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Financial Management Module - 3

The objectives of financial statement analysis are to analyze a company's profitability, liquidity and stability, asset utilization, and debt utilization or leverage. Issues that limit financial statement analysis include statements that have not undergone auditing and may not comply with accounting standards, as well as statements that could be inaccurate or fraudulent. Horizontal analysis compares financial information over multiple periods and can express numbers as a percentage change from a baseline year. Vertical analysis focuses on the relationships between numbers in a single reporting period by restating financial statement amounts as a percentage of net sales or total assets.

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141 views

Financial Management Module - 3

The objectives of financial statement analysis are to analyze a company's profitability, liquidity and stability, asset utilization, and debt utilization or leverage. Issues that limit financial statement analysis include statements that have not undergone auditing and may not comply with accounting standards, as well as statements that could be inaccurate or fraudulent. Horizontal analysis compares financial information over multiple periods and can express numbers as a percentage change from a baseline year. Vertical analysis focuses on the relationships between numbers in a single reporting period by restating financial statement amounts as a percentage of net sales or total assets.

Uploaded by

Roel Asdulo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Kimberly U.

Asdulo BSEntrep 2-D

Financial Management

Module 3

1.In your understanding about the lesson, what are the objectives of financial statement
analysis?

The objectives of the financial statement analysis are the following :

Profitability-This pertains to the ability of the firm to yield sufficient amount of return on
company sales assets and invested capital.Profitability analysis allows companies to
maximize their profit, and thus also maximizes the opportunities that business can take
advantage of in order to keep itself successful and relevant in a very dynamic, competitive,
and vibrant market.

Liquidity and Stability - It is the ability of the firm to meet or pay its current or short-term
maturing obligations.It is also refers to the working capital position or short term financial of
the company.

Asset utilization or activity - This pertains to how efficient the company is managing its
resources.It talks about on how the company effectively manage their resources. It also
refers on how fast the company in turning over the accounts receivable, inventory and their
long term assets.

Debt-utilization or leverage - This pertains to the overall debt status of the company. It
measures the degree of how the firm is financed which measured and evaluated using other
variables like assets, equity and earning power.

2. Discuss the issues that limit financial statement analysis.

Some issues that limit financial statement analysis are: Financial statements that have not
undergone external auditing procedures may or may not conform with the Generally Accepted
Accounting Principles (GAAP) and standards thus, usage of these statements may lead to
erroneous analysis, and ultimately erroneous decisions.

Financial statements that have not undergone external auditing procedures prove to be
inaccurate or worse,fraudulent hence, do not fairly present the company's financial condition.

Audited statements does not guarantee accuracy.

3. Compare and contrast horizontal analysis and vertical analysis in terms of procedure.

The primary difference between vertical analysis and horizontal analysis is that vertical
analysis is focused on the relationships between the numbers in a single reporting period, or
one moment in time. Vertical analysis is also known as common size financial statement
analysis.For example, the vertical analysis of an income statement results in every income
statement amount being restated as a percent of net sales.On the other hand, horizontal
analysis looks at amounts from the financial statements over a horizon of many
years.Horizontal analysis is the comparison of historical financial information over a series of
reporting periods. It may also apply to the ratios derived from this information. The analysis is
most commonly a simple grouping of information that is sorted by period, but the numbers in
each succeeding period can also be expressed as a percentage of the amount in the baseline
year.

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