Question

Horizontal (trend) analysis:

What is the purpose?

What does it compare?

How is it conducted?

How do you calculate year to year change?

How do you interpret results?

Vertical (common size) analysis:

What is the purpose?

What does it compare?

How is it conducted?

How do you prepare a common size income statement and balance sheet?

How do you interpret results?

Ratio analysis:

Describe each category and list the ratios that belong in that category.

Profitability ratios

Liquidity ratios

Solvency ratios

Answer 1

Solution:

Horizontal Trend Analysis:

What is the purpose?

It is used for analysis the trend of each element of the financial statement.

What does it compare?

It compares the increase and decrease of each element of the financial statement and also helps to find out weak areas and make strategy according with the same.

How it is conducted?

It is conducted by computing the changes of each element in terms of percentage. The previous year taken as a base year and compare with current year.

How do you calculate year to year change?

The difference between current year and base year is computed and then the same is converted into percentage form to understand the changes in the trend of the financial statement.

How do you interpret the results?

The results are interpreted by comparing the trend with the current year and base year. In case of income the increase trend is positive sign and in case of expenses decrease trend is positive sign.

Vertical (Common Size) analysis:

What is the purpose?

It is prepared to represent the element of the financial statement in term of percentage of sales and total assets.

What does it compare?

It compares the percentage of each element of the financial statement in terms of total sales and total assets percentage.

How is it conducted?

It is conducted by considering the total sales and total assets. The same is prepared at the end of the financial year.

How do you prepare a common size income statement and balance sheet?

Each element of the income statement is represented in percentage form of total sales and each element of the balance sheet is represented in percentage form of total assets.

How do you interpret results?

The results are interpreted by analysis the change of percentage of each item of the income statement and the balance sheet. It also helps to measure the performance of the financial statement.

Ratio Analysis:

Profitability ratios:

It helps to understand and analysis the profitability of the business. Various ratios under the same are:

Gross Profit Ratio

Net Profit Ratio

Return on Equity

Return on Investment.

Liquidity ratios:

It helps to measure the liquidity position of the business. The ideal liquidity ratio should be 2:1. Various ratios under the same are:

Current Ratio

Quick Ratio

Solvency ratios:

It helps to measure the solvency of the business i.e. business turnover analysis. Various ratios under the same are:

Inventory Turnover Ratio

Debtors Turnover Ratio

Assets Turnover Ratio

References:

Brand, W. A., Coplen, T. B., Vogl, J., Rosner, M., & Prohaska, T. (2014). Assessment of international reference materials for isotope-ratio analysis (IUPAC Technical Report). Pure and Applied Chemistry, 86(3), 425-467.

Gee, G. W., & Bauder, J. W. (1986). Particle-size analysis1. Methods of soil analysis: Part 1—Physical and mineralogical methods, (methodsofsoilan1), 383-411.

Hirsch, R. M., Slack, J. R., & Smith, R. A. (1982). Techniques of trend analysis for monthly water quality data. Water resources research, 18(1), 107-121.

Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, 488-509.