Financial Accounting

Financial
Statement
Analysis
Chapter 12

Spiceland | Thomas | Herrmann

Learning Objectives

Perform vertical analysis

Perform horizontal analysis
Use ratios to analyze a companys risk
Use ratios to analyze a companys profitability

Vertical Analysis
Express each item in a financial statement as a
percentage of the same base amount
Income statement items expressed as a
percentage of sales
Balance sheet items expressed as a percentage
of total assets

MCQ Practice
When using vertical analysis, we express income
statement accounts as a percentage of:
a. Net income
b. Sales
c. Gross profit
d. Total assets

MCQ Practice
When using vertical analysis, we express income
statement accounts as a percentage of:
a. Net income
b. Sales
c. Gross profit
d. Total assets

Sample Problem
Perform a vertical analysis on the following
information:
2015
2014
Cash
$ 420,000
$1,050,000
Acct. Rec.
660,000
300,000
Inventory
1,020,000
925,000
Long-Term Assets
3,900,000
2,725,000
Total Assets
$6,000,000
$5,000,000

2015
Amount
Cash

2014
%

Amount

$ 420,000

7.0

$ 1,050,000

21.0

660,000

11.0

300,000

6.0

Inventory

1,020,000

17.0

925,000

18.5

Long-term assets

3,900,000

65.0

2,725,000

54.5

$6,000,000

100.0

$5,000,000

100.0

Accounts receivable

Total assets

Horizontal Analysis
Analyze trends in financial statement data for a
single company over time

Can be year over year

Can be one base year and show growth (decline)
from the base year

MCQ Question
Horizontal analysis examines trends in a company:
a. Between income statement accounts in the same
year
b. Between balance sheet accounts in the same
year
c. Between income statement and balance sheet
accounts in the same year
d. Over time

MCQ Question
Horizontal analysis examines trends in a company:
a. Between income statement accounts in the same
year
b. Between balance sheet accounts in the same
year
c. Between income statement and balance sheet
accounts in the same year
d. Over time

Sample Problem
Perform a horizontal analysis on the following
information:
2015
2014
Cash
$ 420,000
$1,050,000
Acct. Rec.
660,000
300,000
Inventory
1,020,000
925,000
Long-Term Assets
3,900,000
2,725,000
Total Assets
$6,000,000
$5,000,000

Solution
Year
2015
Cash
Accounts
receivable
Inventory
Long-term
assets
Total assets

Increase (Decrease)
2014

$ 420,000 $ 1,050,000

Amount

$ (630,000)

(60.0)

660,000

300,000

360,000

120.0

1,020,000

925,000

95,000

10.3

3,900,000

2,725,000

1,175,000

43.1

$6,000,000 $5,000,000

$1,000,000

20.0