Method Analysis

Topics: Financial statements, Balance sheet, Income statement Pages: 3 (945 words) Published: October 29, 2012
In a 2 to 3 page paper, evaluate the three methods of analysis: horizontal, vertical, and ratio as explained in Chapter 9 of your textbook. Summarize each method, and discuss how the financial information is used to make a particular decision. Provide a scenario in a health care situation in which a given method of analysis might be used. Horizontal: "Horizontal analysis, also called trend analysis, refers to studying the behavior of indi- vidual financial statement items over several accounting periods. These periods may be several quarters within the same fiscal year or they may be several different years. The analysis of a given item may focus on trends in the absolute dollar amount of the item or trends in percentages. For example, a user may observe that revenue increased from one period to the next by $42 million (an absolute dollar amount) or that it increased by a percentage such as 15 percent." ( Edmond 2010. p 346) Vertical analysis: uses percentages to compare individual components of financial statements to a key statement figure. Horizontal analysis compares items over many time periods; vertical analysis compares many items within the same time period. Ratio analysis: "Ratio analysis involves studying various relationships between different items reported in a set of financial statements. For example, net earnings (net income) reported on the income statement may be compared to total assets reported on the balance sheet. Analysts calculate many different ratios for a wide variety of purposes. (Edmonds 346-347) The financial statement analysis process includes establishing the goal or goals that the analysis is supposed to achieve which helps draw the analyst's attention to the most relevant information. Typical general goals include screening, diagnosis, forecasting, and reconstruction. A full review of the financial statements and the notes produces a rounded view of the company and may call attention to specific areas that should be analyzed in...
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