Financial statement analysis
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Next Page Click Here. Financial Statement Analysis. Covered here. Analytical techniques used to examine relationships among financial statement items. Horizontal analysis (Dollar and percentage changes on statements) Trend analysis Common-size statements (Vertical analysis)

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Financial Statement Analysis

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Financial statement analysis

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Financial Statement Analysis

Covered here

Analytical techniquesused toexamine relationships among financial statement items

  • Horizontal analysis (Dollar and percentage changes on statements)

  • Trend analysis

  • Common-size statements (Vertical analysis)

  • Ratios


Horizontal analysis

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Horizontal Analysis

Horizontal analysis shows the changes between years in the financial data in both dollar and percentage form.


Horizontal analysis using comparative financial statements

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Dollar

Change

Current Year

Figure

Base Year

Figure

=

Percentage

Change

Dollar Change

Base Year Figure

×

100%

=

Horizontal Analysis (using comparative financial statements)

Calculating Change in Dollar Amounts

Calculating Change as a Percentage


Horizontal analysis balance sheet

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Horizontal Analysis – Balance Sheet

20A is the base year

$12,000 – $23,500 = $(11,500)

($11,500 ÷ $23,500) × 100% = 48.9%


Horizontal analysis income statement

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Horizontal Analysis– Income Statement

$520,000 – $480,000 = $40,000

$40,000 ÷ $480,000) × 100% = 8.3%


Trend analysis

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Trend

Percentage

Current Year Amount

Base Year Amount

×

100%

=

Trend Analysis

Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent.


Trend analysis1

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Trend Analysis

The base year is 2002, and its amounts will equal 100%.

20C Amounts ÷ 20B Amounts × 100% = trend percentage

( $290,000 ÷ $275,000 ) × 100% = 105%

( $198,000 ÷ $190,000 ) × 100% = 104%

( $ 92,000 ÷ $ 85,000 ) × 100% = 108%


Trend analysis2

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Trend percentages can be used to construct a graph so the trend over time can be seen.

Trend Analysis


Common size statements vertical analysis

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Common-Size Statements – Vertical Analysis

Common-size statements use percentages to express the relationship of individual components to a total within a single period.

This approach to financial statement analysis is also known as vertical analysis.


Common size statements

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Common-Size Statements

Net sales is usually the base and is expressed as 100%.


Common size statements1

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20B COGS ÷ 20B Net Sales × 100%

( $360,000 ÷ $520,000 ) × 100% = 69.2%

20A COGS ÷ 20A Net Sales × 100%

( $315,000 ÷ $480,000 ) × 100% = 65.6%

Common-Size Statements


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