Acc 280 Week 4 DQ1 and DQ 2

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Week 4 DQ 1 and 2

The differences between vertical and horizontal analysis are vertical is used in both intra and

inter company comparisons and horizontal is used primarily in intra company comparisons.

Horizontal analysis also referred to as trend analysis is used to evaluate the financial

statements over a specifed period of time and may compare the increases or decreases in

changes of net sales. It may be used on the balance sheet to show changes in the assets

section to net, in the liability section to current liabilities and to te stockholder's equity section to

retained earnings. Horizontal analysis of he income statement may predict profitability and show

changes in increase or decrease of net sales, cost of goods and total operating expenses. A

retained earnings statement analyzed horizontally will show increases or decreases in net

income and dividends on the common stock. Vertical analysis expresses each item in the

financial statement in the terms of a percent of the base amount; the base for an asset item

being total assets and the base for liabilities and stockholder's equity being total liabilities and

total stockholder's equity. It basically expresses the size of the classified grouped item in it's

category and can show the percentage of change in an asset, liability or stockholder's equity

item. Vertical analysis also allows the user to compare a company of any size with it's

competitor of any size which is one of it's advantages. I'm thinking a vertical analysis is useful

for internal users particularly management since it can be used for controlling variable costs by

revealing a percentage of increase or decrease in a category. Because variable expenses

should increase or decrease with the level of sales, the percentage relationship

between the expense item and its respective revenue category is the key to good

variable cost control.( Analysis of nancial statements, 2010). It also compares a

company with it's competition and this is important for the owner or management

to know their competitive position, rank or standings among rival companies. In my

opinion, Horizontal analysis is useful for external users since it can show

performance, protability and increases and decreases in assets, debts and equity

over a period of time it may be useful in depicting a strong balance sheet and

income to debt ratio which may be useful for lenders in determining the risks of

lending money to the company.

Three important ratios are liquidity, solvency and

protability.Liquidity ratio measures an operation’s ability to meet

its short-term obligations (one year or less). Solvency ratios

measures an operation’s ability to meet its long-term obligations

(over one year) and Protability ratio measures management’s

e!ectiveness in achieving prot margins and return-on investment

goals.Return on investment(protability ratio) often called return

on equity is cash$ow/total equity or net/stockholder's equity and

this one is very important to external users because it is one that

investor's view and may deem the results as being favorable or not

since it is a protability ratio it gives insight into the earning power

and succuss of the company and how many dollars the company

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Week 4 DQ 1 and 2 The differences between vertical and horizontal analysis are vertical is used in both intra and inter company comparisons and horizontal is used primarily in intra company comparisons. Horizontal analysis also referred to as trend analysis is used to evaluate the financial statements over a specifed period of time and may compare the increases or decreases in changes of net sales. It may be used on the balance sheet to show changes in the assets section to net, in the liability section to current liabilities and to te stockholder's equity section to retained earnings. Horizo ...
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