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Nottingham University Business School N111223 FINANCIAL ACCOUNTING Lectures 9 and 10 Workshop 6 Interpretation of Financial Statements Weetman - Chapter 13 (Ratio Analysis) Chapter 14 (Analysis of Corporate Performance) There are three main aids to the analysis of financial statements: HORIZONTAL and TREND ANALYSIS VERTICAL ANALYSIS RATIO ANALYSIS HORIZONTAL and TREND ANALYSIS Horizontal analysis involves a line by line comparison of one set of data with another - for example, the current year's accounts with last year's, or with this year's budget. It is based on the fact that isolated figures are seldom of much use by themselves. Trend analysis is horizontal analysis extended over several years, often indexing the data to express the first set of figures as 100 and later periods related to that base. For example, profit is £10,000,000. Is this good or bad? (a) Profit for the previous 4 years was: £6,000,000 £7,000,000 £8,000,000 £9,000,000 (b) Profit for the previous 4 years was: £14,000,000 £13,000,000 £12,000,000 £11,000,000 (c) Profit for the previous 4 years was: £10,000,000 £10,000,000 £10,000,000 £10,000,000 The comparison shows fairly clearly how the...

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