TIPS ON CHAPTER TOPICS
TIP: A company's financial statements may be compared to its own historical results. This is called an intracompany analysis. Additional information may be gained by comparing the company's results to industry averages or compare it to other companies who are their competitors.
TIP: The three basic techniques used for evaluating financial statements are (1) horizontal analysis, (2) vertical analysis, and (3) ratio analysis.
TIP: Horizontal analysis involves the expression of dollar amounts of financial statement items in percentage terms of the dollar amounts for the same items in a prior year. There may be two or more years involved in the analysis. Trend analysis is a type of horizontal analysis that is prepared for more than two years.
TIP: In vertical analysis (or the development of common-size financial statements), the relative importance of various items on a single financial statement is indicated by the relationships of these various items to some key figure on the same statement.
TIP: When you are analyzing comparative data, carefully notice which is for prior years and which is for the current year. On a comparative balance sheet, the current year data is typically placed in the first (inside) column. In some situations, however, the reverse may be found.
TIP: Financial statements can be analyzed in percentage terms by using one of two basic approaches: horizontal analysis or vertical analysis.
TIP: In horizontal analysis, a base year (usually ...