ch13s - Chapter 13 Financial Statement Analysis Several...

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1 of 4 Chapter 13 – Financial Statement Analysis Several tools are available to analyze financial statements. Each one can complement the other, but one should choose those tools best suited for a specific set of circumstances. Typical analytic tools include: 1. Horizontal (Time Series) Analysis Compares financial statements over a period of time. For example, financial statements are reported in the company’s annual report for two (balance sheet) and three (income statement; statement of cash flows) years. When horizontal analysis covers a larger number of years it is referred to as trend analysis . Trend statements compare each financial statement item to a base year which is set at 100%. E.g., showing ten years of net sales with 1998 being the base year. Because of the larger number of years of data, trend statements can (1) provide a clearer indication of growth or decline than simple horizontal analysis does, and (2) the data can be used in a statistical analysis, commonly referred to as time series analysis, to predict next year’s financial statement items (e.g., net sales). 2. Vertical (Cross Sectional) Analysis Compares selected financial statement items within a single period using Common Size Financial Statements . Common Size Statements can be prepared for a company’s income statement(s) or balance sheet(s). Common Sized Statements recast each statement item as a percentage of sales (for an income statement) or as a percentage of total assets (for a balance sheet). Common-size financial statements are useful when making comparisons between companies that differ significantly in size (e.g., John’s Grocery vs. Hy-Vee) where the goal is to compare the company against a market leader, or against industry averages. Such comparisons are called benchmarking . Horizontal and vertical analysis can also
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ch13s - Chapter 13 Financial Statement Analysis Several...

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