MAFundamentals defines the foundation of Management Accounting from cost concept, classification and analysis. It provides general discussion on COST, VOLUME, PROFIT, VARIANCE and other information necessary for performance measurement, decision making and pricing.

Techniques Used in Financial Statement Analysis

This article presents the five (5) general techniques used in the analysis and evaluation of financial statements.

1. Horizontal Analysis
Horizontal analysis involves comparison of figures shown in the financial statements of two or more consecutive periods. The difference of the figures between the two periods is calculated. Using the earlier period as the base, the percentage change is calculated.

Formula (click on the image to zoom):







Example (click on the image to zoom):






2. Vertical Analysis
Vertical analysis uses a single period only in comparing figures in the financial statement. Using a common base, the figures are converted and are expressed as percentages . The base may be an important item such as total or net sales (in the income statement) or total assets (in the balance sheet). These converted statements are called common-size statements or percentage composition statements.

Example (click on the image to zoom):
 
3. Ratio Analysis
Ratio analysis used ratios calculated from financial statements with relevant information aboutthe company's liquidity, asset management, use of leverage, cost control, profitability, valuation and growth.
  1. LIQUIDITY RATIOS (click to learn more)
    - provides information about the company's ability to pay its current obligations and continue operations
  2. LEVERAGE RATIOS (click to learn more)
    - measure the company's use of debt to finance operations and assets
  3. ASSET MANAGEMENT RATIOS (click to learn more)
    -measure how the firm uses its asset to generate revenue and income
  4. COST MANAGEMENT RATIOS (click here to learn more)
    - measures how well the firm controls its cost
  5. PROFITABILITY RATIOS RATIOS (click to learn more)
    - measure earnings in relation to some base such as sales, assets, or capital
  6. GROWTH RATIOS (click to learn more)
    - measure the changes in the economic status of a firm over a period of time
  7. VALUATION RATIOS (click to learn more)
    -measure of shareholder's value as reflected in the price of the firm's stock
4. Gross Profit Variance Analysis
Gross profit variance analysis is used to compare actual data with budgeted data, standard data, previous year's data, or base year data. Discussed here are the four (4) types. Learn more.
  1. 4-Way Analysis
  2. 6-Way Analysis
  3. 3-Way Analysis
  4. 4-Way Analysis, Plus - used for two or more products
5. Cash Flow Analysis
Cash flow analysis is a detailed study of the net change in cash as a result of operating, investing, and financing activities during the period.

The Statement of Cash Flows - the basic financial statement prepared and used in analyzing cash flows. The report includes cash receipts, cash payments and the net change in cash. These are results from operating, investing, and financing activities of the company during a certain period.