Calculate and interpret ratios that are used to analyze solvency.

Question

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The Answer is Horizontal analysis is a technique for evaluating a series of data, such as line items in a company's financial statements, by expressing them as percentage increases or decreases over two or more years (or periods of time). The horizontal percentage of a base-period amount is calculated by dividing the amount in a specific year (period) by a base-year (period) amount. This percentage calculation normally covers multiple years (periods). The horizontal percentage change for the period is calculated by dividing the dollar amount of the change between two years (or periods) by the prior-year (period) amount. This percentage calculation normally covers two years (or periods) only. Vertical analysis is a technique for evaluating data within one year (or period) by expressing each item in a financial statement as a percentage of a relevant total (base amount) in that same financial statement. For example, the vertical percentage of a base amount can be determined by expressing each item on the income statement as a percentage of revenue (or net sales) or each item on the statement of financial position as a percentage of total assets by dividing the financial statement amount under analysis by the base amount for that particular financial statement.

Calculate and Interpret Ratios That Are Used to Analyze Solvency