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# Accounting Vertical Analysis

1. What is vertical analysis? When would you use vertical analysis instead of horizontal? Do companies use one or the other? Please explain. What about industry averages? How do people use industry averages for comparative analysis?

2. What are the formulas of the following liquidity ratios and their formulas and what does each ratio tell us?

- Working capital
- Current ratio
- Current cash debt coverage ratio
- Inventor turnover ratio
- Days in inventory
- Receivables turnover ratio
- Receivables turnover ratio
- Average collection period

3. A great example of an extraordinary item in accounting is the BP oil explosion and subsequent oil spill. How would this be treated on BP's books? What about the organizations that were affected by the spill, do you think they would also have an extraordinary item to report? For example, what about resorts in the area? What about fishing companies in the area?

4. Changes in accounting principles are mostly reported retroactively by companies, which includes both the current and previous periods. How far back do you have to go? Do you have any reporting requirements for future periods?

#### Solution Preview

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A vertical analysis of a balance sheet is when each category within the balance sheet is expressed in percentages based on total assets, total liabilities, and total equity. A vertical analysis of an income statement is usually expressed in percentages based on a percentage of sales. Horizontal analysis occurs when an analyst compares line items of a financial statement or a ratio to other line items or ratios over a period of time. Analysts may use one over the other depending on what they are trying to analyze. If the analyst is trying to analyze base on a specific month or period of time, they may use a vertical analysis. If they were trying to analyze something based over a period of time, they would use the horizontal. Analyzing industry averages depends on whether a not an analyst is trying to figure out how ...

#### Solution Summary

The expert examines accounting vertical analysis. The industry averages are determined for a comparative analysis.

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