Question

Analyzing Financial Statements Using Horizontal Analyses

Pinnacle Plus declared and paid a cash dividend of $6,600 in the current year. Its comparative financial statements, prepared at December 31, reported the following summarized information:

Required:

1. Complete the two final columns shown beside each item in Pinnacle Plus’s comparative financial statements. Round the percentages to one decimal place.

2. Which account increased by the largest dollar amount? Which account increased by the largest percentage?

Answer 1

Financial Statement Analysis:

Financial statement analysis refers to the process in which financial statements of a company is evaluated by using some analytical tools. It helps to know the financial performance of a company. It helps the stakeholders like investors, creditors to know about the financial position of the company which helps them in taking decisions.

Financial Statement Analysis is used to evaluate the performance of the company. The objective of the financial statement analysis is to know the information about the past performance of the company, as it may be useful to predict the future performance of the company.

1.

Horizontal analysis:

Horizontal analysis of the Income Statement or Balance sheet is a statement that is used to compare each item that is reported on the income statement or balance sheet in one period to the same item that is reported in the other periods. It is type of analysis in which same item is compared from one period to another period.

Horizontal analysis of the Income Statement or Balance sheet helps to compare the same line items of the income statement or balance sheet over a period of time. In horizontal analysis the amount of increase or decrease and percentage of increase or decrease in the items of the income statement or balance sheet is shown. The increase or decrease in the percentage is calculated by dividing the amount of change by the base year.

Following shows the calculations associated with horizontal analysis:

The above calculation shows how to compute dollar change in account balance. It is computed by deducting the base period amount from the analysis period amount. The percentage change in account balance is computed by dividing the dollar change by the prior year balance. It helps to know the increase or decrease in the items of the income statement or balance sheet.

Prepare schedule showing the Horizontal Analysis:

Prepare schedule showing calculation:

2.

The horizontal analysis of the balance sheet shows that the cash account has the largest increase in terms of dollar. The cash account of the company has increased by $31,500 from the previous year to the current year.

The horizontal analysis of the balance sheet shows that the cash account has the largest increase in terms of percentage. The cash account of the company has shown an increase of 175% from the previous year to the current year. The income tax payable of the company has increased by 100% from the current year to the previous year.