Horizantol and Vertical Analysis

8/3/2019 Horizantol and Vertical Analysis

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Financial StatementFinancial StatementFinancial StatementFinancial StatementAnalysisAnalysisAnalysisAnalysis


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Use financial statement analysis to assess the solvency ofa business.

Describe basic financial statement analytical methods.

of a business.

Describe the contents of corporate annual reports.


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Basic Analytical Methods

Users analyze a companys financial statements using a

variety of analytical methods. Three such methods are as

follows:

.

2. Vertical analysis

3. Common-sized statements


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Horizontal Analysis

The percentage analysis of increases and decreases in

related items using comparative financial statements is

calledhorizontal analysis.


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Horizontal Analysis:Horizontal Analysis:

Difference $17,000

Base year (2009) $533,000= 3.2%


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Comparative Schedule of Current Assets

Horizontal Analysis


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Comparative Income StatementHorizontal Analysis


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Vertical Analysis

A percentage analysis used to show the relationship of

each component to the total within a single statement iscalled vertical analysis.


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Vertical Analysis of Balance Sheet

In a vertical analysis of the balance sheet, each

asset item is stated as a percent of the totalassets. Each liability and stockholders equity item

is stated as a percent of the total liabilities and

stockholders equity.


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Vertical Analysis:Vertical Analysis:

Current assets $550,000Total assets $1,139,500

= 48.3%


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Vertical Analysis of the Income Statement

In a vertical analysis of the income statement, each item is stated

as a percent ofnet sales.

Vertical Analysis:Vertical Analysis:

Selling expenses $191,000

Net sales $1,498,000= 12.8%


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Solvency Analysis

All users of financial statements are interested in the ability of a

company to do the following:

1. Meet its financial obligations (debts), called

solvency.

2. Earn income, calledprofitability.


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Working Capital

The excess of current assets of a business over its currentliabilities is called working capital. The working capital is often

used in evaluating a companys ability to pay current liabilities.

Working Capital = Current Assets Current Liabilities

Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capital $340,000 $290,000


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Current Ratio

Thecurrent ratio, sometimes called the working capital ratio orbankers ratio measures a companys ability to pay its current

liabilities.

Current Ratio =Current Assets

Current Liabilities

2010 2009

Current assets $550,000 $533,000Current liabilities $210,000 $243,000Current ratio 2.6 2.2Current ratio 2.6 2.2

$550,000$210,000

$533,000$243,000


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Quick Ratio

A ratio that measures the instant debt-paying ability

of a company is called the quick ratio oracid-test

ratio.

2010 2009

Quick assets:

Cash $ 90 500 $ 64 700

Temporary Investments 75,000 60,000Accounts receivable (net) 115,000 120,000

a. Total quick assets $280,500 $244,700

b. Current liabilities $210,000 $243,000

Quick ratio (a b) 1.3 1.0


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Accounts Receivable Turnover

The relationship between sales and accounts receivable may be

stated as theaccounts receivable turnover. Collecting accounts

receivable as quickly as possible improves a companys solvency.

Accounts Receivable Turnover =Net Sales

Average Accounts

Receivable

a. Net sales $1,498,000 $1,200,000

Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000

End of year 115,500 120,000

Total $ 235,000 $ 260,000b. Average (Total 2) $ 117,500 $ 130,000

Accounts receivable turnover

(a

b) 12.7 9.2


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Number of Days Sales in Receivables

Thenumber of days sales in receivables is an estimate of the lengthof time (in days) the accounts receivable have been outstanding.

Number of Days Sales inReceivables

Average Accounts

Receivable

Average Daily Sales=

Net Sales

365


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2010 2009

a. Average accounts receivable

(Total accounts

receivable 2) $ 117,500 $ 130,000

Number of days sales in

receivables (a b) 28.6 39.5

Net sales 1,498,000 1,200,000

b. Average daily sales

(Sales 365) $ 4,104 $ 3,288


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Inventory Turnover

The relationship between the volume of goods (merchandise) soldand inventory may be stated as the inventory turnover. The purpose

of this ratio is to assess the efficiency of the firm in managing its

inventory.

Inventory Turnover =

Cost of Goods Sold

Average Inventory

2010 2009

a. Cost of goods sold $1,043,000 $ 820,000Inventories:

Beginning of year $ 283,000 $ 311,000

End of year 264,000 283,000

Total $ 547,000 $ 594,000

b. Average (Total 2) $ 273,500 $ 297,000

Inventory turnover (a b) 3.8 2.8


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Number of Days Sales in Inventory

Thenumber of days sales in inventory is a rough measure of thelength of time it takes to purchase, sell, and replace the inventory.

Number of Days

Sales in Inventory

Average Inventory

Average Daily Cost ofGoods Sold

====

Cost of Goods Sold

Number of days sales in

inventory (a b) 95.7 132.2

a. Average inventory (Total 2) $ 273,500 $ 297,000

Cost of goods sold $1,043,000 $ 820,000

b. Average daily cost of goodssold (COGS 365 days) $2,858 $2,247

2010 2009


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Ratio of Fixed Assets to Long-Term Liabilities

Theratio of fixed assets to long-term liabilities is a solvency

measure that indicates the margin of safety of the noteholders or

bondholders. It also indicates the ability of the business to

borrow additional funds on a long-term basis.

Ratio of Fixed Assets to Long- Fixed Assets (net)

Term Liabilities Long-Term Liabilities

=

2010 2009

Ratio of fixed assets to

long-term liabilities (a b) 4.4 2.4

a. Fixed assets (net) $444,500 $470,000

b. Long-term liabilities $100,000 $200,000


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Ratio of Fixed Assets to Long-Term Liabilities

Theratio of fixed assets to long-term liabilities is a solvencymeasure that indicates the margin of safety of the noteholders or

bondholders. It also indicates the ability of the business to borrow

additional funds on a long-term basis.

Ratio of Fixed Assets to Long-

Term Liabilities

Fixed Assets (net)

Long-Term Liabilities=

2010 2009

Ratio of fixed assets tolong-term liabilities (a b) 4.4 2.4

a. Fixed assets (net) $444,500 $470,000b. Long-term liabilities $100,000 $200,000

Documents

Horizantol and Vertical Analysis