Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Suppliers of Financial Statements analysis Business firms are the suppliers of the financial statements information. Limited liability quired by the act to prepare financial statements and disclose the audited financial statements to the public/shareholders. Listed companies are required by the regulations governing the operation of the stock market to disclose audited financial statement information. At the same time, some firms'internal analysts provide financial statement analy to help managers make decision. Outside intermediaries agencies, such as financial analysts, bond rating agencies, provide professional services to the external users of financial statement information Basic analytical procedures The analytical measures obtained from financial statements are usefully expressed as ratios or Analytical procedure may be used to compare the amount of specific items on a current statement with the corresponding amounts on earlier statements Analytical procedures are also widely used to show the relationship of individual items to each other and of individual items to totals on a single statement Techniques of Financial Statement Analysis Vertical analysis and horizontal analysis Vertical (or common size) analysis uses one item on each financial statement as a base amount and expresses other amounts as a percentage of the base. On the balance sheet, total assets are usually the base, while the income statement uses net sales. Financial statements based on ertical analysis allow for easy analysis between companies or between time periods of a company Formatting financial statements in this way reduces the bias that can occur whe analyzing companies of differing sizes. It also allows for the analysis of a company over various time periods, revealing, for example, what percentage of sales is cost of goods sold and how that value has changed over time Horizontal (or trend) analysis uses data from prior years as a yardstick. Usually, the lde is used as a base, line by line, and subsequent years are expressed as a percentage of the base. In essence, the analyst is looking for areas of deterioration or improvement from a prior period. Care must be taken with horizontal analysis because small changes in large items(such asTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Suppliers of Financial Statements analysis Business firms are the suppliers of the financial statements information. Limited liability companies are required by the company act to prepare financial statements and disclose the audited financial statements to the public/shareholders. Listed companies are required by the regulations governing the operation of the stock market to disclose audited financial statement information. At the same time, some firms’ internal analysts provide financial statement analysis to help managers make decision. Outside intermediaries agencies, such as financial analysts, bond rating agencies, provide professional services to the external users of financial statement information. Basic analytical procedures The analytical measures obtained from financial statements are usefully expressed as ratios or percentages. Analytical procedure may be used to compare the amount of specific items on a current statement with the corresponding amounts on earlier statements. Analytical procedures are also widely used to show the relationship of individual items to each other and of individual items to totals on a single statement. Techniques of Financial Statement Analysis Vertical analysis and horizontal analysis Vertical (or common size) analysis uses one item on each financial statement as a base amount and expresses other amounts as a percentage of the base. On the balance sheet, total assets are usually the base, while the income statement uses net sales. Financial statements based on vertical analysis allow for easy analysis between companies or between time periods of a company. Formatting financial statements in this way reduces the bias that can occur when analyzing companies of differing sizes. It also allows for the analysis of a company over various time periods, revealing, for example, what percentage of sales is cost of goods sold and how that value has changed over time. Horizontal (or trend) analysis uses data from prior years as a yardstick. Usually, the oldest year is used as a base, line by line, and subsequent years are expressed as a percentage of the base. In essence, the analyst is looking for areas of deterioration or improvement from a prior period. Care must be taken with horizontal analysis because small changes in large items (such as