Perform a horizontal analysis of financial statements.

Horizontal analysis/Trend analysis

Trend percentage Line-by-line item analysis Items are expressed as a percentage of a base year This is a time series analysis For example, a line item could look at increase in sales turnover over a period of 5 years to identify what the growth in sales is over this period.

Horizontal Analysis
Increase/(Decrease) 2001 Amount Percent $37,850 $3,650 9.6% 36,900 3,100 8.4% 950 550 57.9%

Sales Expenses Net income

2002 $41,500 40,000 1,500

Horizontal Analysis
2002 $41,500 2001 Difference $37,850 $3,650

Sales

$3,650 $37,850 = .0964, or 9.6%

Trend Percentages...
are computed by selecting a base year whose amounts are set equal to 100%. The amounts of each following year are expressed as a percentage of the base amount.

Trend % = Any year $ Base year $

Trend Percentages
Year 2000 Revenues $27,611 Cost of sales 15,318 Gross profit $12,293 1998 is the base year. 1999 $24,215 14,709 $ 9,506 1998 $21,718 13,049 $ 8,669

What are the trend percentages?

Trend Percentages
Year Revenues Cost of sales Gross profit 2000 1999 1998 127% 111% 100% 117% 113% 100% 142% 110% 100%

These percentages were calculated by dividing each item by the base year.

Perform a vertical analysis of financial statements.

Vertical analysis/Common size analysis/ Component Percentages

All items are expressed as a percentage of a common base item within a financial statement e.g. Financial Performance sales is the base e.g. Financial Position total assets is the base Important analysis for comparative purposes
Over

time and For different sized enterprises

Vertical Analysis...
compares each item in a financial statement to a base number set to 100%. Every item on the financial statement is then reported as a percentage of that base.

Vertical Analysis
Revenues Cost of sales Gross profit Total operating expenses Operating income Other income Income before taxes Income taxes Net income 1999 $38,303 19,688 $18,615 13,209 $ 5,406 2,187 $ 7,593 2,827 $ 4,766 % 100.0 51.4 48.6 34.5 14.1 5.7 19.8 7.4 12.4

Vertical Analysis
Assets Current assets: Cash Receivables net Inventories Prepaid expenses Total current assets Plant and equipment, net Other assets Total assets 1999 $ 1,816 10,438 6,151 3,526 $21,931 6,847 9,997 $38,775 % 4.7 26.9 15.9 9.1 56.6 17.7 25.7 100.0

Prepare common-size financial statements.

Common-size Statements
On the income statement, each item is expressed as a percentage of net sales. On the balance sheet, the common size is the total on each side of the accounting equation. Common-size statements are used to compare one company to other companies, and to the industry average.

Benchmarking
Percent of Net Sales Lucent Technologies
12.4% 7.4% 10.8% 8.0% 43.0% 51.4% 28.8% 38.2%

MCI

Cost of goods sold Income tax

Operating expenses Net income