Quiz 16: Financial Statement Analysis
The two major type of financial statement analysis discussed in this chapter • Vertical analysis and • Horizontal analysis. Vertical analysis is the analysis in which any of the components (such as sales, cost of goods sold etc.) is taken as base (100%) and the remaining amounts are reported as percent of selected base. In the horizontal analysis, all the components of a year are taken as base and corresponding components in other years are reported as percentage of selected bases. Any year is taken as base year in horizontal analysis.
The correct answer of this is Option B. Vertical analysis of the financial statement is the analysis and comparison of two financial statements and the percentage method is used for the comparison. In this the development expenses are compared with the sales of the same period. Any component of a financial statement is taken as base (100%) and the remaining components are reported as percentage of the base.
Vertical analysis: Vertical analysis explains one line item with respect to another line item for same period. Horizontal analysis: Horizontal analysis explains one line item with respect of same of last year taking that year as a base. State the reasons for applying both methods: These both analyses should be used in order to check how company is performing current and also to compare its result with last year. This will help organization to formulate strategies accordingly and run its operations effectively.