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Unit 6: Financial Statements: Analysis and Interpretation

industry. Three primary types of financial statement analysis are commonly known as horizontal Notes
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.

Did u know? What are the different types of financial statements?
There are four different types of financial statements. The different types of financial
statements indicate the different activities occurring in a particular business house.
1. Income Statement
2. Retained Earnings Statement
3. Balance Sheet
4. Statement of Cash Flows
5. Fund Flow Statement

6.2 Ratio Analysis

The ratio analysis is one of the important tools of financial statement analysis to study the
financial stature of the business fleeces, corporate houses and so on.
How the ratios are able to facilitate to study the financial status of the enterprise?

Did u know? What is meant by ratio?
The ratio illustrates the relationship in between the two related variables.

What is meant by the accounting ratio?
The accounting ratios are computed on the basis available accounting information extracted
from the financial statements which are not in a position to reveal the status of the enterprise.

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