The Basic Financial Statement Analysis Essay

The Basic Financial Statement Analysis Essay

Length: 915 words (2.6 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

The four basic financial statement analysis procedures are horizontal, percentage, vertical, and ratio (Edmonds, Tsay, & Olds, 2011).

The first basic financial statement analysis procedure is horizontal analysis or also referred to as trend analysis. Horizontal analysis is used to study the behavior of individual financial statement items over several accounting periods. Likewise, horizontal analysis is the comparison of financial information of a company with past financial information of the same company over a number of reporting periods (Edmonds, Tsay, & Olds, 2011). Furthermore, this analysis focuses on trends in either absolute dollar amounts for the item or in percentages. Moreover, the absolute dollar amounts may be used to evaluate the amounts reported for research and development costs to judge whether a business is spending unnecessarily or conservatively. Thus, users utilizing this analysis are concerned with how amounts change over time. “An example given indicates that a user may observe that revenue increased from one period to the next by $42 million, which would be the absolute dollar amount or that it increased by 15 percent which would be shown in a percentage amount” (Edmonds, Tsay, & Olds, 2011, p. 589). The main purpose of this analysis is to see if the numbers are higher or lower in comparison with past records or trends which may be used to investigate any causes for concerns. Therefore, it is imperative to group together all information and sort it by time periods to see the trends or changes. Furthermore, when the analysis is handled for all financial statements at the same time, the overall impact of functioning activities can be seen on the company’s financial condition during the period under...

... middle of paper ...

...’s ability to pay short term debts and therefore, they focus on the current assets and current liabilities. All the more, this type of ratio is essentially important because it measures the ability of a firm to remain in business.

Solvency ratios are utilized to examine a company’s long term debt,paying abilities and the financial structure of the company. Furthermore, solvency ratios show the length in which a company is dependent upon debt to finance its working performance and its capability to pay back the debt.

Profitability ratios refer to a company’s ability to generate earnings. This type of ratio is utilized by management and external users to see how the company generates profits.

Stock market ratios are used by existing and potential investors to examine and compare the earnings and dividends of different size companies in different industries.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Financial Statement Analysis And Financial Statements Essays

- Managers, firm owners, and investors keep track of their firm performance. Financial statements are used to keep track of the strengths and weaknesses of firms. The three major financial statements used are income statements, balance sheets, and statement of cash flows. Financial ratios are also used to measure where a company stands within itself and in its industry norms. This analysis is called Financial Statement Analysis. Financial Statement Analysis gives understanding to a firm’s financial position at a given point of time and predictions for the future....   [tags: Generally Accepted Accounting Principles]

Better Essays
1002 words (2.9 pages)

Essay about Financial Reporting And Accrual Based Accounting

- Introduction Financial reporting is intended to provide users with meaningful information in order for them to make an informed decision about providing their scarce resources to an entity. However, for financial statements to be informative to users, the information on the financial statements is required to be presented clearly and fully. Managers, however, sometimes control outcomes based on accrual based accounting to show their performances with well-made the financial statement. Because of this, some have argued which method, accrual based or cash based accounting, is better for investors, creditors, other users and firms....   [tags: Income statement]

Better Essays
1782 words (5.1 pages)

Essay about How Useful are Financial Models: The Base Case

- INTRODUCTION Financial Model is defined as the model that captures the future operating, investing and financing activities that determines the future profitability, financial position and risk of a business venture (MacMorran, 2009). It is a decision making tool regarding investment, forecasting and valuation of a project or a company. It is an important element in investment decisions which helps to regulate financial activities. According to Janiszewski S. (2011) the importance of financial modelling is to reflect/represent the forecasted financial performance of a business venture....   [tags: financial risk and return assessment]

Better Essays
1321 words (3.8 pages)

Financial Analysis of Coca-Cola and Pepsi Co. Essay

- PepsiCo and Coca-Cola are fierce competitors and according to their financial statements they are both healthy companies. Therefore I would invest in Coca-Cola if I had to make the decision because it has higher income, a stronger long-term debt to networking capital ratio, steadily rising net income per common share, and a climbing and high solvency ratio. PepsiCo still shows healthy growth and outperforms Coca-Cola in many areas. I will conduct a financial analysis of Coca-Cola and PepsiCo to identify their strengths and weaknesses, ultimately deciding which one is worth the investment....   [tags: Business Analysis]

Better Essays
1955 words (5.6 pages)

Financial Statement Fraud : The Biggest Types Of Fraud Essay examples

- Financial statement fraud is one of the biggest types of fraud in today’s business world. The complexity and mechanism of financial statement fraud brought the attention of auditors and regulators. Financial scandals of Enron, WorldCom, Xerox, Tyco, Parmalat, Qwest, and Satam Computers increased the auditors’ responsibility in detecting and preventing fraudulent transactions. Corporate financial fraud had negative consequences for the market capitalization due to gigantic losses of investors. In addition, accounting scandals of early 2000th ruined auditors’ reputation and the public trust....   [tags: Balance sheet]

Better Essays
1309 words (3.7 pages)

Essay about Financial Planning and Management Summary

- Financial Planning and Management Summary ▲ Financial planning links the goals a business wants to achieve in the future and the resources it will need to achieve these goals. It is also concerned with evaluating the financial resource of a business. Strategic financial management is about setting the goals throughout the business and deciding what resources will be needed to achieve these goals. The main objective of financial management is to properly account for the income and expenditure of a business in order to maximise the value of that business to it’s owners....   [tags: Economic Financial Planning Strategy Summary]

Better Essays
1819 words (5.2 pages)

Personal Statement By Pu Liulin Essay

- Personal Statement By Pu Liulin I am a cultivatable girl, whose affinity for finance burgeons under imperceptible influence of my mother, who has been engaged in finance. I have been interested in the subject of finance since my youth. I enjoy listening to my mother telling stories of the ups and downs of finance. Enchanted by the ever-changing financial world, I gradually from my dream of being a chartered financial analyst who is able to solve problems in my chosen program and in daily life. First and foremost, a major of economics can make me understand more about my specific career, and what I should be focused on, so I major in Economics at Miami University....   [tags: Economics, Bank, Financial services]

Better Essays
728 words (2.1 pages)

Essay about Analysis of United Technologies Corporation

- Analysis of United Technologies Corporation United Technologies Corporation, UTC, was founded in 1934 as United Aircraft Corporation and has since become a global leader in the aerospace industry. UTC is a multi-faceted and diverse company comprised of both an aerospace division and a building and industrial systems side. The aerospace side is comprised of; of Pratt Whitney, UTC Aerospace Systems and Sikorsky helicopters. The industrial side is comprised of; Otis, Carrier and Kidde. Having such a diverse and global mix of business brings both stability and cross functional talent to every business unit across the globe....   [tags: business pllanning, financial analysis]

Better Essays
1684 words (4.8 pages)

Basic Finance Essay

- Basic Finance The main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates....   [tags: Business Finance Analysis]

Free Essays
878 words (2.5 pages)

Financial Ratio Analysis Essay

- Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000....   [tags: Business Finance]

Better Essays
1415 words (4 pages)