Q1RQ - Horngren'S Financial And Managerial Accounting

Question

Question: What are the three main ways to analyze financial statements?

Step-by-Step Solution

Answer

Answer

 

1. Horizontal analysis, 2. Vertical analysis, 3. Ratio analysis

 

Step 1: Definition of Financial Analysis

The valuation made on the basis of analyzing the financial transactions of business operations is known as financial analysis. This is generally done to analyze the performance and sustainability of the project and the business.

 

Step 2: The three main ways of analyzing financial statements are

1. Horizontal analysis: Under horizontal analysis, the analyst takes out financial statements of different periods and then compares each line item reported in the financial statements of different periods.

 

1. Vertical analysis: Under vertical analysis, the analyst compares the items within the same financial statement. It is done by presenting each line item in terms of percentage. The percentage value is calculated using a base item for all line items.

 

1. Ratio analysis: The analysis that compares the various line items is known as ratio analysis. It depicts profitability, solvency, and liquidity.