Week 7: Financial Statement Analysis Discussion
Financial Statement Analysis (graded)
If you were to get a physical from your Doctor and they only took your blood pressure prior to stating that you
are in good health, would you be concerned? If you have noticed in your readings starting in Chapter 3 that there
has been explanation of the methods by which you could determine the financial health of a company. Name
one and explain how it is computed? Which financial statement(s) does the input come from? Most importantly,
what does it tell you about the financial performance or health?
Responses
Response
RE:
Financial
Statement
Analysis
Author
Dimitra Arrieta
Date/Time
10/19/2012 7:24:14 PM
Modified:10/19/2012 7:26 PM
Financial statement users analyze the financial statements to determine how well the company is
performing financially. These users calculate financial ratios to measure the company's liquidity,
solvency and profitability. The numbers used in the calculations appear on the financial
statements. Users utilize several methods for determining the financial health of organizations
through the use of these ratios.
Profitability

One method used to determine the company's financial health considers the profitability of the
company. Users calculate profitability ratios, such as the profit margin or the earnings per
share. The profit margin divides the net income by total sales, both numbers that come from
the income statement. Earnings per share divide net income by the number of shares of
common stock outstanding. The number of shares of common stock outstanding appears on
the balance sheet. The profit generated by the company each year increases the retained
earnings and stockholders' equity for the company. This improves the company's financial
health.
Trending

Another method used for determining financial health involves the use of trending. Trending
refers to calculating financial ratios for several time periods and comparing those time periods.
For example, if the user calculates the earnings per share for 2008, 2009 and 2010, he can
determine if the company is generating more income for stockholders in recent years than in
years past. Higher income generation in recent years indicates that the company's financial
health is growing each year.
Debt vs. Equity

Some investors focus on where the company's financing comes from to determine financial
health. These investors review the debt versus equity reported on the balance sheet. The debt-
to-equity ratio divides the total liabilities by the total stockholder's equity. A company with a
high debt-to-equity ratio owes a large percentage of its assets to third parties, which may
signal declining financial health.
Company Growth

Financial statement analysis also communicates the level of growth a company experiences.
Horizontal analysis calculates the dollar increase and percentage increase in the value of each
balance sheet or income statement item reported. As a company grows, these percentages
measure the level of growth from one year to the next. Continued growth demonstrates
increasing financial health.

