final submission

Financial Analysis Method

Define and describe various financial analysis methods. Explain how and why each method would be used in an organization's financial review process.

The four methods of financial analysis, we are going to be focusing on in this assignment are horizontal, vertical analysis, trend analysis as well as ratio analysis. Horizontal analysis is defined as the method of financial analysis where data sets of two different periods are compared during the analysis. These different periods could be different months of different years. To be able to make financial review the analyst using this method looks at the changes in similar data between these two periods. Vertical analysis is a method of analysis where the analyst works with data from a single period. The analyst in this cases reviews different figures of different entities on the financial statement the analysis of a one-year balance sheet is an example of vertical analysis.

Ratio analysis is a method of financial analysis that makes use of different financial ratios in the analysis. A ratio helps to show the relationship between two or more entities of the same or different financial statements and the figure obtained is compared to the budget as well as the ratio of the industry is as to determine the financial position that an organization holds. Examples of ratios used include the asset turnover ratio which is an activity ratio that is measured by comparing the sales of an organization and the total assets of an organization.

Finally, trend analysis is defined as a continuation of horizontal analysis whereby financial statements of three of more periods is compared (Albrecht, Stice & Stice, 2011). The analyst making use of this method first needs to select a base year which becomes the earliest year. After the selection of the base year, the analyst the financial statement then compares with the subsequent years.

Compares the similarities and differences among the methods

The main similarity between these financial is the fact that they all aim at determining the financial health and the financial condition of an organization. However, they all differ in their approach to financial review. The horizontal analysis method compared two different periods, by looking at similar entities in the different reports. The vertical method of analysis involves a single period report where different figures of different entities are compared. The trend analysis, on the other hand, compares similar entities on three or more reports from different years. Finally, the ratio analysis focuses on the relationship between two different entities of either the same or different reports from the same period (Shim & Siegel, 2007).

Using the financial statements for your case, examine how at least one of the methods can be used. Support your position with the actual ratio outcome(s). Explain WHY this method should be used over the others, based on case financial challenges.

In the case of the reports for Johnson & Johnson Company, I believe that the best method to make use of for the analyses is the horizontal method which compares same entities across reports from two time periods. This is because from the balance sheet and income statement data provided in this case, data is provided for two time periods that is 2014 and 2015. An analyst, for example, can make analysis by looking at the inventory data whereby the level of inventory was higher in 2014 than in 2015 by a margin of 131.

References

Albrecht, W., Stice, E. & Stice, J. (2011). Financial accounting. Mason, OH: Thomson/South-Western.

Loughran, M. (2011). Financial accounting for dummies. Hoboken, N.J: John Wiley & Sons.

Maynard, J. (2013). Financial accounting, reporting, and analysis. Oxford: OXFORD UNIVERSITY PRESS.

Shim, J. & Siegel, J. (2007). Handbook of financial analysis, forecasting, and modelling. Chicago, IL: Wolters Kluwer/CCH.