Also calledtrend analysis, is a technique for evaluating aseries of financial statement data over a period of time.Purpose is to determine increase or decrease that has takenplace.Commonly applied to the balance sheet and incomestatement.Comparative AnalysisHorizontal Analysis
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13-12Helpful Hint:When usinghorizontalanalysis, be sureto examine bothdollar amountchanges andpercentagechanges.Illustration 13-11Horizontal analysisof balance sheetsComparative AnalysisLO 4Describe and apply horizontal analysis.
13-13Illustration 13-12Horizontal analysisof Income statementsComparative AnalysisHelpful Hint:In horizontal analysis, while the amount column is additive (thetotal is $99 million), the percentage column is not additive (9.9% is not a total).LO 4Describe and apply horizontal analysis.
13-14Summary financial information for Rosepatch Companyis as follows.SolutionLO 4Describe and apply horizontal analysis.Compute the amount and percentage changes in 2012 using horizontalanalysis, assuming 2011 is the base year.Advance slide in presentationmode to reveal solution.
13-15LO 5Describe and apply vertical analysis.Also calledcommon-size analysis, is a technique thatexpresses each financial statement item as a percent of abase amount.Vertical analysisis commonly applied to the balance sheetand the income statement.Comparative AnalysisVertical Analysis
13-16LO 5Describe and apply vertical analysis.Comparative AnalysisThese resultsindicate thecompany shiftedtoward equityfinancing by relyingless on debt and byincreasing theamountof retainedearnings.Illustration 13-13Vertical analysis ofIncome statements
13-17The increase in net income as a percentage of net sales is due primarily to thedecrease in interest expense and income tax expense as a percentage ofsales.LO 5Describe and apply vertical analysis.Comparative AnalysisIllustration 13-14Vertical analysis ofan incomestatements
13-18Illustration 13-15Intercompanycomparison by verticalanalysisLO 5Describe and apply vertical analysis.Although Chicago Cereal’s net sales are less than those of General Mills,vertical analysis eliminates the impact of this size difference for our analysis.Comparative AnalysisVertical analysisalso enables acomparison ofcompanies ofdifferent sizes.
13-20ProfitabilityMeasures theincome oroperating successof a company for agiven period oftime.SolvencyMeasures theability of thecompany tosurvive over a longperiod of time.LO 6Identify and compute ratios used in analyzing acompany’s liquidity, solvency, and profitability.Ratio AnalysisRatio analysisexpresses the relationship among selecteditems of financial statement data.LiquidityMeasures short-term ability of thecompany to pay itsmaturingobligations and tomeet unexpectedneeds for cash.Financial Ratio Classifications
13-21Analyzing financial statements involves:CharacteristicsComparisonBasesLiquidityProfitabilitySolvencyIntracompanyIndustry averagesIntercompanyThe financial information in Illustrations 13A-1 through 13A-4 will be used tocalculate Chicago’s 2011 ratios.Appendix 13AAppendix 13AComprehensiveRatio AnalysisLO 8Evaluate a company comprehensively using ratio analysis.
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