Download ANALYSIS 1 Methods of Analysis Name ACC281: Accounting

Running head: ANALYSIS
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Methods of Analysis
Name
ACC281: Accounting Concepts for Health Care Professionals
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Methods of Analysis
The three methods of methods of analysis are horizontal, vertical, and ratio. Horizontal
analysis provides you with a way to compare your numbers from one period to the next, using
financial statements from at least two distinct periods. Each line item has an entry in a current
period column and a prior period column. Those two entries are compared to show both the
dollar difference and percentage change between the two periods. A vertical analysis shows you
the relationships among components of one financial statement, measured as percentages. On
your balance sheet, each asset is shown as a percentage of total assets; each liability or equity
item is shown as a percentage of total liabilities and equity. On your statement of profit and loss,
each line item is shown as a percentage of net sales. Ratio analysis is used to evaluate
relationships among financial statement items. The ratios are used to identify trends over time for
one company or to compare two or more companies at one point in time. Financial statement
ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.
Horizontal analysis is performed in one of two different ways. The first way is called the
absolute dollar this analysis compares the absolute dollar amounts of certain items over a period
of time. For example, this method would compare the actual dollar amount of operating expenses
over a period of several accounting periods. This method is valuable when trying to determine
whether a company is conservative or excessive in spending on certain items. This method also
aids in determining the effects of outside influences on the company, such as increasing gas
prices or a reduction in the cost of materials. The other way is percentage in this analysis it
compares the percentage difference in certain items over a period of time. The dollar amount of
the change is converted to a percentage change. For example, a change in operating expenses
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from $1,000 in period one to $1,050 in period two would be reported as a 5% increase. This
method is particularly useful when comparing small companies to large companies.
Vertical analysis can be used on income statement this wills involves comparing each
income statement item to sales. Each item is then reported as a percentage of sales. For example,
if sales equals $10,000 and operating expenses equals $1,000, then operating expenses would be
reported as 10% of sales. Vertical analysis can also be used on the balance sheet by comparing
each balance sheet item to total assets. Each item is then reported as a percentage of total assets.
For example, if cash equals $5,000 and total assets equals $25,000, then cash would be reported
as 20% of total assets.
Ratios analysis quantifies many aspects of a business and is an integral part of the
financial statement analysis. Financial ratios are categorized according to the financial aspect of
the business which the ratio measures. Liquidity ratios measure the availability of cash to pay
debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt
ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the firm's
use of its assets and control of its expenses to generate an acceptable rate of return. Financial
ratios allow for comparisons between companies, between industries, between different time
periods for one company between a single company and its industry average. Ratios generally
are not useful unless they are benchmarked against something else, like past performance or
another company. Thus, the ratios of firms in different industries, which face different risks,
capital requirements, and competition, are usually hard to compare.
Provide a scenario in a health care situation in which a given method of analysis might be
used. The scenario that I chose was the Financial Indicators for Critical Access Hospitals.
Financial statement analysis is important to boards, managers, payers, lenders, and others who
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make judgments about the financial health of organizations. One widely accepted method of
assessing financial statements is ratio analysis, which uses data from the balance sheet and
income statement to produce values that have easily interpreted financial meaning. Most
hospitals, health systems and other healthcare organizations routinely evaluate their financial
condition by calculating various ratios and comparing the values to those for previous periods,
looking for differences that could indicate a meaningful change in financial condition.
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Reference Page
Edmonds, T., Olds, P., McNair, F., &Tsay, B. (2010). Survey of Accounting (2nd ed.). New
York: McGraw-Hill Irwin
www.flexmonitoring.org/.../BriefingPaper7_FinancialIndicators.pdff