Tools of analysis

1. Horizontal analysis : evaluates a series of financial statement data over a period of time
2. Vertical analysis : evaluate financial statement data by expressing each item in a financial
statement as a percent of base amount.
3. Ratio analysis: expresses the relationship among selected items of financial statement data.

A. Horizontal analysis
- Is used primarily in intracompany comparisons ( compares an item or financial relationship
within a company in the current year with the same item or relationship in one or more prior
years).
- Is called trend analysis is a technique to evaluating a series of financial statement over a period
of time
- Its purpose is to determine the increase or decrease that has taken place .
- This change may be expressed as either an amount or a percentage.
- Horizontal common-size analysis uses the amounts in accounts in a specified year as the base,
and subsequent years’ amounts are stated as a percentage of the base value.

 Useful when comparing growth of different accounts over time.

Change since base period = current year amount – base year amount / base year amount

B. Vertical analysis

Is used in both intra- inter company comparison

- Is called common size analysis

- evaluate financial statement data by expressing each item in a financial statement as a percent
of base amount.
- Vertical common-size analysis uses the aggregate value in a financial statement for a given year
as the base, and each account’s amount is restated as a percentage of the aggregate.
- Balance sheet: Aggregate amount is total assets.
- Income statement: Aggregate amount is revenues or sales.
 1. Analysis of financial statements is enhanced with the use of comparative data

There are many tools to analysis and evaluate financial statements such as vertical, horizontal , trend
analysis and common size analysis these tools use the comparative data are basic or primary evaluation.

But the most important tool to enhance financial statement analysis ( deeper tool ) is financial ratio with
the use the relationships between different financial statement

2. Comparisons of company data with industry averages can provide some insight into the
company's relative position in the industry.

When the company use vertical analysis and financial ratio analysis ( intercompany or industry averages)
it can compare its position relative to the other competitors in the same industry.

3. Vertical and horizontal analyses are concerned with the format used to prepare financial
statements.

It concerned with time

4. Horizontal, vertical, and circular analyses are the most common tools of financial statement
analysis.

Horizontal and vertical and trend and common size and financial ratios

5. Horizontal analysis is a technique for evaluating a financial statement item in the current year
with other items in the current year.

evaluates a series of financial statement data over a period of time

6. Another name for trend analysis is horizontal analysis.

- Is called trend analysis is a technique to evaluating a series of financial statement over a period
of time
7. In horizontal analysis, if an item has a negative amount in the base year, and a positive amount
in the following year, no percentage change for that item can be calculated.

If an item has no value in a base year or preceding year but does have a value in the next year, we
cannot compute a percentage change. Similarly, if a negative amount appears in the base or preceding
period and a positive amount exists the following year (or vice versa), no percentage change can be
computed.
 8. Common size analysis expresses each item within a financial statement in terms of a percent of
a base amount.

‫المعادلة‬

9. Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

Vertical analysis : evaluate financial statement data by expressing each item in a financial statement as
a percent of base amount.

10. Vertical analysis is useful in making comparisons of companies of different sizes

Because it expressing as % not amount

11. Meaningful analysis of financial statements will include either horizontal or vertical
analysis, but not both.

- Is used primarily in intracompany comparisons ( compares an item or financial relationship

within a company in the current year with the same item or relationship in one or more prior
years).
- Is called trend analysis is a technique to evaluating a series of financial statement over a period
of time

Is used in both intra- inter company comparison

- Is called common size analysis

- evaluate financial statement data by expressing each item in a financial statement as a percent
of base amount.
12. The current ratio is a measure of all the ratios calculated for the current year.
13. All companies, regardless of size, should have a current ratio of at least 2:1.
14. Prepaid expenses are excluded from the calculation of the quick ratio.