Diagram Common Financial Statements - Research Paper Example

Organizing financial statements this way lessens the bias that can arise when analyzing companies of different sizes. It also permits for the analysis of a firm over various times, revealing, for instance, what percentage of the sales is the cost of goods sold and how that particular value has changed with time. For example, a common-size balance sheet will report all of the balance sheet amounts as a percentage of the "Total Assets" amount. If Cash was $80,000 and Total Assets were $1,000,000 then Cash will appear as 8% and Total Assets will appear as 100%.

If the Current Assets were to be $3,500,000 they will seem to be 35%. If Current Liabilities were given as $1,800,000 then on the common-size statement show it as 18%. By having all of the balance sheet amounts as a percentage of Total Assets, you can compare your company's current asset percentage (and all other line items) to your industry's percentage or to any other company's percentages. It will not matter if the other firm was smaller or larger than your company, since all totals are in percentages of theTotal Assets.

This brings the name "common-size." A common-size income statement will display all of the income statement sums as a percentage of net sales. . Horizontal analysis is a process in fundamental analysis whereby an analyst associates line items or ratios in a company's fiscal statements over a given period of time. In this process, the analyst will use his preference when selecting a particular timeline; nevertheless, the choice is often centered on the investing time horizon under deliberation.

In this scenario, when revenues increase by let’s say 10 percent this quarter, horizontal analysis must have been used. Horizontal analysis can be employed in any item that is in the company’s fiscals. This analysis is crucial in relating the performances of several companies (Bragg, 2007). Horizontal analysis is also used when converting the balance sheets and the available income statements the desired change statements. Horizontal analysis bears a resemblance to vertical analysis in the sense that it also converts financial statements balances into percentages.

However, instead of computing financial statement amounts into percentages of the total assets, or gross sales, it converts the percentage changing income stamen balances and balance sheet numbers from a given period to the next one (Albrecht, 2009). Horizontal analysis can be carried out on ratios such as price earnings ratio, earning per share, dividend payout among others. This analysis can be performed in one of the below methods, that is, Percentage Comparison and Absolute Comparison. Absolute Comparison involves performing horizontal analysis in making comparisons in the the absolute currency aggregates of some pieces over the given period of time.

For instance, cash in hand at the closure of an accounting period