Checkpoint ratio, vertical, and horizontal analyses - Assignment Example

Checkpoint: Ratio, Vertical and Horizontal analysis Three tools of financial ment analysis Ratio analysis, vertical analysis (common-size analysis) and horizontal analysis (trend analysis) are the three tools of financial ratio analysis. Ratio analysis is used to express relationship between various items present in the financial statements (Weygandt, Kimmel and Kieso 2009). For example, if we divide sales done by a firm during a financial period with the total assets held by it during the same period the resulting ratio tells us the efficiency in use of company’s assets to generate sales.

Vertical analysis helps is analyzing a financial statement by expressing one item as a percentage of a base item (Weygandt, Kimmel and Kieso 2009). It helps to understand the quantity of an item in the financial statement as a percentage of a whole and compare over a horizon of many years. Comparing current assets as percentage of total assets in year1 and year2 would be an example of vertical analysis. Horizontal analysis helps in analyzing the various items over a period of time either in absolute numbers or in percentage.

Example, change in sales (+ or -) figures in year1 as compare to previous year. Analysis of Pepsico and Coca-Cola companies The current ratio shows that Pepsico is showing a decreasing trend from 1.28 in 2004 to 1.11 in 2005 (appendix). Coca-Cola is also showing a similar trend with the ratio at 1.10 in 2004 and 1.04 in 2005 (appendix). This shows that both the companies are increasing their short term financing. They can afford to do this at present as both companies have their current liabilities adequately covered.

However, the trend could be alarming for their short term liquidity position in the future if it continues, especially for Coca-Cola which has almost equal amount of current assets covering the current liabilities ($1.04 for every $1 of current liability). Vertical analysis of Assets shows that for Pepsico current assets component of total assets has increased marginally in 2005 over the previous year (appendix). The current liabilities as percentage of total liabilities has increased drastically which shows that the company is financing more through short term obligations rather than long term debt.

A further component analysis reveals a clearer picture. There has been a major increase in short term liabilities and taxes showing an increased short term financing for growing business (appendix). For coca-cola current liabilities have increased and assets decreased again showing increased short term financing (appendix). Horizontal analysis of Pepsico shows that there has been an increase in current assets and liabilities in 2005 over 2004 (appendix). A further investigation shows that the impact on current asset increase is due to increase in cash and liabilities and that in liabilities is due to short term debt and taxes.

This shows that the company has increased cash and is financing through short term debt. Increased taxes show more business. Coca-cola shows an opposite trend i.e. a decrease in both figures (appendix). Current liabilities have been mainly impacted by current maturities of long term debt showing that long term debt is reducing.Business sectors for careerIf I were to be an accountant, one of the business sectors I would like to work for is the insurance sector as a forensic accountant because this is one business segment which suffers the most from fraudulent claims.

It would give me an opportunity to apply auditing concept to real life applications. The second sector I would like to join would be the retail sector because it deals in various products starting from food to clothing to electronic items. This business area would give me an exposure of the various international accounting practices as retailing depends on supplies from various geographical locations. Besides I will also be able to work in other areas like cost accounting and financial management.

Company choice for careerWal-Mart is a good company to work with because it is one of the world’s leading retailers. As the company is a multinational and has presence in many countries, I expect the working environment to be very conducive as people of different cultures need to work together and the company needs to ensure that all are comfortable at work. Within the accounting field I expect to get opportunities to work in various fields like costing, supply chain management, internal auditing and financial management.

I anticipate an exposure to international accounting standards because of its multinational scope of activity. If I were to work in the financial consolidation function I would get a huge exposure to the consolidation activity of such a big enterprise.ReferencesWeygandt, J.J, Kimmel, P, D and Kieso, D, E (2009) Financial Accounting, John Wiley and Sons AppendixPepsicoRatio AnalysisYear20052004Current Assets(CA) 10,454 8,639 Current Liabilities (CL) 9,406 6,752 Current ratio1.111.28 Vertical AnalysisYear20052004Current Assets(CA) 10,454 8,639 Current Liabilities (CL) 9,406 6,752 Total Assets(TA) 31,727 27,987 Total Liabilities(TL) 17,476 14,464 CA/TA %32.95%30.87%CL/TL %53.82%46.68%Horizontal AnalysisYear20052004Increase in 2005% increaseCurrent Assets(CA) 10,454 8,639 1,815 21.

01%Current Liabilities (CL) 9,406 6,752 2,654 39.31%Coca – ColaRatio AnalysisYear20052004Current Assets(CA) 10,250 12,281 Current Liabilities (CL) 9,836 11,133 Current ratio1.041.10Vertical AnalysisYear20052004Current Assets(CA) 10,250 12,281 Current Liabilities (CL) 9,836 11,133 Total Assets(TA) 29,427 31,441 Total Liabilities(TL) 13,072 15,506 CA/TA %34.83%39.06%CL/TL %75.24%71.80%Horizontal AnalysisYear20052004Increase (Decrease) in 2005% increase (Decrease)Current Assets(CA) 10,250 12,281 -2,031 -16.

54%Current Liabilities (CL) 9,836 11,133 -1,297 -11.65%