Methods Of Analysis

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Methods of Analysis Companies use three methods to analyze how well the company is performing. These methods, horizontal, vertical, and ratio give a numerical account of how the business has been performing over a specified period of time as compared to a previous period of time. The information is used to assist them in making decisions in determining such things as whether it is the right time to borrow money or purchase inventory. The horizontal analysis method is a method by which an analyst compares ratios or individual line items from the financial statements of a company for a particular timeline. Horizontal analysis shows changes from one year to the next in percentage form and in dollar amount. The dollar amount helps show factors that affect profitability or financial position. Showing changes in percentage form gives the analyst a better feel for whether or not the change is significant enough to come to a certain decision. There are two types of horizontal analysis, absolute amounts and percentage analysis. Absolute amount is one method of horizontal analysis that measures the exact dollar amount of certain line items from the financial statement over a period of time. It analyzes cost from items such as materials needed or rising gas prices to see the effects it has on and aids the analyst in determining whether or not the company is being frugal or if they are indulging in excessive spending on particular items. Percentage analysis compares the percentage difference in the line items from the financial statements over a certain period of time. Instead of showing a dollar amount, the amount is converter into a percentage amount. Percentage analysis is best used when comparing small companies to large companies. Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure (Edmonds,

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