Please respond to the following discussion question. Your response should fully address all elements of the question and be a minimum of 200 to 300 words long.
We have been studying financial statements and major accounting principle areas in this course. Using this week’s readings and research on the Internet, identify methods that analysts use to analyze financial statements. Ratios are one such method. What are the types of ratios and which ratio do you think is most important in analyzing the financial condition and performance of a company?
Respond to two students post below in 100 word count
Analysts use vertical and horizontal financial analysis as well as ratios to assess a company’s performance based on historical data in order to make projections on how a company will perform in the future. The vertical analysis, also called common size statement, is a comparative examination of a financial statement in which each line is listed as a percentage of a base where each line item in the income statement is stated as a percentage of gross sales; every line item on a balance sheet is stated as a percentage of total assets; every line item in the statements of cash flows is stated as a percentage of total cash inflow (Kimmel, Weygandt, & Kieso, 2016). Analysts see the relative proportions of account balances between one company to another and through industries. Horizontal analysis, also called trend analysis, is the comparison of several years of financial data and comparing them to each other to determine growth rate. It helps analysts find out if a company’s performance is in decline or growing. Ratios are also be used by analysts to determine the performance of a company. There are three types of ratios for analysis: liquidity ratios – used to determine the company’s ability to meet its short term financial obligations; solvency ratios or debt ratios – a comprehensive measure of a company’s long term survival in the market; and profitability ratios – a measure of a company’s income (Kimmel, Weygandt, & Kieso, 2016). Although the three ratios are useful in its own, each can be useful based on the user’s goal. As far as determining the overall performance of a company, then the three ratio categories as well as the horizontal and vertical analysis need to be used to be able to effectively assess a company’s performance and project future projections.
We have been studying financial statements and major accounting principle areas in this course. Using this weeks readings and research on the internet, we are able to identify methods that analysts use to analyze financial statements. There are several methods used to analyze financial statements including ratios, horizontal analysis and vertical analysis. As mentioned previously ratios are one method to analyzing financial statements. There are several types of ratios including price earning ratio, liquidity ratio, solvency ratios, and profitability ratios. The type of ratio that I think is the most important in analyzing the financial condition and performance of the company are solvency ratios and profitability ratios. Although the discussion questions asks for which one is the most important, I believe they are both important and necessary to understanding the financial condition and performance of a company. The solvency ratio measures the ability of a company to survive over a long period of time. This ratio is important because it shows the companies ability to pay back debts and interests in a long-term situation. This type of ratio is particularly important for creditors and investors. The profitability ratio is important in understanding the financial condition and performance of a company because it measures the income or operating success of a company for a given period of time. This ratio shows whether or not a company is operating financially responsibly and taking in income.