http://www.ehow.com/info_8386796_do-determine-financial-healthorganization.html
RE:
Financial
Statement Professor Thomas
Analysis
10/19/2012 8:52:29 PM
Hi Dimitra,
Can you tell us one ratio that assesses the financial health of a company and
which financial statement it uses?
RE:
Financial
Statement Dimitra Arrieta
Analysis
10/22/2012 8:07:40 PM
Ratios of financial condition indicate the overall financial health of a business. For
example, debt-to-equity ratio compares the amount of incurred debt, such as
business loans and credit card balances, to the amount of equity, such as the
amount of business assets you hold. The lower the debt compared to equity, the
less susceptible your business is to downturns in economic conditions. It also
makes you more attractive to lenders in the event additional financing is needed.
http://smallbusiness.chron.com/4-categories-financial-ratios-1672.html
RE:
Financial
Statement
Analysis
Marvalyn Richards
10/21/2012 7:05:23 PM
Modified:10/21/2012 7:08 PM
I could do a horizontal analysis that would compare years horizontally. It is computed by
dividing the amount of change by the base year amount, it gives the percentage. Thus allowing
you to see the increase or decrease in percentage
A horizontal analysis can be done from any one ot the financial statements.
RE:
Financial
Statement Professor Thomas
Analysis
10/22/2012 8:32:22 PM
Great choice Marvalyn. I like horizontal analysis and it is one of the more
common analysis methods used. Any thoughts on why it is commonly
performed?
RE:
Financial
Statement Edward Steward
Analysis
10/24/2012 12:26:52 PM
I would think that it's most common, because when an analyst wants
to compare financial information a for a given number of years, they
usually read across the page, making comparing any given single
item easier.
RE:
Financial
Statement Amirah Howard
Analysis
10/24/2012 2:32:35 PM
True Edward, it makes it so much easier to just look at one
sheet to compare for the last couple years.
RE:
Financial
Statement
Analysis
Edward Steward
10/22/2012 9:05:29 AM
Modified:10/22/2012 9:20 AM
One of the most common methods is financial ratio analysis. The basic ratios include
five categories: profitability ratios, liquidity ratios, debt ratios, and asset activity
ratios. Let's take the profitability ratio, this measures the profitabiity of the company
which includes the gross profit margin, operating profit, net profit, return on assets
and the return on equity ratio. Each are calculated by their totals divided by either the
sales or total assets. Like gross profit and operating profit are both calculated by
dividing the profit by total sales and for return on asset it is calculated by taking the
net earnings and dividing it by the total assets.
Financial ratio analysis can be an invaluable resource to investors and external users
who must determine the financial stability of an organization.
Common
Size
Statement
Bruce Burbank
10/22/2012 3:05:59 PM
Common-size statements report only vertical analysis percents no dollar amounts. It
help in comparison of different companies. On the common size income statement
each item is expressed as a percentage of the revenue amount. Total revenue is
therefore the common size. In the balance sheet, the common size is total assets. A
common size financial statement aids the comparison of different companies because
all amounts are stated in percentages.
Financial
statements
Marvalyn Richards
10/22/2012 7:16:11 PM
Vertical analysis is computed by dividing each income statement item by the total revenue, it
results in percentage.
Financial
Statement
Analysis
Amirah Howard
10/23/2012 5:12:17 AM
Vertical analysis shows relationship of an financial statement. shows you if the
company is doing good side by side in comparison.
Financial
Statement
Analysis
Bruce Burbank
10/23/2012 7:14:14 PM
Another type of analysis is Vertical it is computed by dividing each income statement
item by the total revenue this results in percentage to compare against the industry
standard numbers.
RE:
Financial
Marvalyn Richards
10/24/2012 6:54:51 PM
Statement
Analysis
Bruce, I was a little worried about the project, totally forgetting that its not something I
would have to figure out for myself, that the formulas would be there, I thought that
was going to be the most challenging of everything I am expected to do, but I will say
again the journal entries posed the most challenge. For me, the journal entries kind of
set the stage, if the entries are correctly made everything from there is manageable, if
they are done incorrectly, then everything else will be incorrect.
RE:
Financial
Statement Edward Steward
Analysis
10/26/2012 10:37:46 AM
I have to agree with you Marvalyn, the journal entries were
confusing to me and of course as a result going forward, everything
else was incorrect. Even after re-reading I still got some entries
incorrect, I wish I have the book in hard copy, then I can use it as a
constant resource., with practice I hope it will get easier and
everything falls into place.
Financial
Statement
Analysis
Dimitra Arrieta
10/23/2012 9:39:36 PM
Vertical Analysis Overview
Vertical analysis is the proportional analysis of a financial statement, where each line
item on a financial statement is listed as a percentage of another item. Typically, this
means that every line item on an income statement is stated as a percentage of gross
sales, while every line item on a balance sheet is stated as a percentage of total assets.
The most common use of vertical analysis is within a financial statement for a single
time period, so that you can see the relative proportions of account balances. Vertical
analysis is also useful for timeline analysis, where you can see relative changes in
accounts over time. For example, if the cost of goods sold has a history of being 40%
of sales, then a new percentage of 48% would be a cause for alarm.
Vertical Analysis of the Income Statement
The most common use of vertical analysis in an income statement is to show the
various expense line items as a percentage of sales, though it can also be used to show
the percentage of different revenue line items that make up total sales. An example of
vertical analysis for an income statement is shown in the far right column of the
following condensed income statement:
$ Totals
Percent
$1,000,000
100%
Cost of goods sold
400,000
40%
Gross margin
600,000
60%
Salaries and wages
250,000
25%
Office rent
50,000
5%
Supplies
10,000
1%
Utilities
20,000
2%
Other expenses
90,000
9%
Total expenses
420,000
42%
Net profit
180,000
18%
Sales
Vertical Analysis of the Balance Sheet
The central issue when creating a vertical analysis of a balance sheet is what to use as
the denominator in the percentage calculation. The usual denominator is the asset
total, but you can also use the total of all liabilities when calculating all liability line
item percentages, and the total of all equity accounts when calculating all equity line
item percentages. An example of vertical analysis for a balance sheet is shown in the
far right column of the following condensed balance sheet:
$ Totals
Percent
$100,000
10%
Accounts receivable
350,000
35%
Inventory
150,000
15%
Total current assets
600,000
60%
Fixed assets
400,000
40%
Total assets
$1,000,000
100%
Accounts payable
$180,000
18%
Accrued liabilities
70,000
7%
Total current liabilities
250,000
25%
Notes payable
300,000
30%
Cash
Total liabilities
550,000
55%
Capital stock
200,000
20%
Retained earnings
250,000
25%
Total equity
450,000
45%
$1,000,000
100%
Total liabilities and equity
http://www.accountingtools.com/vertical-analysis
Financial
Statement
Analysis
Bruce Burbank
10/24/2012 7:11:53 AM
I found this article that did a comparison of vertical and horizontal analysis. This is
the summary of the article and the full link is here as well.
http://www.brighthub.com/office/finance/articles/118967.aspx
Summary
Horizontal analysis and vertical analysis are important parts of financial statement
analysis. It's important for investors, managers, and others to have an idea of how a
company can be expected to perform in the future. These analyses arrange data on the
current and past statements in a way that show important relationships regarding this.



Vertical analysis shows financial data on the current year’s financial
statements that is more company specific and in the current timeframe. Each
item is expressed as a percentage of the total for the accounts in its category
and can be easily compared to other company's statements.
Horizontal analysis compares current year financial statement items to the
previous year’s items and increases or decreases are expressed as percentages.
This makes comparisons to other companies or industry averages easier.
Trend analysis takes horizontal analysis further using several time periods and
trend percentages in a way that can show developing trends.
As far as horizontal analysis versus vertical analysis can be thought of, the contrast is
distinct but together these forms of analysis help analysts and investors make
intelligent projections concerning a company’s future performance.
RE:
Financial
Statement Amirah Howard
Analysis
10/24/2012 2:27:05 PM
Good article. I would prefer the Horizontal analysis because you can compare
to the last year or years and how the company is doing. Which would be
better because you can estimate for the coming up year as well.