Week 7 CheckPoint Ratio_ Vertical_ and Horizontal Analysis

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Week 7 CheckPoint Ratio_ Vertical_ and Horizontal Analysis Powered By Docstoc
					Ratio, Vertical, and Horizontal Analyses

              XACC 280

      Submitted by: Jenna Eaton

         Date: March 25, 2011
   Determining a company’s financial health involves analyzing their financial

statements. The examination and review of financial records includes three components

known as liquidity, profitability, and solvency. A company’s liquidity is a term used to

describe the company’s ability to pay short-term debts when they are due. Profitability is

a term used to express a company’s performance over a period of time. A company’s

solvency refers to the company’s ability to meet long-term financial obligations along

with being able to reinvest for future growth. In order to measure these characteristics

three tools are used. These tools include ratio analysis, vertical analysis, and horizontal


   Profitability, liquidity, and solvency ratios are used to help measure the financial

stability of a company. These ratios go beyond the typical financial statement data

providing a better view into the financial health of a company. With the vertical analysis,

the balance sheet items are divided by the total assets. The figure computed provides a

decimal point figure that is then converted into a percent. This percentage can then be

used to measure a company’s growth, expansion, or contraction over a period of time.

With the horizontal analyses intracompany comparisons are performed using the balance

sheet, retained earnings, and income statements. This method uses the financial statement

data for at least the last two years and then takes a secondary look at the last five to ten

years of financial data. This analysis helps determine whether the company has increased

or decreased.

   We can use these tools to measure PepsiCo Incorporated financial performance. First

we start with calculating the current ratio for 2005. To determine this ratio we must start

with the formula where “current ratio=current assets / current liabilities”. We then take
the data from the consolidated balance sheet in our text and input the data to find the

solution as follows:

                  10,554(current assets )
CurrentRatio                                = 1.11
                 9,406 (current liabilities)

The current ratio for Pepsi Co Inc. for the year 2005 equates to 1.11:1. Now we need to

calculate the same data for the year 2004 using the same formula.

                   8639 (current assets )
Current Ratio                                = 1.28
                  6752 (current liabilities )

The current ratio for PepsiCo Inc. for the year 2004 equates to 1.28:1. Now that we have

this data we can proceed with performing a vertical analyses. For the vertical analyses we

take the items from the balance sheet and then divide by the total assets. This will tell us

what the cash value is compared to their total assets. The formula used will look like the

following: Percentage= Cash + Cash equivalents / Total Assets. For 2005 we take the

data provided in our text and input the data as follows:

       1716 (cash  cash equivalents )
 %=                                    = 0.054
            31727 (total assets )
Converting the .054 into a percentage would equate to 5.4% in cash with cash
equivalents. Next we look at the same values for 2004.

     1280 cash  cash equivalents ) 
%=                                     = 0.046
           27987 (total assets )
Converting the .046 into a percentage leaves us with 4.6% in cash with cash equivalents.
The data provided in this formula can be used to look at the overall picture compared to
the company’s current assets. Using this data we can start to put together the pieces in
order to see the whole picture. So next we should take a look at how these numbers fit
together when combined to create a complete picture. Using the same type of equation
where the percent equals the current assets divided by the totals assets as follows:

                                  10454 current assets ) 
For 2005 PepsiCo formula: % =                               = 0.3295 or 32.95%
                                   31727 total assets ) 

                                  8639 (current assets )
For 2004 PepsiCo formula: % =                            = 0.3087 or 30.87%
                                   27987 (total assets )

For the horizontal analyses for PepsiCo we need to calculate the increase or decrease for
2004 to 2005. So we take the data provided to calculate the change in assets by percent.
The formula to determine this calculation uses the 2005 total current assets which divided
by the 2004 current assets as follows:
          10454 2005 assets 
1.2101=                        = A total difference of 21.01 % which is an increase from
           8639 (2004assets )
2004. Next we look at the company’s liabilities using the following formula:

          9406 total current liabilitie (2005)
1.393 =                                        = A total difference of 39% which equates to
          6752 total current liabilties(2004)
an increase in liabilities from 2004 to 2005. This could be result of the company
acquiring additional assets during this period.
For the Coca-Cola Company we can use the same equations to come up with ratio
comparative data starting with vertical, then horizontal, and then reviewing the overall

Current Ratio for 2005
 10250 current assets ) 
                             = 1.042 > 1.042:1
9836 current liabilities) 

Current Ratio for 2004
 12,281current assets ) 
                               = 1.103 > 1.103:1
11133 current liabilities ) 

2005 percentage in cash and equivalents

4701 cash  cashequivalents ) 
                                 = 0.1598 > 15.98% in total assets
     29427 total assets ) 

2004 percentage in cash and equivalents

6707 casb  equivalents ) 
                             = .2133 > 21.33% in total assets
  31441total assets ) 

2005 percent of current assets

10250 current assets 
                        = .348 > 34.8% in current assets
 29427 total assets 

2004 percent of current assets

12281 current assets 
                         = .391 > 39.1 % in current assets
 31441 total assets ) 
Then taking the two compilations for each year with 10250 divided by 12281 results in a
difference of .835 or 83.5%. This would be a significant decrease from 2004 compared to
2005. To calculate the difference we subtract the 83.5 from 100 and we end up with 16.5.
This would a total of 16.5 % decrease in total assets. Next we can look at the decrease in
liabilities using the same type of formula. We know that for 2005 we had 9836 in total
liabilities and in 2004 we had 11133. If we divide the numbers we have .8835 which
would be a difference of 88.35%. We can then take this number and subtract from 100 to
obtain our decrease in liabilities which equals 11.65% from 2004 to 2005.

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