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There are methods that companies use to affect the quality of earning s; these include alternate accounting methods such as last -in, firs t-out (LIFO); first -in, first -out (FIFO); or pro f orma income , which excludes unusual or non -recurring items and improper recognition, such as improperly recorded revenue (W eygandt et al., 2018). The horizontal analysis is an important analysis that a llow s a company to compare the income s tatement from period to period or the balance s heet from period to period. This analysis will enable companies to see areas of the financial statement in which there is growth or any declines over two periods of time. The presentation includes the two periods being compared, the difference between the two periods , and the percentage of the base (W eygandt et al., 2018). Figure 1: Statement of comprehensive incom e (W eygandt et al. , 2018, p. 18 -3) BBA 2201, Princi ples of Accounting I 3 UNIT x STUDY GUIDE Title The vertical analysis is also referred to as the common -size analysis . This analysis allows a company to show one period compared to another or one company compared to its competition or one company compared to industry averages. Vertical analysis is another way for companies to see how they are doing financial ly in each area against the prior period or compared to a competitor (W eygandt et al., 2018). Figure 2: Horizontal analysis of balance sheets and horizontal analysis of income statem ents (W eygandt et al., 2018, p. 18 -11) BBA 2201, Princi ples of Accounting I 4 UNIT x STUDY GUIDE Title Figure 3: Vertical analysis of balance sheets (W eygandt et al., 2018, p. 18 -12 ) BBA 2201, Princi ples of Accounting I 5 UNIT x STUDY GUIDE Title The final analysis is one of the most pop ular methods, and it is called ratio a nalysis. Ratio analysis shows the relationship between figures in the f inancial statem ents. A calculation will be m ade based on a formula , and the relationship will be expressed in terms of a percentage, rate , or proportion. There are several categories of ratios; the specific focus for this lesson will be liquidity, solvency , and profitability ratios.  Liquidity ratios : Liquidity ratios are important within or outside an organization. There are several different l iquidity ratio s that can be calculated , which help determine a debtor’s ability to pay current debt obligations.  Solvency r atios : Solvency r atios are another group of important metrics inside or outside an organization. The solvency r atio helps an organization to determine whether the company’s cash flow is sufficient to meet its short -term obligations and long -term obligations.  Profitability ratios : There are several different profitability r atios that can be used insi de or outside an organization. These ratios help to determine the ability of the company to create earnings (W eygandt et al., 2018). The importance of financial analysis is the process of evaluating businesses, projects, efforts, or budgets to determine if it is worthwhile in terms of perform ance and suitable to the organization. The analysis is used to determine the stability, solvent, liquidity, or profitability to determine if the m onetary investment is worthwhile and if a project, effort , or budget should be recommended. Figure 4: Vertical analysis of income statements (W eygandt et al., 2018, p. 18 -13 ) BBA 2201, Princi ples of Accounting I 6 UNIT x STUDY GUIDE Title Reference W eygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting principles (13th ed.) [VitalSource Bookshelf version]. Suggested Unit Resources In order to access the following resources, click the links below. A transcript and closed captioning are available once you access the video s. This video explains how financial ratio analysis works and discusses ten of the m ost popular financial ratios behind the numbers. The Finance Storyteller. (2019, January 24). Financial ratio analysis [Video] . This video discusses horizontal analysis and how it is used in companies and how to calculate it. Sutton, F. (2013, December 13). Horizontal analysis [Video] . This video discusses the key numbers that should be the point of focus in financial statem ents. Phil Town’s Rule #1 Investing . (2014, December 19). The 4 most important financial metrics [Video] . Learning Activities (Nong raded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. This is an opportunity for you to express your thoug hts about the material you are studying by writing about it. Conceptual thinking is a great way to study because it gives you a chance to process what you have learned , and it increases your ability to rem ember it. In order to practice what you have learn ed, please attempt the exercises below, which can be found in your textbook.  DO IT! 1 | Unusual Items, p . 18 -8  DO IT! 2 | Horizontal Analysis, p . 18 -14  DO IT! 3 | Ratio Analysis, p. 18 -27 You are also encouraged to complete the following end -of-chapter e xercises and problems, which can be found in your textbook.  Practice Multiple Choice Questions and Solutions, p p. 18 -32 to 18 -33  Practice Brief Exercises, p p. 18 -33 to 18 -34  Practice Problem s, p p. 18 -36 to 18 -37 If you have any questions or do not understand a concept, contact your professor for clarification. Completing these practice exercises and problems will give you practice, which will be helpful as you complete the assignment for this unit.

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