L3 TRADITIONAL APPROACHES

• Horizontal Analysis

  • This allows the learners to see the trend for the different accounts in the Financial Statements.

  • This is also known as trend analysis.

  • To establish the trend, percentage changes of accounts from one period to another have to be

  made.
• Horizontal Analysis

  To compute:

  Amount of change = Current year amount – Base (earlier) year amount

  Percent of change = Amount of change/Base (earlier) year amount
• Some of the more important accounts to monitor when doing trend analysis are the following: HORIZONTAL ANALYSIS

  • Sales

  • Operating profits

  • Total assets

  • Interest-bearing liabilities

  • Interest expense
• Vertical analysis is a method of financial statement analysis in which each line item is listed as a

  percentage of a base figure within the statement. Thus, line items on an income statement can be

  stated as a percentage of gross sales. In contrast, line items on a balance sheet can be stated as a

  percentage of total assets or liabilities. Vertical analysis of a cash flow statement shows each cash

  inflow or outflow as a percentage of the total cash inflows.
• This is a technique for evaluating financial statements where each line item is listed in terms of

  a percent of a base amount.

  • All accounts are presented as a percentage of total assets for the Statement of Financial

  Position or Balance Sheet.

  • All accounts are presented as a percentage of net sales for the Statement of Profit or Loss or

  Income Statement.

  VERTICAL ANALYSIS
• • In this type of analysis, attention must be focused on items with significant changes from one

  period to another. Depending on the nature of the business, even a slight change in the

  percentage may warrant the attention of top management. Vertical analysis
• type of analysis

  A) ASSET

  B) LIABILITIES

  C) OWNERS