Financial Statement Analysis (Ch. 18)

Comparing financial statement information of a company can be done...

- on an intracompany basis (current year vs prior years)

- on an intercompany basis (with other competing companies)

- based on industry advantages

Horizontal tool of analysis

- evaluate a series of data over 2+ time periods

- mainly for analysis within a company

- identify changes and trends overtime by expressing change in $ or %

Horizontal analysis application formulas

Horizontal percentage of base year =

(analysis-period amount / base period amount) * 100

Horizontal percentage change for period =

(analysis period amount - prior period amount) / (prior period amount) * 100

Vertical tool of analysis

Evaluate data as a percentage of base amount within the same financial statement and period

Vertical analysis formula

(Analysis amount / Base Amount) * 100

Alternative accounting policies (limitations of financial statement analysis)

IFRS vs ASPE, depreciation methods, inventory costing methods

Quality of information (limitations of financial statement analysis)

Full and transparent reporting aids in accurate financial analysis

Economic Factors (limitations of financial statement analysis)

- irregular items (ex. discontinued operations) must be excluded

- losses make it difficult to calc and interpret ratios