Financial_Accounting_Concepts_and_Principles_Week_7

The three tools of financial statement analysis are ratio analysis, the vertical analysis and the horizontal analysis. The three characteristics of a business, liquidity, profitability and solvency can be determined from the company’s financial statements by using these three tools. The company’s liquidity ratio, profitability ratio and their solvency ratio can all be obtained through this analysis. The knowing of the financial stability of a business is what these ratios can provide. The vertical analysis is described as “A technique that expresses each financial statement item as a percent of a base amount (Weygandt, Kimmel, & Kieso, 2008).” Common-size analysis is another name for the vertical analysis. By dividing each balance sheet item by the company’s total assets gives you the vertical analysis. This gives a number that translates to a percentage. This percentage shows the growth pattern of the company. Going up or down depends on the increase in debt or positive retained earnings. The horizontal analysis or trend analysis is finds company financial data increase or decrease relative to a base year figure. The horizontal analysis can be performed on the Balance Sheet, the Income Statement and the Retained Earnings Statement. These all provide valuable information such as the stability and past success of a company which will allow someone to decide if the company is a sound investment opportunity or a good credit risk. To see the current ratio, use the formula Current Ratio = Current Assets divided by Current Liabilities. I found that the current ratio of the company is: Current Ratio=10,554current assets9,406current liabilities=1.11 PepsiCo’s 2005 current ratio is 1.11:1. Their 2004 current ratio is calculation was: Current Ratio=8639 current assets6752 current liabilities=1.28 PepsiCo, Inc. has a current ratio of 1.28:1 for 2004. The vertical analysis takes the individual line items from the consolidated balance sheet and divides each of them by the company’s total assets on the same balance sheet. We could determine the total cash percentage and cash equivalents by dividing total cash and cash equivalents each by the total of all company assets. %=1716 Cash and cash equivalents31727 Total assets=0.054 During 2005, PepsiCo, Inc. cash and cash equivalents were a total of 5.4%. %=1280 Cash and cash equivalents27987 Total assets=0.046 or 4.6% cash and cash equivalents for 2004. The company’s current assets include the smaller figures, cash and cash equivalents. The application of this formula for grouped numbers also can be done. In 2005, PepsiCo had: %=10454 Current assets31727 Total assets=0.3295 or 32.95% In 2004, the company showed: %=8639 Current assets27987 Total assets=0.3087 or 30.87% The calculation for PepsiCo, Inc.’s horizontal analysis shows whether or not there were increases or decreases between the years 2004 and 2005. This is done by looking at the total change in assets as a percentage of assets. Do this by taking the 2005 current assets figure and divides it by the 2004 current assets figure. 10454(total current assets 20058639(total current assets 2004=1.2101 There was a 21.01% increase in total current assets for PepsiCo. Reviewing PepsiCo’s liabilities shows that an increase in assets is because of an increase in the company’s liabilities. The equation used is: 9406(total current liabilities 20056752(total current liabilities 2004=1.393 This is a 39% increase in PepsiCo’s liabilities during the same period. The company increased its net assets through the use of increased credit. Not something that would be done to accomplish this. Using the same tools to the Coco-Cola Company, shows: Current Ratio 2005=10,250current assets9,836current liabilities=1.042 or 1.042:1 Current Ratio 2004=12,281current assets11,133current liabilities=1.103 or 1.103:1 % of cash and equivalents for 2005=4701 Cash and cash equivalents29427 Total assets=0.1598 which is 15.98% of total assets is from cash and cash equivalents % of cash and equivalents for 2004=6707 Cash and cash equivalents31441 Total assets=0.2133 which is 21.33% of total assets is from cash and cash equivalents In 2005, they had: % of current assets 2005=10250 Current assets29427 Total assets=0.348 or 34.8% In 2004, they had: % of current assets 2004=12281Current assets31441 Total assets=0.391 or 39.17% 10250 (total current assets 2005)12281 (total current assets 2004)=0.835 which is a difference of 83.5% decrease from 2004. In 2005 they have a total of 83.5% current assets compared to 2004. The 2004 year is the base year and therefore represents 100%. By subtracting the second year from the first a 16.5% decrease is shown in total current assets. 9836 (total current liabilities 2005)11133(total current liabilities 2004)=0.8835 or a difference of 88.35%. Making the same calculation as in the last formula, I subtract the 88.35% from 100 yielding a 11.65% decrease in liabilities from 2004. This is quite better than PepsiCo.