Course Project

Running Head: ANALYSIS OF FINANCIAL STATEMENTS 1

ANALYSIS OF FINANCIAL STATEMENTS 3

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Analysis of financial statements

Horizontal analysis

 Horizontal analysis makes it possible to compare financial ratios and line items over several accounting periods (Wahlen, Baginski & Bradshaw, 2014). This method is best used in the analysis of trends. For example, an organization like Apple can use horizontal analysis to identify the trends of iPhones once they are released to the public. This type of analysis makes it possible to assess changes and their effects over several accounting periods. Horizontal analysis helps in the identification of expenses trends, revenue trends over a long transacting period (Weygandt, Kimmel & Kieso, 2015). Companies like amazon use horizontal analysis to compare their liquidity at the end of an accounting period compared to other periods.

Vertical analysis

A vertical analysis is done when there is a need to compare different accounts is a single specific accounting period on a financial statement. Vertical analysis is done when all accounts on a statement are given a percentage where the total of all accounts represents a 100%. For instance, when this type of analysis is done on an income statement, it will indicate the top-line sales number as 100% whereas every other account on the statement will show as a percentage of the overall sales percentage. Vertical analysis come in handy when it comes to showing the performance of an organization, however it cannot explain why the performance is as it is (Grant, 2016). Since a company like apple has many products that it deals with, vertical analysis can be used to see how the different products are performing.

Ratio analysis

Ratio analysis is important for the analysis of an organization’s financial health. Ratio analysis helps in the identification of threats, opportunities and changes in an organization. The results of the ratio analysis can be used in the formulation of strategic management policies for an organization. In this type of analysis, the ratios are divided into categories depending on what needs to be analyzed there are two main types of ratio analysis that can be done on a financial statement; liquidity ratio analysis and asset management ratio analysis. Liquidity Ratios help in measuring the ability or capability of a company to honor its short-term financial obligations (Hoskin, Fizzell & Cherry, 2014). Asset management ratios or activity ratios are used measure how well an organization or company manages their assets. Ratio analysis can be used in the cannabis industry can be used to check for profitability and liquidity.

References

Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.