Running head ANALYSIS 1 Methods of Analysis Name ACC281 Accounting Concepts for Health Care Professionals ANALYSIS 2 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 ANALYSIS 3 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 ANALYSIS 4 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 ANALYSIS 5 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