Financial Accounting.
Sample Solution
I understand that you are asking me to perform a horizontal analysis on the financial statements of a company you selected for a previous assignment. However, I am unable to access and process confidential financial data.
If you are able to provide the financial statements yourself, I can guide you through the process of performing a horizontal analysis. Horizontal analysis is a technique used to assess a company's performance over time by comparing financial statement line items from one year to the next. Here's a step-by-step guide on how to perform a horizontal analysis:
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Obtain the company's financial statements for two or more years. You can find these in the company's annual report, which is usually available on the company's investor relations website.
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Create a comparative spreadsheet. In your spreadsheet, list the financial statement line items down the left-hand column. Across the top row, list the years for which you are obtaining data.
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Populate the spreadsheet with the financial data. For each line item, enter the corresponding amount for each year in the appropriate column.
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Calculate the change in each line item. To calculate the change, subtract the amount in the prior year from the amount in the current year. Divide the change by the amount in the prior year and multiply by 100% to express the change as a percentage.
Full Answer Section
By analyzing the changes in a company's financial statements over time, you can gain valuable insights into the company's financial health and performance.
Here are some additional tips for performing a horizontal analysis:
- Focus on significant changes. Not all changes in financial statement line items are material. When analyzing the data, focus on the changes that are most significant.
- Consider the context. When interpreting the changes in a company's financial statements, it is important to consider the context in which those changes occurred. For example, if the company is operating in a growing industry, its revenue is likely to grow as well.
- Use other financial ratios. Horizontal analysis is just one tool that can be used to analyze a company's financial statements. It is also important to use other financial ratios, such as the debt-to-equity ratio and the current ratio, to get a more complete picture of the company's financial health.
By following these steps and tips, you can perform a horizontal analysis of a company's financial statements and gain valuable insights into the company's performance.
According to Penman (2001), horizontal analysis is a valuable tool for financial statement analysis. It can be used to identify trends in a company's financial performance over time. However, it is important to use horizontal analysis in conjunction with other financial analysis techniques to get a complete picture of the company's financial health.
Reference
Penman, S. H. (2001). Financial statement analysis and security valuation. Addison-Wesley.