Question

1. Differentiate between investing activities, operating activities and financing activities. Please provide examples of each in your answer.

2. Discuss and explain the difference between a vertical analysis and a horizontal analysis. Which method do you feel is better?

Answer 1

(1)

Operating cash statement shows all cash flows (CF) from its normal activities like sales revenue, expenses etc. In operational activities (OA) of cash flows, any particular change in the working capital is recorded. For example: Increase or decrease in current assets and current liabilities etc.

Investing activities are those activities which are undertaken by the business to meets its investment goals and to earn revenue from fixed assets. It involves activities like purchase and sale of fixed assets.

Financing activities are those activities which are used to finance capital for business by issuing equity, debenture and raising a loan.  

(2)

Vertical analysis refers to the technique of breakdown of financial statements under which each item of the financial statements is presented as a %age of base amounts of the financial statement.

In the income statement (IS) the base amount is the sales revenue of the company and in the balance sheet (BS), the base amount is the total of the balance sheet. The total of the balance sheet (BS) is equaled to the total assets of the company.

Horizontal analysis refers to the analysis which shows the change in the value of financial statements from period to period. In this analysis, the base period value is taken in the denominator to compute the changes in the value of financial statements.

Both analysis are important, as vertical analysis is used for the computation of various heads in a same year and horizontal analysis is used to compare the financial statement of one period with the base  period.