Methods of Analysis

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Methods of Analysis

Financial statements are necessary to keep track of where a company’s money is going and to determine whether or not it is making a profit. Companies also use different methods of analysis in order to isolate specific information in the financial statements in order to make decisions about the future of the business. The three categories of analysis that will be discussed further will be horizontal, vertical, and ratio analysis, as well as situations in which a health care organization may use each method and why.

Horizontal analysis, also called trend analysis, focuses on studying the behavior of individual financial statement items over a number of years (Edmonds, et al., 2010, p. 325). Horizontal analysis is most often used to determine long-term trends, year-to-year changes, and geometric growth rates. Long-term trends represent the growth rate of the company in a ten year period, while year-to-year changes focus on percent changes each year, and geometric growth rates show compound annual growth rates (Horizontal, 2010). Looking at the various ways in which horizontal analysis studies a business’s trends is a way for them to identify any abnormal changes, and it also allows them to identify the cause of the change and determine whether the trend is likely to continue. By looking at a number of years and the changes in trends, it is possible to plan for the future of the business by making adjustments in certain areas.

Vertical analysis is used to relate a specific item in a financial statement to a related item on that same statement. An example may be related Cost of Goods Sold to the sales amount. It is often used to compare firms that vary greatly in terms of size of operations. The goal of vertical analysis is to produce common size statements, where each item in the statement is presented as a percentage of the common base amount (Khan, 2010). Using vertical analysis, health care organizations are able to include items...