great so now we know what subtotals and
totals in a financial statement are and we also know how to calculate
year-on-year growth this is already a good start that will ease our work
the next thing we’ll mention our financial statement formats when we talk
about different formats we mean different ways to arrange the items
inside the balance sheet and the income statement please remember that there is
no rule regulating how to organize the format’s of financial statements what is
important is to remain consistent with names and definitions and to use a
format that describes the business under consideration well for example for some
businesses it may be more appropriate to use an income statement format that
shows a gross profit subtotal that is given by revenues minus cost of goods
sold other businesses on the other hand may not use this format and will
directly show operating profit also known as EBIT and so on the decision is
up to the company’s management and should be taken in a way that best
represents the underlying business a popular balance sheet format is the one
grouping assets and liabilities according to their maturity current and
non-current however there are also some other formats analysts often organize
the balance sheets that they are using by separating operating from non
operating assets and liabilities now let’s suppose that we’ve chosen the
correct format and we are ready to start carrying out our analysis there are two
main types of analysis that we can perform horizontal and vertical
horizontal analysis represents the comparison of historical financial
information over a series of reporting periods the main idea is to see if any
numbers are unusually high or low with respect to the information about
previous periods for example we can wonder how much the total revenues
increased in percentage compared to the ones observed a year ago horizontal
analysis is also known as trend analysis because it shows the development of a
given parameter over time on the other hand vertical analysis
involves the numbers from the same accounting period each item is divided
into a specified base which is the 100% figure in the balance sheet this base is
usually the value of total assets while in the income statement this is the
total revenues figure as you can see in this example the gross profit operating
income and net income are divided by total revenues which allows us to
understand what percentage of revenues they represent then once we’ve done that
we can compare these figures with the company’s peers or with its historical
data and make observations that are based on the development of its
financials so now that we know about different income statement and balance
sheet formats and about horizontal and vertical analysis we are ready to delve
into another interesting topic ratio analysis