# Financial Accounting Concepts and Principles Week 7

The three tools of financial statement analysis are ratio analysis, the vertical analysis and the horizontal analysis. The three characteristics of a business, liquidity, profitability and solvency can be determined from the company’s financial statements by using these three tools.   The company’s liquidity ratio, profitability ratio and their solvency ratio can all be obtained through this analysis. The knowing of the financial stability of a business is what these ratios can provide.
The vertical analysis is described as “A technique that expresses each financial statement item as a percent of a base amount (Weygandt, Kimmel, & Kieso, 2008).” Common-size analysis is another name for the vertical analysis. By dividing each balance sheet item by the company’s total assets gives you the vertical analysis. This gives a number that translates to a percentage. This percentage shows the growth pattern of the company. Going up or down depends on the increase in debt or positive retained earnings.
The horizontal analysis or trend analysis is finds company financial data increase or decrease relative to a base year figure. The horizontal analysis can be performed on the Balance Sheet, the Income Statement and the Retained Earnings Statement. These all provide valuable information such as the stability and past success of a company which will allow someone to decide if the company is a sound investment opportunity or a good credit risk.
To see the current ratio, use the formula Current Ratio = Current Assets divided by Current Liabilities. I found that the current ratio of the company is:
Current Ratio=10,554current assets9,406current liabilities=1.11
PepsiCo’s 2005 current ratio is 1.11:1. Their 2004 current ratio is calculation was:
Current Ratio=8639 current assets6752 current liabilities=1.28
PepsiCo, Inc. has a current ratio of 1.28:1 for 2004.
The vertical analysis takes the individual line items from the consolidated balance sheet and divides each of...