P2A.1 Basic Financial Statement Analysis

Question 1

Vertical Analysis (Common Size Statement)

Answer 1

1. Presents financial statement line items as a percentage of a base.
2. Provides an overview of the company’s financial position/performance.
3. Enables comparison of two or more companies of differing sizes or nature.

Question 2

Vertical Analysis Formula

Answer 2

Percentage of a base = Individual line amount / Base amount

Income Statement Base = Net Sales
Balance Sheet Base = Total Assets

Question 3

Horizontal Analysis (Trend Analysis)

Answer 3

1. Presents the financial position & performance trend of a single company over time. Allows users to assess progress.
2. Presents the percentage change in financial statement line items over a period of time.
3. Provides a basis for forecasting future trends in balance sheet and income statement.

Question 4

Horizontal Analysis Formula

Answer 4

Percentage Change = Amount of change / Base period amount

= (Year 2 - Year 1) / Year 1

Question 5

What is Window Dressing?

Answer 5

1. Intentional alteration of elements of the financial statements to improve performance measures and account balances, is a negative element that often occurs when performance is evaluated using raw data or ratios.