Financial Statement Analysis
Jeanette M. Rogers
Acc 281: Accounting Concepts for Health Care Professionals
Instructor Alan Wells
November 16, 2010
There are three types of financial statement analysis; for example, (1) Horizontal Analysis, (2) Vertical Analysis, and (3) Ratio Analysis. First, the horizontal analysis is also known as trend analysis, which views the behavior of an individual financial statement items over several accounting, which may be several quarters within the same fiscal year or several different years; however, the analysis of a given item may focus on absolute dollar amount, according to Edmonds, T.P., Olds, P.R., McNair, F.M., and Tsay. (2010). Moreover, “percentage analysis sidesteps the materiality problems of comparing different size companies by measuring changes in percentages rather than absolute amount; in other words, each change is converted to a percentage of the base year.”( Edmonds et al 2010, p. 326). Second, as Edmonds et al stated, vertical analysis of an income statement also known as a common size statement, involves converting each income statement component to a percentage of sales; however, vertical analysis suggest examining only one period, which is useful to compare common size income statements for several years; which also involves converting each balance sheet component to a percentage of total assets. Third, “ratio analysis involves the study of various relationships between different items reported in a set of financial statement; for example, net earnings reported on the income statement may be compared to total assets reported on the balance sheet; however, analysis calculate many different ratios for a wide variety of purposes.” (Edmonds, et al, 2010). In summary, a ratio analysis would be a good method to use at a health care organization; as a result, at the John Hopkins Bloomberg School of Public Health, Dr. Gerald F. Anderson, PhD had proven how...