1. What is the difference between horizontal and vertical analysis of financial statements?
Horizontal analysis compares the financial statements of a company for two or more accounting periods. Horizontal analysis focuses on changes and trends over time while a vertical analysis reviews the financial statements for only one year. Vertical analysis amounts are converted into percentages.
2. What is the advantage of using comparative statements for financial analysis rather than statements for a single date or period?
Comparative statements are better than single date statements because they allow the accountant to compare how well the company is doing compared to last year. It allows a company to see each line as a percentage and see any changes that may have occurred from one year to another. It also allows companies to see any trends that may be emerging within the different year statements.
3. Why is it advantageous to have a high inventory turnover? Is it possible for the inventory turnover to be too high? Explain.
High inventory turnover means that a company keeps selling its inventory. The business needs to keep buying inventory to stock their shelves in order to fulfill the demand. I suppose too high of an inventory turnover could be a bad thing because you can’t stock the shelves fast enough. If there is no product for the customers to buy than they will go elsewhere to buy it. Most customers aren’t going to wait until your inventory shipment to come in, so if your turnover is faster than your re-stock that could be a bad thing.
4. Is it a favorable or unfavorable trend if a company’s Number of Days Sales in Receivables has increased each year for the past three years? Explain.
It is unfavorable if a company’s Number of Days Sales in Receivables has increased because that means that it takes the company longer now to collect its accounts receivable than it did to collect them three years ago.
5. Company A has a quick...