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A ratio analysis looks at various numbers in the financial statements such as net profit or total expenses to arrive at a relationship between each number. To ensure accuracy, it is usually best if both statements have been audited by a certified public accountant, or CPA.
Ensure that both financial statements have been audited or at the very least prepared by a neutral, third-party accounting firm, to help ensure the integrity and accuracy of the reported numbers.
Also, verify that the numbers reported are from the same accounting period such as January through December.
Compare the statements such as the profit and loss to see if the results are reported in a similar fashion. For example, net sales are usually reported as gross sales, less customer discounts, whereas some companies report net sales as gross sales, less discounts, and cost of goods sold.
Perform a ratio analysis on some of the key components of the statements. There are many types of ratios, but some of the most important include the net profit ratio and the return on assets ratio.
The net profit ratio is arrived at by taking the net, pre-tax profit shown near the bottom of the profit and loss and dividing it by the nets sales. The same ratio should be performed both statements. The other important ratio is the return on assets ratio. This is determined by dividing the net, pre-tax profit by the total assets shown on the balance sheet.
Compare the various ratios of each company to see which is more or less profitable or efficient in its operation.
You should consult with a CPA or financial analyst to help you with the comparison. If the businesses are dependent on large machinery in their operations, look closely at ratios that focus on assets.
If the business relates more on commission- sales based on service, look closer at payroll to sales-related ratios. Warning Comparing two company's financial results isn't the only measure of evaluating their profitability.
For example, one business might be successful based on a key individual who may be leaving or retiring. In that case, the future results may not be as valid, because the prior results were based on the dependence of the key person.Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time.
It is a useful tool to evaluate the trend situations. The statements for two or more periods are used in horizontal analysis. The earliest period . Financial statement, any report of the financial condition or of the financial results of the operations of a business, a government, or other organization.
The term is most often used in a more limited sense in trade and financial circles to refer to the balance sheet, statement of income, and. benjaminpohle.com a financial portal launched on 31 October, , offers investment ideas and analyses of equities listed in Singapore, Hong Kong and the United States.
This is an independent website dedicated to sharing stock picks and learning the principles of business analysis and valuation. The portal carries regular portfolio-update articles . The comparative financial statements of Synotech, Inc., will serve as a basis for an example of horizontal analysis and vertical analysis of a balance sheet and a statement of income and retained earnings.
MODULE - 6A Analysis of Financial Statements Notes 5 Financial Statements Analysis - An Introduction ACCOUNTANCY TECHNIQUES AND TOOLS OF FINANCIAL STATEMENT. Social Security Administration Research, Statistics, and Policy Analysis.