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WEEK 3: HORIZONTAL AND VERTICAL ANALYSIS --> ACCT-301: Class. Which do you think is more useful:...

WEEK 3: HORIZONTAL AND VERTICAL ANALYSIS --> ACCT-301: Class.

Which do you think is more useful: horizontal and vertical analysis or ratio analysis, and why?

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Answer #1

Vertical Analysis: vertical Analysis is nothing but analysis of any amount of financial statement in relation to another amount.For example, every Item of balance sheet is divide by the total assets, which gives the percentage of such item in relation to a particular item called total assets. In the same way, for Income Statement every item can be divided by total sales for performing Vertical Analysis.

Horizontal Analysis: It can be described as a ratio arrived by divison of current year amount with the previous year amount of the same item. it basically means comparitive ratios or trend analysis in as per accounting terms.

Ratio Analysis: This can be described as quantitative analysis of all items in the financial statements. This analysis can be used to know the operating effectiveness of the entity, efficiency, liquidity status of the company and also the profitability. there are various types of ratio analysis that can be performed on financial statements. Some of them are Quick assets ratio, Assets turnover ratio, Cash ratio etc..

In my opinion ratio analysis are more useful because, Vertical and Horizontal Analysis might not give fruit ful results in all cases ending up with percentages which may give meaning less ratios. Where as, in Ratio Analysis many decisions can be taken just depending on the ratios, such as return on Investment ratio , which is one of the profitability ratio, which helps the management of the entity in taking quick decisions. It also helps to Identify the problem of the entity very easily, for example low liquidity ratio, which depicts entity is not in good health. Since, many of the companies perform ratio analysis, it willbe useful for comparision of ratios with other entities which are available ready made.

As every coin has two sides, there are limitations also of ratio analysis, which might end up by just window dressing of financial statements.

  

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