1. Financial Analysis Tools

2. Financial statement analysis helps users make better decisions.
Purpose of Analysis
Financial statement analysis helps users make better decisions.
Internal Users
External Users
Managers
Officers
Internal Auditors
Shareholders
Lenders
Customers

3. Standards for Comparison
To help me interpret our financial statements, I use several standards of comparison.
Intracompany
Intercompany
Industry
Guidelines

4. Comparing a company’s financial condition and performance across time
Tools of Analysis
Horizontal Analysis
Comparing a company’s financial condition and performance across time
Time

5. Now, let’s look at some ways to use horizontal analysis.
Time
The term horizontal analysis arises from left-to-right (or right-to-left) movement of our eyes as we review comparative financial statements across time.

7. Comparative Statements
Calculate Change in Dollar Amount
Dollar
Change
Analysis Period
Amount
Base Period
Amount = –
Since we are measuring the amount of the change between 2003 and 2004, the dollar amounts for 2003 become the “base” period amounts.

8. Comparative Statements
Calculate Change as a Percent
Percent
Change
Dollar Change
Base Period Amount × =
100%

9. $12,000 – $23,500 = $(11,500)
($11,500 ÷ $23,500) × 100% = 48.9%

11. Now, let’s review the dollar and percent changes for the liabilities and shareholders’ equity accounts.

13. Now, let’s look at some vertical analysis tools!

14. Tools of Analysis V e r t i c a l
Comparing a company’s financial condition and performance to a base amount

15. Vertical Analysis is also called as common-size analysis
The term vertical analysis arises from the up-down (down-up) movement of our eyes as we review common-size financial statements.

16. Common-Size Statements
Calculate Common-size Percent
Common-size
Percent
Analysis Amount
Base Amount × =
100%
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues

17. ($12,000 ÷ $315,000) × 100% = 3.8%
($23,500 ÷ $289,700) × 100% = 8.1%