Chapter 18 - Financial statement analysis. In this chapter, the learning objectives are: Apply horizontal and vertical analysis to financial statements, analyze a company’s performance using ratio analysis, apply the concept of sustainable income. | Learning Objectives Apply horizontal and vertical analysis to financial statements. 1 Analyze a company’s performance using ratio analysis. 2 Apply the concept of sustainable income. 3 Financial Statement Analysis 18 Analyzing financial statements involves: Characteristics Comparison Bases Tools of Analysis Liquidity Profitability Solvency Intracompany Industry averages Intercompany Horizontal Vertical Ratio LEARNING OBJECTIVE Apply horizontal and vertical analysis to financial statements. 1 LO 1 Horizontal Analysis Horizontal analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Purpose is to determine the increase or decrease. Commonly applied to the balance sheet, income statement, and statement of retained earnings. LO 1 Changes suggest that the company expanded its asset base during 2013 and financed this expansion primarily by retaining income rather than assuming additional long-term debt. Illustration 18-5 Horizontal analysis of balance sheets Horizontal Analysis LO 1 LO 1 Overall, gross profit and net income were up substantially. Gross profit increased , and net income, . Quality’s profit trend appears favorable. Illustration 18-6 Horizontal analysis of Income statements Horizontal Analysis The ending retained earnings increased . As indicated earlier, the company retained a significant portion of net income to finance additional plant facilities. Illustration 18-7 Horizontal analysis of retained earnings statements Horizontal Analysis LO 1 Vertical analysis, also called common-size analysis, is a technique that expresses each financial statement item as a percent of a base amount. On an income statement, we might say that selling expenses are 16% of net sales. Vertical analysis is commonly applied to the balance sheet and income statement. Vertical Analysis LO 1 Quality is choosing to finance its growth through retention of earnings rather than through issuing . | Learning Objectives Apply horizontal and vertical analysis to financial statements. 1 Analyze a company’s performance using ratio analysis. 2 Apply the concept of sustainable income. 3 Financial Statement Analysis 18 Analyzing financial statements involves: Characteristics Comparison Bases Tools of Analysis Liquidity Profitability Solvency Intracompany Industry averages Intercompany Horizontal Vertical Ratio LEARNING OBJECTIVE Apply horizontal and vertical analysis to financial statements. 1 LO 1 Horizontal Analysis Horizontal analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Purpose is to determine the increase or decrease. Commonly applied to the balance sheet, income statement, and statement of retained earnings. LO 1 Changes suggest that the company expanded its asset base during 2013 and financed this expansion primarily by retaining income rather than assuming additional long-term debt. Illustration .
