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...
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...’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.
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