Ratio, Vertical, and Horizontal Analyses

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 3 (468 words) Published: June 3, 2012
Ratio, Vertical, and Horizontal Analyses
May 8, 2012

Analyzing financial statements can help a company find out important financial information about itself and other competitors in the industry. There are three important tools that evaluate a company’s liquidity, profitability, and solvency. This information is relative to banks, creditors, and for internal gain. There are three commonly used tools to help investigate and generate the results using percentages and ratios.

The horizontal analysis evaluates data from the financial statement over a period of time to generate the data needed for the analysis. The purpose of the analysis is to figure out the increase and decrease in amounts by percentages. This is a tool used to evaluate gains internally.

The vertical analysis is used to show each item on the financial statement as a percentage of a base amount (Weygandt, Kimmel, & Kieso, 2008). Its purpose is to show the relative size of each category on the balance sheet. This method is used to compare a company with others in the same field.

Ratio analysis shows the relationship among a line item chosen from the data on the financial statement (Weygandt, Kimmel, & Kieso, 2008). The results are shown either in a percentage or ratio of the mathematical relationship between the totals. This is also another good tool to compare with the results of other industry peers.

The PepsiCo, Inc.
Current Ratio for 2005:
Formula - Current Assets
Current Liabilities= Current Ratio
9406= 1.11:1
Current Ratio for 2004:
6752= 1.28:9
Vertical Analysis
Formula - Items on Balance Sheet
Total Assets= %
Current Assets10454
Total Assets=31727 = 33%
Formula - Item on Balance Sheet
Total Liabilities with Shareholders Equity = %
Short Term Obligations 2889
Total Liabilities with Shareholders Equity= 31727 = 9%
Horizontal Analysis
Formula -Current Year Amount...
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