18-1
Learning Objectives
Apply horizontal and vertical analysis to financial
statements.
1
Analyze a company’s performance using ratio analysis.
2
Apply the concept of sustainable income.
3
Financial Statement
Analysis
18
18-2
Analyzing financial statements involves:
Characteristics Comparison
Bases Tools of
Analysis
◆Liquidity
◆Profitability
◆Solvency
◆Intracompany
◆Industry
averages
◆Intercompany
◆Horizontal
◆Vertical
◆Ratio
LEARNING
OBJECTIVE Apply horizontal and vertical analysis to
financial statements.
1
LO 1
18-3
Horizontal Analysis
Horizontal analysis, also called trend analysis, is a
technique for evaluating a series of financial statement data
over a period of time.
◆Purpose is to determine the increase or decrease.
◆Commonly applied to the
►balance sheet,
►income statement, and
►statement of retained earnings.
LO 1
18-4
Changes suggest that
the company
expanded its asset
base during 2013 and
financed this
expansion primarily
by retaining income
rather than assuming
additional long-term
debt.
Illustration 18-5
Horizontal analysis of
balance sheets
Horizontal Analysis
LO 1
18-5 LO 1
Overall, gross profit
and net income were
up substantially.
Gross profit increased
17.1%, and net
income, 26.5%.
Quality’s profit trend
appears favorable.
Illustration 18-6
Horizontal analysis of
Income statements
Horizontal Analysis
18-6
The ending retained earnings increased 38.6%. As
indicated earlier, the company retained a significant
portion of net income to finance additional plant facilities.
Illustration 18-7
Horizontal analysis of
retained earnings
statements
Horizontal Analysis
LO 1
18-7
Vertical analysis, also called common-size analysis, is a
technique that expresses each financial statement item as a
percent of a base amount.
◆On an income statement, we might say that selling
expenses are 16% of net sales.
◆Vertical analysis is commonly applied to the
►balance sheet and
►income statement.
Vertical Analysis
LO 1
18-8
Quality is choosing to
finance its growth
through retention of
earnings rather than
through issuing
additional debt.
Illustration 18-8
Vertical analysis of
balance sheets
Vertical Analysis
LO 1
18-9
Illustration 18-9
Vertical analysis of
Income statements
Vertical Analysis
LO 1
Quality appears
to be a profitable
enterprise that is
becoming even more
successful.
18–10
Enables a comparison of companies of different sizes.
Illustration 18–10
Intercompany income statement comparison
Vertical Analysis
LO 1
18–11
DO IT! Horizontal Analysis
1
LO 1
Ratio analysis expresses the relationship among selected
items of financial statement data.
Liquidity Profitability Solvency
Measures short-term
Financial Ratio Classifications
Measures the
Measures the ability
LEARNING
OBJECTIVE Analyze a company’s performance using
ratio analysis.
2
