June 28, 2012
Accounting is the way all companies keep track of their out-going and in-coming finances. Applying accounting principles in any business is incredibly important because it allows for the least amount of mistakes and gives a comprehensive view of all transactions. There are many tools used in accounting, each with it’s own unique function. Statements are used to show a specific time period’s overview of assets, liabilities, and all transactions. These statements allow for easier comparing of months, years, or even different companies accounts. Two of the tools of financial statement analysis are called vertical analysis and horizontal analysis. Much like the definitions of vertical and horizontal, these two analyses are similar, but also have striking differences. In this paper I will provide you with information regarding the two tools, vertical and horizontal analysis, and how comparing them is applied to two big businesses called PepsiCo, Incorporated and Coca-Cola Company.
When referring to vertical analysis, we are referring to when a total percentage is calculated for one financial statement. As defined on “Accounting Coach” (2012), “A type of financial analysis involving income statements and balance sheets. All income statement amounts are divided by the amount of net sales so that the income statement figures will become percentages of net sales. All balance sheet amounts are divided by total assets so that the balance sheet figures will become percentages of total assets,” (Dictionary). Using vertical analysis is very helpful when comparing a company’s percentages between statements, (Price, Haddock, & Brock, para. Vertical analysis of financial statements, 2007). It can also be helpful when comparing numbers of two companies that are within the same trade; such as the companies being compared in this paper: PepsiCo, Inc. and Coca-Cola Company. Using vertical analysis will help us to compare how well each company did in the certain accounts that were analyzed. The reason we want to do these comparisons is because it can sometimes be difficult to determine how much each statement is worth within a company or when compared to another larger or smaller company. By converting them into percentages, it becomes effortless to compare and understand that information each statement gives.
To perform a vertical analysis of PepsiCo we divide the current assets by the total assets. This will tell us what percentage of the assets in the company are current. To find this we divide the current assets, $4,882, by the total assets, $31,727, (University of Phoenix, 2008). By doing this math, we now know that the current assets make up 6.5%. We will perform a similar problem to find what percentage of total assets are shareholder equity. Taking the total assets, $31,727, and dividing that by the shareholder equity, $14,320, we see that the shareholder equity makes up 2.22% of the total assets, (University of Phoenix, 2008). This can be done to all other accounts to find what percentage of total assets each account is. Below is the example of percentages of total assets that the current assets and shareholder equity make up.
Two measures of vertical analysis-
1. Current assets divided by total assets- 4882 / 31727 = 6.5%
2. Shareholder equity divided by total assets- 14320 / 31727 = 2.22%
A vertical analysis of Coca-Cola will show us similar percentages to those of PepsiCo. We divide he total assets, $29,427 by the current assets of $10,250. From this we now know that 2.87% of the total assets are made up of current assets. Using the same equation, we substitute the current assets with the shareholder equity of $16,355, (University of Phoenix, 2008). By dividing the total assets of $29,427 by $16,355 we are left with 1.79%. This means that the shareholder equity make up 1.79% of the total assets of Coca-Cola Company. See the equations below:
Two measures of...