1 / 19

Financial Statement Analysis Techniques: Horizontal and Vertical Analysis

Learn about financial statement analysis techniques such as horizontal and vertical analysis, which involve comparing items over time and finding relationships between items, respectively. Understand how these methods can provide useful interpretations of financial statements.

lmarquez
Download Presentation

Financial Statement Analysis Techniques: Horizontal and Vertical Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Module 7 Interpretation and Analysis of Accounts FSA Dr. Varadraj Bapat, IIT Mumbai

  2. Index • Financial Statement Analysis • Vertical & Horizontal Analysis • Horizontal vs. Vertical Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

  3. Analysis of Financial Statements Financial statement analysis refers to detailed study of these statements to arrive at useful interpretations. For the users, the details in the financial statements signify only raw data. This raw data needs to be re-organized, processed and converted into relevent and useful information. FSA Dr. Varadraj Bapat, IIT Mumbai

  4. Horizontal and Vertical Analysis The analysis of financial statements is done by various techniques like Horizontal analysis and Vertical Analysis. FSA Dr. Varadraj Bapat, IIT Mumbai

  5. Horizontal Analysis Horizontal analysis involves comparison of two years for the same concerns. It involves preparation of Comparative Statement. FSA Dr. Varadraj Bapat, IIT Mumbai

  6. Every item on the financial statement is compared with that in the previous year. The change is calculated in absolute amount and also as a percentage of that base Horizontal Analysis

  7. Vertical Analysis Vertical analysis on the other hand involves finding out the relationship between two items in respect of the same concern and in same year. It involves preparation of Common-size Statement. FSA Dr. Varadraj Bapat, IIT Mumbai

  8. Vertical Analysis... • compares each item in a financial statement to a base number set to 100%. • Every item on the financial statement is then reported as a percentage of that base.

  9. Common-size Statements • On the income statement, each item is expressed as a percentage of net sales. • On the balance sheet, the common size is the total on each side of the accounting equation. • Common-size statements are used to compare one company to other companies, and to the industry average. • they are also used to compare financials with earlier years.

  10. Benchmarking Percent of Net Sales Company A Company B  Cost of goods sold  Operating expenses  Income tax Net income

  11. Balance Sheet horizontal format Financial statements are traditionally prepared for the owners of the organisation. A typical traditional balance sheet is prepared in Horizontal format. FSA Dr. Varadraj Bapat, IIT Mumbai

  12. Horizontal Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

  13. Vertical format The conventional horizontal form of Balance Sheet is not suitable for financial analysis, precisely because 1. It is designed for the owner. FSA Dr. Varadraj Bapat, IIT Mumbai

  14. Vertical format 2. Its presentation and sequence or order of items is relevant only in the event of liquidation; it is unsuitable for financial analysis of a ‘going concern’. FSA Dr. Varadraj Bapat, IIT Mumbai

  15. Vertical format Hence financial analysts generally converts horizontal balance sheet, into vertical format which is more suitable for financial analysis, especially in ratio analysis. FSA Dr. Varadraj Bapat, IIT Mumbai

  16. Vertical Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

  17. Vertical Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

  18. Vertical Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

  19. Vertical Balance Sheet FSA Dr. Varadraj Bapat, IIT Mumbai

More Related