Horizontal Common-Size Statements: 1. Horizontal Analysis A. Comparative Financial Statement Analysis B. Trend Analysis
Horizontal Common-Size Statements: 1. Horizontal Analysis A. Comparative Financial Statement Analysis B. Trend Analysis
Horizontal Common-Size Statements: 1. Horizontal Analysis A. Comparative Financial Statement Analysis B. Trend Analysis
Horizontal Analysis
a. Comparative Financial Statement Analysis
b. Trend Analysis
While the specific data contained within each financial statement will vary from
company to company, each of these documents is designed to offer insight
into the health of the company. They are also essential to monitoring a
company’s performance over time, as well as understanding how a company
is progressing toward key strategic initiatives.
At its heart, says Ittelson, financial statement analysis allows an individual to
“watch where the money, goods, and services go.”
CENGAGE
Financial Statement analysis is used to :
Predict a company’s future profitability and cash flows from its past
performance.
Evaluate the performance of a company with an eye toward identifying
problem areas.
In sum, financial statement analysis is both diagnosis-identifying where a firm has problems-
and prognosis-predicting how a firm will perform in the future.
(there are also some explanations in the book regarding the steps.)
Comparisons can be made on a number of different bases. We will introduce three of them,
which are relevant for our discussion.
1. Intracompany basis.
a. Comparisons within a company are often useful to detect changes in financial
relationships and significant trends.
2. Industry averages.
a. Comparisons with industry averages provide information about a company’s
relative position within the industry.
3. Intercompany basis.
a. Comparison with other companies provide insight into a company’s
competitive position.
Tools of Analysis
We use various tools to evaluate the significance of financial statement data. Three
commonly used tools are as follows:
a. Horizontal Analysis
b. Vertical Analysis
c. Ratio Analysis
(In this unit, we are going to discuss or delve into the Horizontal and the vertical analysis)
Based on the bases we have discussed a while ago, HOrizontal analysis is used primarily in
intracompany comparisons. Vertical analysis is used both intra and intercompany
comparisons.
Vertical and horizontal analysis are two related, but different, techniques used
to analyze financial statements. They each refer to the way in which a
financial statement is read, and the comparisons that an analyst can draw
from that reading. Both types of analysis are critical to gaining an accurate
understanding of the information provided in a financial statement.
HORIZONTAL ANALYSIS (also called Trend Anlalysis in some sources)
- Is a technique for evaluating a series of financial statement data for a single period
across different categories or accounts, typically by expressing each item as
percentage of a base amount, such as comparing financial statements from one year
to the next, to evaluate changes or shifts within a shorter time frame…. Its purpose
is to determine the increase or decrease that has taken place within that certain
period.. This change may be expressed as either an amount or a percentage.
Percentage of change =
Coca-Cola Company Illustrative Example:
hows that net sales increased by $4,129,000,000, or 13.3 percent. Cost of goods sold had a
corresponding increase of $1,605,000,000, or 14.5 percent. The increase in net sales and related
increase in cost of goods sold resulted in an increase in gross margin of $2,524,000,000, or 12.7
percent. The increase in selling and administrative expenses of $1,800,000,000, or 15.8 percent,
outpaced the increase in net sales, resulting in a relatively small increase in operating income of
Question: What does the balance sheet trend analysis in Figure 13.2 "Balance Sheet Trend Analysis
for " tell us about current assets and current liabilities for Coca-Cola?
Answer: Figure 13.2 "Balance Sheet Trend Analysis for " shows that cash and cash equivalents
increased by $2,048,000,000, or 22.4 percent. Coca-Cola’s statement of cash flows would provide
detailed information regarding this increase. (Chapter 12 "How Is the Statement of Cash Flows
Prepared and Used?" covers the statement of cash flows.) Marketable securities increased 122.6
percent, accounts receivable increased 17.9 percent, and merchandise inventory increased 12.6
Moving to current liabilities, accounts payable and accrued liabilities increased by 33.1 percent, loans
and notes payable increased 20.0 percent, and other current liabilities decreased 391.7 percent
$218,000,000, or 2.6 percent. The significant increase in other income (expenses), net of 555.6
percent relates to a one-time gain of $4,978,000,000 resulting from Coca-Cola’s acquisition of
Coca-Cola Enterprises, Inc., in 2010 (this information comes from the notes to the financial
statements). This one-time gain caused an unusually large increase in net income for 2010. This
is important as we continue our analysis of Coca-Cola Company throughout the chapter. Net
income will appear to have an unusually large increase as we cover various measures of
performance, but keep in mind that the one-time gain in 2010 of $4,978,000,000 caused most of
the increase from 2009 to 2010.
- percentage relationships.
To provide a reference point for comparing subsequent periods, and also to identify if how much
increases or decreases occurred in subsequent years.