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• 12 Financial Statement Analysis

• 12.1 Horizontal Analysis

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• What is horizontal analysis?

  Horizontal analysis is the study of percentage changes from year to year.

• How is a horizontal analysis performed?

  In two steps:
  1. Compute the dollar amount of the change from one period (the base period) to the next
  2. Divide the dollar amount of change by the base-period amound

• What are trend percentages?

  Trend percentages are a form of horizontal analysis. Trends indicate the direction a business is taking.

• How can trend percentages be computed?

  By selecting a base year whose amounts are set equal to 100%.

• 12.2 Vertical Analysis

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• What is vertical analysis?

  Vertical analysis (or component analysis) shows the relationship of financial statement items relative to a total, which is the 100% figure.

• 12.3 Benchmarking

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• How it is called when financial statements are compared side-by-side?

  Common-size statements. These only show percentages.

• 12.4.1 Cash conversion cycle

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• What does a fast inventory turnover mean? What does a low turnover mean?

  A fast turnover indicates ease in selling inventory. A low turnover indicates difficulty.

• What is accounts receivable turnover?

  Receivable turnover measures the ability to collect cash from customers. 

• What does a high accounts receivable turnover mean? And a low?

  The higher the ratio, the better. A low receivable turnover indicates ineffectiveness in collecting dues from customers. However, if receivable turnover is too high, this may indicate that credit is too tight, and that may cause you to lose sales to good customers. 

• What is the receivable collection period?

  This is the receivable ratio converted into days. Also known as days sales outstanding, or days sales in cash from its receivables.