Page 33 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 3.1 Meaning and Concept of Financial Statement Analysis

Analysts can obtain useful information by comparing a company’s most recent financial
statements with its results in previous years and with the results of other companies in the same
industry. Three primary types of financial statement analysis are commonly known as horizontal
analysis, vertical analysis, and ratio analysis.

Horizontal Analysis

When an analyst compares financial information for two or more years for a single company,
the process is referred to as horizontal analysis, since the analyst is reading across the page to
compare any single line item, such as sales revenues.
Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single financial statement as
a percentage of a total. The term vertical analysis applies because each year’s figures are listed
vertically on a financial statement. The total used by the analyst on the income statement is net
sales revenue, while on the balance sheet it is total assets.

Ratio Analysis

Ratio analysis enables the analyst to compare items on a single financial statement or to examine
the relationships between items on two financial statements. After calculating ratios for each
year’s financial data, the analyst can then examine trends for the company across years. Since
ratios adjust for size, using this analytical tool facilitates inter-company as well as intra-company
comparisons.

Notes The entire financial statement analysis can be classified into various categories:
z z Comparative financial statements
z z Common size financial statements

z z Trend percentages
z z Fund flow statements
z z Cash flow statements and
z z Ratio analysis

Self Assessment

Fill in the blanks:
1. When an analyst compares financial information for two or more years for a single
company, the process is referred to as ………………… analysis.
2. ………………… enables the analyst to compare items on a single financial statement or to
examine the relationships between items on two financial statements.

3. When using …………………, the analyst calculates each item on a single financial statement
as a percentage of a total.

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