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Beginning the Financial Analysis Vertical analysis Conversion of all amounts to percentages of a base amount Base amount on income statement is sales Base amount on balance sheet is total assets Common size statements After all accounts of a particular statement are converted into percentages Useful for Detecting items that are out of line Detecting deviations from preset amounts Detecting other problems Beneficial to managers to compare against other firms in the same industry Financial information services publish averages for all major industries Dun and Bradstreet Standard & Poors Moody’s Awareness of differences between firms is necessary, such as Geographical effects Accounting practices

Management’s Analysis Primary reason to analyze Evaluate the overall performance of the firm Especially as seen by those external to the firm Should be aware of total company performance, in addition to each manager’s own responsibility area Analysis helps managers understand How the firm is performing, and How the firm is perceived Financial Performance General purpose financial statements Provide an overall measure of firm’s performance Enable comparison of the firm with similar firms Can help identify potential weaknesses Internal reporting system limited to component performance Important for monitoring lending restrictions To ensure compliance Allows managers to see the firm as outsiders see it Identify factors that influence financial statements and their analysis. Factors ImpactingFinancial Statement Analysis No single financial statement analysis measure can summarize an organization’s performance Manager must know which alternative accounting procedures the firm uses Such as depreciation methods and inventory costing Inflation/deflation effects can distort comparisons between periods because statements are based on historical dollars