Module 05 Project - Proposal and Final Submission

Financial Analysis Methods

Institution

Name

Various Financial Analysis methods

Financial analysis is critical to evaluate the performance of an enterprise. To establish the financial wellness of an organization requires an evaluation of its financial information either from the current period or comparing this period over a number of financial periods. This information is always obtained from the financial statement of the organization under consideration. Three main financial analysis methods are usually used to analyze the financial performance of an organization.

1. Horizontal Analysis

This method compares financial information over a number of reporting periods. In this case each item of the income statement is expressed as a proportion of the total sales (Robinson, 2015).

2. Vertical analysis

Vertical analysis involves comparing two line items during the same financial reporting period (Robinson, 2015).

3. Ratio Analysis

Ratio analysis is used to compare one number in relation to another in the financial statement. The ratio is then compared with a previous period to establish whether the organization under investigation is in line with its set financial goals.

4. Trend analysis

This method compares financial statements for more than three periods, with the earliest year being used as the base year.

How and why each of the Methods would be used in Organization’s Financial Review

The horizontal analysis looks at how a dollar amount is the financial statement of a company has changes over time noting any differences from the expectations of the company over a period of time (Robinson, 2015). On the other hand, vertical analysis looks at each line item as a percentage of the total cash inflow of the financial statement in the company. Financial ratios are used to identify whether the company is operating within its set goals and highlight any potential issues that need to be reviewed within the company. Trend analysis is similar to horizontal analysis only that it compares financial information for three or more financial periods.

Similarities and Differences among the Methods

Horizontal analysis and trend analysis are similar in that they compare financial information on the same line item over two different periods. The difference is that trend analysis uses data from three or more periods while horizontal analysis only compares two financial periods. Vertical analysis involves comparison of two lines items during the same financial period while horizontal analysis compares each item on the financial statement as a proportion of the total sales.

How one of the Methods would be used (Horizontal and vertical analysis)

The table below shows both vertical and horizontal analysis

The vertical analysis shows that gross profit is 68 percent of the total sales for the period. Profit before tax provision on income is 20 percent. Horizontal analysis on

the other hand indicates that sales for the current period increased by 3 percent while gross profit by 2 percent. Profit before provision of tax on income increased by 11 percent.

Why this method should be used over other methods based on the case financial challenges

Horizontal analysis should be used instead of other financial analysis methods due to the fact that it is capable of enabling the reviewer to assess the relative changes in different items of the income statement over a period of time (Robinson, 2015). It will also make it easier to analyze the behavior of revenues and other important items of the income statement over time which is not possible while using other methods such as ratio analysis.

References

Robinson, T. R. (2015). International financial statement analysis. John Wiley & Sons.