How Do You Analyze a Financial Statement?
Not all methods listed above work with all financial statements.
For example, vertical analysis is typically used with an income statement or profit and loss statement, dividing each line item by total sales to determine the percentage of each line item.
For example, if you have $1,000,000 in sales, with a cost of goods sold of $380,000 and a gross profit of $620,000, you would divide both into your total sales to get the percentage.
|Cost of Goods Sold||$380,000||38%|
You would also take your expenses and divide that by total sales to come up with the correct percentage.
Though most commonly used with an income statement, vertical analysis can also be used with a balance sheet if desired.
For horizontal analysis, there are three options that you can use:
Direct comparison uses historical data to compare the totals of one accounting period to another period.
Commonly used by investors to determine the financial health of a business, the variance method calculates the variance between two accounting periods. The variance method is also useful for spotting trends.
The percentage method, like the variance method, helps spot trends b by applying a percentage to each accounting period.
| ||2021||2022||$ Change||% Change|
|Cost of Goods Sold||$200,000||$275,000||$75,000||37.5%|
To calculate the $ change amount, you’ll subtract the 2021 totals from the 2022 totals.
To calculate the % change, you’ll need to divide the amount in the $ change column by the 2021 total.
For example, to determine the revenue percentage change, you’ll divide $5,000 by $675,000 which equals 7.4%.
You can compare as many accounting periods as you like, which gives you the ability to spot trends such as increases or decreases in revenue, cost of goods sold, or other expenses.