Accounting400 Week 5

Topics: Generally Accepted Accounting Principles, Economics Pages: 2 (631 words) Published: June 30, 2013
To:
R.J. Falk, CEO of Ventura Electronics,
Financial statement analysis is done by every successful corporation, as your team at Ventura Electronics very well knows. “Comparisons within a company are often useful to detect changes in financial relationships and significant trends” (Kimmel, Weygandt, and Keiso p. 653). Financial statement analysis is done by horizontal analysis, vertical analysis, and ratio analysis. “Horizontal analysis, also known as trend analysis, is a technique for evaluating a series of financial statement data over a period of time (Kimmel, Weygandt, and Keiso p.654). If Ventura Electronics is interested in determining any increase or decrease in, for example, net sales (as an amount or percentage) than horizontal analysis are appropriate. Vertical analysis analyzes more specific data on the financial statement. “Vertical analysis, also called common-size analysis, is a technique for evaluating financial statement data that expresses each item in a financial statement as a percent of a base amount”(Kimmel, Weygandt, and Keiso p.656). Ventura Electronics can not only analyze the relative size of each category on the financial statement, but can also see the percentage change in the individual asset, liability, and stockholders’ equity. Ventura Electronic can also use this analysis when comparing its financial statements to the competition. The last tool commonly used for financial statement analysis is ratio analysis. These ratios are useful in evaluating the financial health and performance of a company. In ratio analysis we use three different ratios; liquidity ratios, solvency ratios, and profitability ratios. Liquidity ratios are important because it evaluates the short-term ability of a business to pay their obligations as well as meet their unexpected cash flow needs. When Ventura Electronics wants to measure the ability of the company to survive over a long period of time then solvency ratios are appropriate. Profitability ratios...
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