Chapter 17 - Financial Statement Analysis

Horizontal Analysis- is the percentage analysis of increasing and deceasing in related items in comparative financial statements.

*the amount of each item on the most recent statement is compared with the related item in one or more earlier statements.
*When comparing two or more statements the earliest of the statements is used as the base.
*A comparative balance sheet compares assets, liabilities and stockholders equity.
it compares the different numbers from year to year then shows the increase or decrease from the years and then finally the percent increase or decrease.

Vertical Analysis- is a percentage analysis to show the relationship of each component to the total within a single statement.

*statements are prepared in either detailed or condensed form.
*vertical analysis is limited to only analyzing one statement, so it may be beneficial to prepare a comparative analysis to better look at the numbers over a longer period of time.
*A comparative balance sheet for vertical analysis also shows assets, liabilities and stockholders equity but only shows the numbers from that one year it doesn't show the increase or decrease from base years and it also doesn't show the percent change from year to year.

Common Size Statements- Are statements used to compare two companies in terms of percents from both vertical and horizontal analysis.

*common size statements are useful to compare the current period with previous periods.
*this information is usually able to be found through trade associations and financial information services.

Solvency Analysis

Solvency- is the ability of a business to meet its financial obligations
Profitability- is the ability of a business to earn income

*Factors associated with solvency and profitability are interrelated
*If a business cannot pay its debts in a timely manor the business may experience difficulty obtaining credit
*If a business cant obtain credit in may in turn affect its profitability
*Solvency Analysis focuses on the ability of a business to pay or otherwise satisfy its current and non current liabilities
*It involves analyzing balance sheet relationship ships and the following analyses

1. Current Position Analysis
2. Accounts Receivable Analysis
3. Inventory Analysis
4. Ratio of fixed assets to long term liability
5. ratio of liabilities to stockholders equity
6. number of times interest charges are earned