Financial Statement Analysis
Class Activity
Financial statement analysis is a method used by interested parties such as investors, creditors,
and management to evaluate the past, current, and projected conditions and performance of a
company. Through this activity, you will learn how to evaluate a company based on the two
methods of financial statement analysis – horizontal and vertical.
Step 1: First you need to define a few important terms to help give you a real understanding
of the types of analysis you will be completing in this activity. Use your favorite search
engine to help you find the definitions to the following terms:
a.
b.
c.
d.
e.
f.
Horizontal Analysis
Vertical Analysis
Current Assets
Current Liabilities
Stockholder Equity
Operating Expenses
Step 2: Now you need to consider an industry that you might be interested in investing in.
(eg. Food and beverage, entertainment, technology, etc.)
Step 3: Once you have narrowed down your industry, choose 2 competing companies within
that industry(eg. coke, pepsi, dr. pepper). Give me a brief overview of each of the companies
you chose – include when it was started, how they grew, what they sell, etc. (should be a
minimum of one paragraph each)
Step 4: Next you will need to locate the financial statements for both of your companies. To
do this, find each company on finance.yahoo.com. Once you are on the information page of
the company, scroll to the bottom left of the side menu and locate the Balance Sheet and
Income Statement. Now you are ready to begin your analysis.
When analyzing financial statements, it is good to start with a horizontal analysis. This will
help you to get an idea of where the company stands and how their growth/decline measures
out. Complete a Horizontal Analysis of both companies by answering the questions on the
following page:
Horizontal Analysis
** If possible, compare up to 3 years of financial statements for each company **
(1) Explain the growth/decline pattern and of each of the following: (ie. The company’s
cash amount increased from 2008-2009 but decreased slightly from 2009-2010.)
a. Balance Sheet
i. Cash and cash equivalents
ii. Total current assets
iii. Total assets
iv. Current liabilities
v. Stockholder’s equity
b. Income Statement
i. Total revenue
ii. Total operating expenses
iii. Net income/loss
(2) Based on the company’s overall growth/decline patterns, do you feel like this
company is doing well? Why or why not? Explain your answering using supporting
information from the above research. (DO NOT compare the companies to each
other!)
Step 4: Once you have had the chance to assess a company through horizontal analysis, you are
ready to research the company’s current status. This is done through Vertical Analysis.
Complete a full Vertical Analysis of each company’s Balance Sheet and Income Statement by
either entering the information into excel, or printing out a current financial statement and
handwriting the percentages. Below are some calculating hints to help get you started:
1. When analyzing the Balance Sheet:
a. compare all assets to the Total Assets
b. compare all liabilities to the Total Liabilities
c. compare all stockholder’s equity to the Total Sockholder’s Equity
For example – If Cash and Cash Equivalents are equal to $379,000 and the total of all assets are
$921,000, you would complete the following calculation:
379,000 / 921,000 = .4115 = 41.15%
Therefore, the Cash and Cash Equivalents are equal to 41.15% of the total assets
2. When analyzing the Income Statement:
a. Compare your Cost of Revenue, Gross Profit, Total Operating Expenses and Net
Income all to Total Revenue
Step 5: Once you have completed both the Horizontal and Vertical Analysis, you are ready to
compare the companies to each other. Using all of the information gathered from the above
exercises, give a detailed comparison of the two companies and explain which company you feel
is in the best financial position. Be sure to give specific details to ensure you receive full points.