Vertical analysis compares each item on a financial statement with

FINANCIAL ANALYSIS METHOD 4

Financial Analysis Method

Keri King

Module 3

4/26/2020

Financial Analysis Method

In an organizational setting, it is crucial to conduct a review to assess the performance of the business. Such tasks are daunting because they require that financial information is organized, collected and evaluated in the right manner. Financial analysis allows highlighting of the strengths and flaws of the finance of a given business by critically analyzing the balance sheet and income statements. The financial statements provide summarized data which is analyzed and interpreted accordingly before making vital decisions on the same. In this paper, I will explore about the various financial analysis methods, how and why they should be used in an organization as well as comparing their similarities and differences.

Financial analysis methods can be categorized into three forms; horizontal and vertical, trend and ratio analysis methods. In horizontal and vertical financial analysis, financial information is reported over a given sequence and time, then the results are compared. Horizontal analysis compares business entities after a months or months but within a fiscal year. In vertical analysis, the financial information is analyzed in proportions where each item in the financial record is proportional to the other. In this case, income statements entail gross sales while the balance sheet information entails assets.

The ratio analysis is used in calculating the comparative measures of numbers and how they link to each other. In most cases, the ratios calculated in a financial analysis falls within expected sets, however, in case they indicate any potential issues, reviewers are always on the look out to identify the issues. The ratios can be liquidity, activity, leverage or profitability ratios.

The trend analysis is a financial analysis method which allows analysts to review financial statements of more than three periods. In this case, the financial statements are assessed for any increments in the patterns. Any potential change on the financial statement can be an indication of an increase in income or a decrease in expenses.

There exist similarities and differences in these methods of financial analysis. In horizontal and vertical analysis, business entities are analyzed but limited for a given period of time. Dollar analysis as well as percentage analysis are examples of horizontal analysis whereas vertical analysis majorly into the balance sheet. More so, ratio analysis is important in assessing the growth, profitability as well as solvency of a given business.

Using the financial statements for my case study, I would propose for the use of a vertical financial analysis method. Trinity mother Francis Health hospital has encountered issues related to financial management. If the auditors and health care analysis would employ a vertical approach, I am sure all the projects will fall in place. In this case, all the items presented on the income statement indicate the percentage gross sale. Therefore, the vertical analysis is given by:

VAF=IS/Total sales X 100 (VAF- vertical analysis formula, IS- income statement). In this case, the ratio outcome might be by use of a balance sheet or an income statement. More so, based on the finance challenges experienced at the Trinity Mother Francis Health facility, the vertical analysis method would be crucial because it will entail all the income statements as well as balance sheet items recorded over a specific period of time, hence making it easier to compare and understand the financial proportions . That means that the two projects at hand would be analyzed and their financial statements compared for accounting and funding purposes.

References

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. John Wiley & Sons. https://books.google.co.ke/books?hl=en&lr=&id=oVKsDwAAQBAJ&oi=fnd&pg=PA1&dq=methods+of+financial+analysis&ots=1WWgmB275F&sig=0x3vM1CKdKviBEWODmBM6ae99pY&redir_esc=y

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169. https://ideas.repec.org/h/wsi/wschap/9789813224261_0004.html