Readings and Key Terms
Ch. 13 of Accounting
Overview: In assessing the financial condition and performance of a company, you can compare data within the individual financial statements.
Horizontal analysis is an important tool that can be used for simple but important analysis of quantitative data. It is simply a matter of comparing the same data for two different time periods—sales revenue for two different years—to see how you did. Horizontal analysis is often called trend analysis.
Vertical analysis is another important and simple tool. It is comparing the individual components of financial statements to the whole—as a percentage of the total. For example, if cash equals $15,000 and total assets equal $100,000 then cash equals 15% of total assets. Vertical analysis is also called common-size analysis.
Overview: Ratio analysis is the most powerful method of using financial statement information to assess the financial well-being and performance of a company. Ratio analysis is used to compare certain data within the financial statements to assess liquidity, solvency, profitability.
Liquidity ratios: Measures the ability of a company to pay its debts (liabilities) in the short-term and its ability to generate cash when needed during the current fiscal year. Creditors and suppliers are especially interested in the liquidity of the company. Examples of liquidity ratio analysis include:
Working capital ratio
Inventory turnover ratio
Solvency ratios: Measures the ability of a company to pay long-term liabilities and to survive over a long-term period. Investors and employees are most interested in solvency indicators. Examples of solvency ratios include:
Debt to total assets ratio
Cash debt coverage ratio
Times interest earned ratio
Free cash flow ratio
Profitability ratios: Measures the