Financial_Analysis

The three tools of the financial statement analysis are as follows: Vertical or Common Size Analysis, Horizontal or Trend Analysis, and Ratio Analysis. Each of the analysis functions is different from each other; however each of them serves to analyze pertinent data found on the financial statement. The Vertical Analysis functions to evaluate financial statement data by expressing each item in a financial statement as a percent of the base amount. The Horizontal Analysis functions to evaluate a series of financial statement data and the Ratio Analysis functions to express the relationship among selected items of the financial statement data. If we take a look at PepsiCo, Inc.’s consolidated balance sheet as an example, we are able to determine the company’s current ratio. If we apply the formula for Current Ratio, and plug in the company’s consolidated balance sheet numbers, we derive at this equation. Current Ratio = 10,554 (current assets) = 1.11 9,406 (current liabilities) This equation concludes that for 2005, PepsiCo, Inc. had a Current Ratio of 1.11:1 To determine the Current Ratio for the previous year, the same equation is used and the numbers for 2004 are applied as follows: Current Ratio = 8639 (current assets) = 1.28 8752 (current liabilities The equation demonstrates that for 2004, PepsiCo, Inc. had a Current Ratio of 1.28:1 To evaluate PepsiCo, Inc. using Vertical Analysis, we have to look at individual items on the consolidated balance sheet and divide them by the total assets of the company. In order for us to know the percentage of cash and cash equivalents to total assets, we have to divide the cash and cash equivalents by the total assets. % = 1716 (cash and cash equivalents) = 0.054 31727 (total assets) This equation translates to PepsiCo, Inc. having had a total of 5.4% cash and cash equivalents for 2005. The same equation applies for 2004 numbers. % = 1280 (cash and cash equivalents) = 0.046 27987 (total assets) The equation result is PepsiCo, Inc. having had 4.6% cash and cash equivalents for 2004. The cash and cash equivalents belong to a larger figure known as the Current Assets. The equation below is used to determine the percentage of grouped numbers. For Example: % = 10454 (current assets) = 0.3295 or 32.95 % (2005) 31727 (total assets) % = 8639 (current assets) = 0.3087 or 30.87 (2004) 27987 (total assets) To evaluate PepsiCo, Inc. using Horizontal Analysis we need to determine increase and decrease that has occurred from 2004 to 2005. Alike, we need to determine the total change in assets by percentage. To accomplish this, we divide 2005 current assets by 2004 current assets in the equation below. (10454 (total current assets 2005) / (8639 (total current assets 2004) = 1.2101 This demonstrates a difference of 21.01% increase in total current assets. The same equation can be used to determine if the company’s increase in assets is a factor in their increase of liabilities as well. (9404 (total current liabilities 2005) / (6752 (total current liabilities 2004) = 1.393 The above equation demonstrates a 39% increase in liabilities; which is a result of the company acquiring more liabilities altogether. This analysis finding is somewhat of a red flag for the business. To evaluate the Coco-Cola Company the same ratios are used that were applied to the evaluation of the PepsiCo, Inc. business. Current Ratio 2005 = 10,250 (current assets) = 1.042 or 1.042:1 9,836 (current liabilities) Current Ratio 2004 = 12281 (current assets) = 1.103 or 1.103:1 11133 (current liabilities) % of cash and cash equivalents for 2005 = 4701 (cash and cash equivalents) = 0.1598 29427 (total assets) % of cash and cash equivalents for 2004 = 6707 (cash and cash equivalents) = 0.2133 31441 (total assets) % of current assets 2005 = 10250 (current assets) = 0.348 or 34.8% 29427 (total assets) % of current assets 2004 = 12281 (current assets) = 0.391 or 39.17% 31441 (total assets) 10250 (total current assets 2005) = 0.835 or 83.5% 12281 (total current assets 2004) The percentage of 83.5% is a decrease from 2004. The percentage represents a total of 83.5% in 2005 of current assets as compared to 2004’s percentage; which is 100%. To calculate the difference we subtract the percentage (83.5) from 100 and result in a difference of 16.5% decrease in total current assets. 9836 (total current liabilities 2005) = 0.8835 or 88.35% 11133 (total current liabilities 2004) The same calculation process is used to determine a decrease in liabilities from 2004 to 2005. If we subtract the percentage (88.35) from 100, we see a decrease of 11.65% respectively.