Textbook Problem

Name the two major types of financial statement analysis discussed in this chapter.

To determine

Explain two types of financial statement analysis.

Explanation of Solution

Financial statement analysis

Financial statements are analyzed to understand relationship between different items in the financial statements during the course of time. These relationships are studied to evaluate the past performance of the company as well as scope for future growth.

Financial statements can be analyzed using the following two techniques:

• Common-size analysis: Each item in the financial statement is expressed in terms of percentage to compare present statement with the statement of the previous year.
• Ratio analysis: Another technique of financial statement analysis is ratio analysis. Each item in the statement is expressed in terms of percentages or ratios by dividing that item by another item or account to evaluate the financial performance of the company. Ratios are compared with industrial standards to make comparisons better.