Question

As you begin to assess the financial statements of a corporation, you would use many different tools. Please discuss the purpose of each tool/process below along with the insight that you would expect to attain from each:

Vertical and horizontal analysis of the income statement and balance sheet

Cash flow analysis

Deep-dive review of account balances

Ratio analysis

You should also apply additional technical tools including:

Structured Query Language (SQL)

Open Database Connectivity (ODBC)

Digital Analysis

Outlier Investigation

Stratification

Summarization

You should consider how each of these financial tools can provide insight into the company and help to develop a list of “red flags.”

Answer 1

1. Vertical and horizontal analysis of financial statements:

• Vertical and horizontal of financial statements helps the managerial accounting in decision making and to analyze the financial position of the entity.
• Financial statements analyses are useful not only to the company abut also to the external users such as shareholders, creditors, governments and financial institutions.
• If analysis reveals any unexpected differences in income statement accounts, management and accounting staff at the company should isolate the reasons and take action to fix the problems.

1. Cash flow analysis:

• Cash flow analysis helps in determining the closing cash balance at the end of the year
• It also helps in identifying cash spent and cash received from various activities such as:
  • Cash flow from operating activities
  • Cash flow from financing activities
  • Cash flow from investing activities
• Free cash flow signals that the company is liquid enough in paying debts, dividends interests etc.

1. Ratio Analysis:

• it is a quantitative analysis of financial information contained in the financial statements of the company.
• It gives the picture of the company’s profitability, liquidity, operational efficiency, owner’s equity.
• Contains various formulae in evaluating the company’s growth rate, turnover capabilities in various areas including debtors turnover, sales turnover etc.

1. Deep-dive review of account balances:

• By performing deep dive review of account balances each account gives a clear view of all the transactions made and done in the prejudicial to the interests of the company.   
• Performing such a review is time taking as it involves analysis of each and every transaction in an account.