Question

In: Accounting

Describe what information you can learn about a company from both Horizontal Analysis and Vertical Analysis....

  1. Describe what information you can learn about a company from both Horizontal Analysis and Vertical Analysis. How are the numbers in each analysis calculated?

  2. Select three different financial statement ratios, each from a different category (i.e., one from liquidity ratios, one from profitability ratios, etc.). For each ratio, provide the formula and state what information the ratio can tell you about a company.

Solutions

Expert Solution

Horizontal analysis is analysing financial data such as balance sheet, Income statements and cash flow statement of a company over a period of time. It analyses more than one financial years data to evaluate the trend situations.

In horizontal analysis current year is taken as comparison year and last year is taken as base year. Figures are calculated as

Amount in comparison year - Amount in base year/Amount in base year*100

Vertical analysis

In vertical analysis vertical analysis, every line item on the financial statement is entered as a percentage of another item. For example in an income statement every other item is expressed as a percentage of sales

Vertical analysis formula is calculated as

Individual item/Base amount *100

In income statement sales is taken an base amount

In balance sheet Assets/ Liabilities become base amount respectively

Liquidity ratio

Current ratio

Formula : Current asset/Current liability

Liquidity or short-term solvency means ability of the business to pay its short-term liabilities. The main question this ratio addresses is: "Does your business have enough current assets to
meet the payment schedule of its current debts with a margin of safety for possible losses in
current assets?"

Profitability ratio

Return on Investments ratio ( ROI)

Formula = Return/Investment*100

this ratio tells the owner whether or not all the effort put into the business has been worthwhile. It compares earnings/ returns/
profit with the investment in the entity


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