Xacc 280 Week 7 Ratios, Vertical, Horizontal

Ratio, Vertical, and Horizontal Analyses

XACC 280

Submitted by: Jenna Eaton

Date: March 25, 2011

Determining a company’s financial health involves analyzing their financial statements. The examination and review of financial records includes three components known as liquidity, profitability, and solvency. A company’s liquidity is a term used to describe the company’s ability to pay short-term debts when they are due. Profitability is a term used to express a company’s performance over a period of time. A company’s solvency refers to the company’s ability to meet long-term financial obligations along with being able to reinvest for future growth. In order to measure these characteristics three tools are used. These tools include ratio analysis, vertical analysis, and horizontal analysis.

Profitability, liquidity, and solvency ratios are used to help measure the financial stability of a company. These ratios go beyond the typical financial statement data providing a better view into the financial health of a company. With the vertical analysis, the balance sheet items are divided by the total assets. The figure computed provides a decimal point figure that is then converted into a percent. This percentage can then be used to measure a company’s growth, expansion, or contraction over a period of time. With the horizontal analyses intracompany comparisons are performed using the balance sheet, retained earnings, and income statements. This method uses the financial statement data for at least the last two years and then takes a secondary look at the last five to ten years of financial data. This analysis helps determine whether the company has increased or decreased.

We can use these tools to measure PepsiCo Incorporated financial performance. First we start with calculating the current ratio for 2005. To determine this ratio we must start with the formula where “current ratio=current assets / current liabilities”. We then take the data...