Methods of Analysis Essay Example | Topics and Well Written Essays - 750 words

Methods of Analysis - Essay ExampleThe purpose of this paper is to describe and analyze these threesome fiscal summary techniques. Vertical analysis is utilized to analyze financial statements. Vertical analysis is a regularity that involves comparing each entry for each of the three major categories of fib (assets, liabilities, and equity) in a balance sheet represented as a proportion of the total flier (Answers, 2011). One of the advantages of this method is that is simple to implement and it fag be applied to corpo proportionalityn of all sizes. The method helps financial analyst easily visualize relative annual changes within one business (Investopedia, 2011). Horizontal or impulsion analysis compares two or more long time of financial data. Horizontal analysis shows the changes between years in both dollar and dower form. Showing the trend in dollar form flock help an analyst focus on the key factors that have affected profitableness or financial position (Garrison & Noreen, 2003). The use of percentage form can help provide perspective in regards to the import of the changes that occurred. For example a change of 30% in sales between one year and another(prenominal) is significant, while a change of 0.25% in sales is insignificant. When dealing with companies that move millions of dollars in revenues the use of percentage form can better measure the relative change that occurred. A financial technique that can be very useful to evaluate the financial performance of a guild is proportion analysis. The rationality ratio analysis is such an effective tool is because ratio analysis can measure divers(prenominal) aspects of a firms performance. There are different categories of ratios. The five major ratio analysis categories are liquidity, leverage, efficiency, and positiveness, and market value ratios. Liquidity ratios measure the cash position of a firm. When a company is liquid the firm has enough money to pay off its short bourne and lon g term obligation. The current ratio measures the ability of a firm to pay its short term debts, while the debt ratio measures the ability of a company to pay off its long term obligations. The current ratio is calculatedal dividing current assets by current liabilities. The debt ratio is calculated dividing total assets by total liabilities. Three profitability ratios are pelf margin, return on assets (ROA) and return on equity (ROE). Net margin is the ratio that best measures the profitability of a company. It is calculated dividing net income by total sales. Another important profitability ratio is gross margin percentage. This ratio is calculated dividing gross margin by sales. The return on assets ratio measures how well a company is using its assets to generate revenues. Return on assets is calculated dividing net income by total assets. The return on equity metric measures how much revenues were generated in relation to its equity. The metric is calculated dividing net inc ome by total equity. Two efficiency ratios are account receivable disturbance and descent turnover. The inventory turnover ratio measures how many times a companys inventory has been sold and replaced during a year. The metric is calculated dividing cost of goods sold by average inventory balance. The account receivable turnover is a measure of how many times a companys account receivable