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Apply horizontal analysis, trend analysis, and vertical analysis to financial statements. Horizontal Analysis It begins with the computation of changes from the previous year to the current year. The base year is the first year considered. Horizontal analysis uses both dollar amounts and percentages. Percentage Change = 100 x(Amount of Change / Base Year Amount) Trend Analysis Changes are calculated for several successive years instead of for two years. Trend analysis is important because it may point to basic changes in the nature of a business. Trend analysis uses an index number to show changes in related items over a period of time. Index = 100 x(Index Year Amount / Base Year Amount) Vertical Analysis Percentages are used to show the relationship of the different parts to a total in a single statement. The analyst sets a total figure in the statement equal to 100% and computes each components percentage of that total. The statement of percentages is called a common-size statement. Vertical analysis is useful for comparing the importance of specific components in the operation of a business and changes in the components from one year to the next.
Ratio Analysis Ratios identify meaningful relationships between the components of the financial statements. They are useful in: Evaluating a companys financial position and operations. Making comparisons with results in previous years or with other companies. The primary purpose of ratios is to point out areas needing further investigation.
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Du Pont equation ROE ROA K Profit Margin ROA: TAT FAT DSO DI
= ROE / ROA
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