| In current difficult economic situation great number of companies face the objectives aimed on rising financial and business efficacy, mobilization of resources to be capable to continue the business and future stable development. Removal of these problems is closely linked with current situation analysis. Within one company level or a group of companies, one of basic analytical inspection tools is financial analysis. Financial analysis (also called as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project using figures/data of financial statements and other reports, with the aim of revealing:
1. Main problems of economic and financial activity;
2. Tendencies of development set in a company.
Financial analysts often examine:
1. Past Performance - Across historical time periods for the same firm (the last 5 years for example),
2. Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values.
3. Comparative Performance - Comparison between similar firms in current situation.
Decisions are always made based on these data and results of financial analysis, management and investment.
There are many types of financial statement analysis and accountants use these types of financial statement analysis as per their requirement and comfort. To name some of the types of financial statement analysis are as follows:
1. Internal Analysis: an internal financial statement analysis is done by insiders of the firm who have access to all the financial information. E.g. Analysis done by the top management, finance manager, employees, etc. can be termed as internal financial statement analysis.
2. External Analysis: External analysis is an analysis done by outsiders to the business firm. Such parties have access to limited financial information which are published or revealed to the analysts by the firm.
3. Horizontal Analysis: In case of horizontal analysis the financial statements are analyzed horizontally. Examples of horizontal analysis are comparative statement analysis and trend statement analysis. In the case of a horizontal analysis the same item is compared of one year with the preceding year. In this case more than one year's companies’ financial statements are essential.
4. Vertical Analysis: In case of vertical analysis only one year's financial statement is required. The analysis is done vertically in this case. A particular item, i.e. net sales in income statement and in Balance sheet total capital available/employed, is compared with all other items.
5. Dynamic Analysis: In case of dynamic analysis more than one year's financial data is essential. Examples of dynamic analysis are ratios calculated for more than one year, comparative statement analysis, trend analysis, etc. such an analysis has broader scope since it facilitates comparison over a period of time i.e. year-to-year comparison.
6. Static Analysis: in case of static analysis only one year's financial data can be utilized. It has limited scope since year-to-year comparison cannot be done. Examples of static analysis are ratios calculated of only one year, common size analysis, etc.
7. Long Term Analysis: In this case the long term solvency, stability and profitability positions are judged. It is helpful for long term providers of funds. It judges the company's position over a period of time and not just for one year or less than that.
8. Short Term Analysis: it is helpful for short term providers of funds. Short term funds are current liabilities. Mainly trade creditors and banks in order to provide Bank overdraft and short term loans use short term analysis. It is mainly concerned with analysis of the firm working capital management.
9. Intra Firm Analysis: Intra firm analysis is used for comparing the financial performance of the same business firm over a period of time. Past years performance is compared with the current year's performance which indicates that in which direction the business firm is moving. For intra firm analysis techniques like ratio analysis, common size analysis, comparative analysis and trend analysis are used.
10. Inter Firm Analysis: Inter-Firm analysis is used to compare the financial figures of two firms from the same industry for the same period. It helps to know which firm is having a comparatively better performance. Techniques like ratio analysis, common size analysis, and comparative analysis are used for inter-firm analysis.
These are types of financial statement analysis that are used by companies to know their market position and it also helps them to know where their competitors stand.
Managers and investors repeatedly find themselves in a situation of necessity to make decisions based on economically right data. Furthermore time for decision making is sharply limited. However understanding financial statements is of great importance. Hence the article is to observe this very type of situation. Thus it is essential to examine the following methods: horizontal and vertical analysis.
Horizontal Analysis.
Methods of financial statement analysis generally involve comparing certain information. The horizontal analysis compares specific items over a number of accounting periods. For example, accounts payable may be compared over a period of months within a fiscal year, or revenue may be compared over a period of several years. These comparisons are performed in one of two different ways.
Absolute Dollars.
One method of performing a horizontal financial statement analysis compares the absolute dollar amounts of certain items over a period of time. For example, this method would compare the actual dollar amount of operating expenses over a period of several accounting periods. This method is valuable when trying to determine whether a company is conservative or excessive in spending on certain items. This method also aids in determining the effects of outside influences on the company, such as increasing gas prices or a reduction in the cost of materials.
Percentage.
The other method of performing horizontal financial statement analysis compares the percentage difference in certain items over a period of time. The dollar amount of the change is converted to a percentage change. For example, a change in operating expenses from $1,000 in period one to $1,050 in period two would be reported as a 5% increase. This method is particularly useful when comparing small companies to large companies.
Vertical Analysis.
The vertical analysis compares each separate figure to one specific figure in the financial statement. The comparison is reported as a percentage. This method compares several items to one certain item in the same accounting period. Users often expand upon vertical analysis by comparing the analyses of several periods to one another. This can reveal trends that may be helpful in decision making. An explanation of Vertical analysis of the income statement and vertical analysis of the balance sheet follows:
Income Statement.
Performing vertical analysis of the income statement involves comparing each income statement item to sales. Each item is then reported as a percentage of sales. For example, if sales equals $10,000 and operating expenses equals $1,000, then operating expenses would be reported as 10% of sales.
Balance Sheet.
Performing vertical analysis of the balance sheet involves comparing each balance sheet item to total assets. Each item is then reported as a percentage of total assets. For example, if cash equals $5,000 and total assets equals $25,000, then cash would be reported as 20% of total assets. So, the article briefly describe importance of qualitative financial analysis and necessity of its fast preparation/ calculation not only for managers of a company but especially for businessmen interested in investing their capital into a company. Thus, the main methods of financial analysis were considered and the article is focused on one method which is the most appropriate / suitable for express-analysis 'Horizontal and Vertical Analysis'. First and foremost it allows to solve a problem concerning revealing weak points of company's financial activity to examine them more precisely if it is necessary.
Examples of Horizontal and Vertical Analysis are enclosed.
Scientific advisors:
Natalya A. Belenyuk, senior teacher, candidate of science,
Tatiana V. Kalashnikova, senior teacher, candidate of technical science. |
