Question

Describe two types of analyses that are done using integrated financial statements and three controls associated with the use of integrated financial statements.

Answer 1

The two main types of analysis that are done using an integrated financial statements are discussed below:

(i) Horizontal Analysis : Under it some selected variables like Purchase, Sales, Revenues, Assets / Liabilities etc., of two or more years are arranged side by side horizontally for 2 years or more. The increase / decrease can be easily located. The percentage change can be found out and the trend can be detected.

(ii) Vertical Analysis : Under it the Balance Sheet total is taken as 100. Each liability and asset is expressed as a percentage of the total. From the revenue statement, net sales is taken as 100. Each individual revenue or expense is expressed as a percentage (out of 100).

Then a comparative analysis of the structural relationships like profit to sales or Shareholders’ Equity compared to Total Debts etc., is made. It is a numerical relationship between related figures.

The three major controls associated with the use of an integrated financial statement are:

1. To balance the short-term liquidity position of the business.
2. To have a control on the long term solvency position of the business
3. Finding out the financial risk as well as business risk associated with the company.

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