Financial statements indicate a company’s accounts records at a given period but do not indicate the meaning of certain figures in the statements of financial position and the income statement. Thus, it is prudent that financial statements are analyzed for the purpose of decision making as required by management and potential investors. Moreover, there is a myriad of financial analysis tools that investors use to establish the authenticity and credibility of the financial records of a firm. Thus, some of the common financial analysis tools include ratios, DuPont analysis, vertical and horizontal analysis among others (Cucchiella, D’Adamo, &Gastaldi, 2015). However, for the purpose of completing this paper, vertical and horizontal analysis will be analyzed to ascertain the company’s standing over the recent past years. Therefore, this paper will attempt to demystify through computations both vertical and horizontal analysis of accounts receivable, fixed assets and debt financing for the most current years 2014 and 2015 respectively.
The vertical analysis represents a comparative analysis of the firm where each line of the financial statements is represented as a percentage of the other line. In word other words, every line item in the comprehensive income statement is expressed as a percentage of the total sales while every line item in the balance sheet is expressed as the percentage of the total sales. Therefore, the vertical analysis is crucial for timeline analysis to establish the percentage changes in the financial statements over a given period for the purpose of sound decision making (Siboni et al., 2016). The focal point when creating a vertical analysis of the balance items is the total assets which are used as a relative point. The excel table below show the vertical analysis of the firm performed on its total assets, debt financing and accounts were receivable.
Given table I vertical analysis attached in appendix section, it is evident that the company’s method of accounts receivable management is not effective since the firm has experienced more receivable in the year 2015 by $80,000,000. It will be appropriate if the firm changes its management tactics to improve the methods of collecting accounts receivable. Moreover, depreciation and amortization are accounted on a fair value of the market. Debt financing of the company shows a high gearing level given substantial changes in the debt amount.
Horizontal analysis, on the other hand, refers to the historical analysis of the financial statement over a given period. The objective of horizontal is to determine the level of change or variance which offers a basis for investigation as to why the certain value is high and other very low (Brusca et al. 2015). However, horizontal analysis has certain drawbacks which may not rely upon for future analysis. This is because most of the records are based on historical date and by the time computation is made, certain values might have changed. Nonetheless, this method of analyzing financial statements offers investors at a glance changes in the accounting information over a particular period. The excel table below represents computation of horizontal analysis.
Based on Table II in the appendix, the highest change in represented by asset acquisition while the least change is shown by accounts receivable. Such changes are important are they aid management in decision making. For instance, asset acquisition represented a large disparity which means that Starbucks reduced its expenditure on fixed assets. Thus, could be due to various reasons comprising maintenance of a certain percentage of liquidity. Thus, a reduction in asset acquisition came as a result of improving the firm’s cash flow in current assets. However, it is important to know that sometimes a company may fail to have so much cash on hand since most of its cash is fixed in long-term investments. In precision, both vertical and horizontal analysis are among the best methods that represent at a quick glance charges in the financial statements of a particular company. However, additional methods that can be used to ascertain real changes and offer further analysis entails ratio and DuPont analysis.
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Siboni, B., Siboni, B., Sangiorgi, D., Sangiorgi, D., Farneti, F., Farneti, F., …& de Villiers, C. (2016). Gender (in) accounting: an agenda for future research. Meditari Accountancy Research, 24(2), 158-168.