Ratio

Ratio, Vertical, and Horizontal Analyses 10/11/2013 XACC/280 Toral Kapur Ratio, Vertical, and Horizontal Analyses There are a variety of tools used to evaluate the significance of financial statement data. There are three commonly used tools in financial statement analysis are ratio analysis, horizontal analysis, and vertical analyses. Financial statement analysis is a process of examining relationship among financial statement elements and making comparison with relevant information. Ratio analysis is a method of analyzing data that is used to determine the overall financial strength of a business. These ratios are useful when they are compared to other ratios; comparable ratios of similar businesses or the historical trend of a single business that is over several business cycles. Horizontal analysis is a type of fundamental analysis that has certain financial data that is used to asses a company’s performance over a certain period of time. This can be assessed on a single company over a given period of time, comparing the same items or ratios, or it can be performed on a multiple companies in the same industry to assess a company’s relative to competitors. Vertical analysis is a method of analyzing financial statements in which each item in the statement is represented as a percentage of a single larger item. This makes comparison between two or more companies in the same industry easier. This analysis allows a company to weigh current reports against other reports. This report will help the company to make improvements in that area. The current ratio for any company is calculated with the use of the following mathematical equation. Current Ratio= Current Assets Current Liabilities PepsiCo Inc, 2005 PepsiCo, Inc 2004 $10454/$9406=1.11:1 $8639/$6752=1.28:1 Vertical Analysis = (Itemonb/s)/(Total Assets)=Percentage or (Item on B/S)/(Total Liabilities with Shareholder Equity)=Percentage Two measures of vertical analysis: (Current Assets)/(Total Assets)=10454/31727=33% (Short-term Obligations)/(Total Liabilities with shareholders Equity)=2889/31727=9 % Horizontal Analysis (Current year amount)/(Base year amount)=Current Result in relation to Base Period Two measure of Horizontal analysis (Current Assets 2005 )/(Current Assets 2004 )=10454/8639=121% or 21% increase in assets from 2004 to 2005 (Current Liabilities 2005)/(Current liabilites 2004)=9406/6752=139% or 39% increase in liabilities from 2004 to 2005 The current ratio for any company is calculated with the use of the following mathematical equation. Current Ratio= (Current Assets)/(Current Liabilities) Coca-Cola 2005 Coca-Cola 2004 10250/9836=1.04:1 12281/11133=1.10:1 Vertical Analysis=(Item on B/S)/(Total Assets)=Percentage or (Item on B/S)/(Total liabilities with Shareholders Equity)=Percentage Two measures of vertical analysis: (Current Assets)/(Total Assets)=10250/29427=34.8% (Loans Notes Payable)/(Total Liabilities with Shareholders Equity)=4518/29427=15.4% Horizontal Analysis (Current year amount)/(Base year Amount)=Current Results in relation to base period Two measures of horizontal analysis: (Cureent Assets 2005)/(Current Assets 2004)=10250/12281=83.5% or 16.5% decrease in assets from 2004 to 2005 (Current Liabilities 2005)/(Current Liabilities 2004)= 9836/11133=88.4% or 11.6% decrease in liabilities from 2004 to 2005