Part 1: Financial Statements Analysis (Intro, Horizontal or Trend Analysis and Vertical Analysis)

This lecture series covers the interpreting phase of the accounting process, which involves evaluating financial statements to assess a firm's past performance, present condition, and future potential. Financial analysis helps stakeholders determine profitability, liquidity, and solvency. This series will focus on horizontal analysis, vertical analysis, and financial ratios.

Horizontal analysis evaluates financial data over time by comparing figures from two or more consecutive periods. It computes the difference and percentage change using the earlier period as the base. This method is often called trend ratios and percentages. The video demonstrates how to perform horizontal analysis on a statement of financial position, calculating the increase/decrease in both amount and percentage for each account.

The video walks through an example of horizontal analysis for a company's statement of financial position. It details how to calculate the increase or decrease in monetary value and the corresponding percentage change for each asset and liability account. The earlier year's amount is always used as the base for percentage calculations. It also highlights that while amounts can be footed (summed vertically), percentages cannot.

Horizontal analysis provides additional insights into business performance. For example, a significant cash increase might indicate a need for better cash utilization to earn more profit. The consistency between total assets and total liabilities and owner's equity percentage changes is also discussed, adhering to the basic accounting equation.

Vertical analysis compares figures within the financial statements of a single period. It expresses each financial item as a percentage of a base amount: total assets for the statement of financial position and net sales for the income statement. This method is also known as common size statements.

The video demonstrates how to prepare a vertical analysis for an income statement. Every amount on the income statement is divided by net sales and multiplied by 100 to express it as a percentage. Net sales are set as 100%. The instructor shows calculations for various income statement items like gross sales, sales returns, and cost of goods sold.

Unlike horizontal analysis percentages, vertical analysis percentages can be checked vertically. However, minor differences (e.g., 0.01%) may occur due to rounding off. The common size income statement helps to understand the proportion of each item relative to net sales, such as sales returns or net income. This analysis can highlight areas for improvement if certain percentages are deemed unfavorable. The video also notes that for multi-period vertical analysis, additional columns for each period's amount and percentage are needed.