-Size Statements
Financial statements that show only percentages and no absolute dollar amounts
17-6
Trend Percentages
Show changes over time in given financial statement items
(can help evaluate financial information of several years)
17-7
Ratio Analysis
Expression of logical relationships between items in a financial statement of a single period
(e.g., percentage relationship between revenue and net income)
17-8
Horizontal Analysis Example
The management of Clover Company provides you with comparative balance sheets of the years ended December 31,
1999 and 1998. Management asks you to prepare a horizontal analysis on the information. 17-9
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Assets
Current assets:
Cash
$
12,000
$
23,500
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
3,000
1,200
155,000
164,700
40,000
40,000
120,000
85,000
160,000
125,000
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
$
315,000
$
289,700
Incre
Amo
17-10
Horizontal Analysis Example
Calculating Change in Dollar Amounts
Dollar
Change
=
Current Year