week 8- financial statements analysis

# week 8- financial statements analysis - Week 8- Financial...

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Week 8- Financial Statements Analysis COMPARATIVE ANALYSIS For example if a certain amount of cash is reported in the balance sheet, we know that entity has cash of that amount but whether represents an increase over previous years or whether it is adequate in relation to entity’s need, it must be compared with other financial data to provide more information . Intra-entity current periods against previous periods, understanding changes and trends Inter-entity comparing one entity with another (usually competitor) Industry averages identify entity’s position relative to industry 3 basic tools: 1) Horizontal analysis 2) Vertical analysis 3) Ratio analysis 1) Horizontal Analysis - Aka time series analysis - Technique for evaluating a series of financial statement data over a period of time - Measures percentage increases or decreases [percentage form enables the grasp upon magnitude of changes] 1

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Week 8- Financial Statements Analysis - Must show ‘amount’ and ‘percentage change’ - Uses a base year- set to 100% = - change since base period current year amount base year amountbase year amount - This analysis can provide insights into underlying conditions for entities, significant changes should be investigated - COMPLICATIONS: If an item has no value in a base year or preceding year and a value in the next year, no percentage change can be calculated. Also, if a negative amount appears in the base or preceding period and a positive amount exists the following year, or vice versa, no meaningful percentage change can be calculated. 2) Vertical Analysis - Technique for evaluating financial statement data that express each item in a financial statement as a percentage of base amounts(REVENUE FOR INCOME STATEMENTS, ASSETS FOR BALANCE SHEET) - Set sales and revenue to 100% and express each item in the financial statements as a percentage of that base (e.g. expenses are 54% of total revenue or current assets are 37% of total assets) RATIO ANALYSIS explore relationships between financial statements Liquidity can have 2 meanings: 1) Ability to pay obligations and meet unexpected cash needs in the short run 2) How quickly liabilities need to be paid and how quickly assets can be converted into cash 3 main types: - Liquidity - Solvency - Profitability Liquidity Ratios 2
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## This note was uploaded on 06/10/2011 for the course ACCT 1002 taught by Professor Angela during the Three '10 term at University of Sydney.

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week 8- financial statements analysis - Week 8- Financial...

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