Horizontal Analysis- Horizontal analysis, also called trend analysis, refers to studying
the behavior of individual financial statement items over several accounting periods.
These periods may be several quarters within the same fiscal year or they may be several
different years. The analysis of a given item may focus on trends in the absolute dollar
amount of the item or trends in percentages. The absolute amounts of particular financial
statement items have many uses. Various national economic statistics, such as gross
domestic product and the amount spent to replace productive capacity are derived by
combining absolute amounts reported by businesses. Comparing only absolute amounts
has drawbacks, however, because materiality levels differ from company to company or
even from year to year for a given company. The materiality of information refers to its
relative importance. An item is considered material if knowledge of it would influence
the decision of a reasonably informed user. Generally accepted accounting principles
permit companies to account for immaterial items in the most convenient way, regardless
of technical accounting rules. The concept of materiality, which has both quantitative
and qualitative aspects, underlies all accounting principles. It is difficult to judge the
materiality of an absolute financial statement amount without considering the size of the
company reporting it. Meaningful comparisons between the two companies’ operating
performance are impossible using only absolute amounts. Users can surmount these
difficulties with percentage analysis. Percentage analysis involves computing the percent-
age relationship between two amounts. In horizontal percentage analysis, a financial
statement item is expressed as a percentage of the previous balance for the same item.
Percentage analysis sidesteps the materiality problems of comparing different size
companies by measuring changes in percent- ages rather than absolute amounts. Each
change is converted to a percentage of the base year. The main point of performing a
horizontal analysis on your financial statements is to see how things have changed from
one period to the next. These changes are called trends and you can tell a lot about your
company by the trends in its financial statements. In addition to that, it will help shine a
light on numbers that should have changed by a certain amount but didn’t.
Vertical Analysis- Vertical analysis uses percentages to compare individual components
of financial statements to a key statement figure. Horizontal analysis compares items over
many time periods; vertical analysis compares many items within the same time period.
Vertical analysis of an income statement (also called a common size income statement)
involves converting each income statement component to a percentage of sales. Although
vertical analysis suggests examining only one period, it is useful to compare common
size income statements for several years. Vertical analysis of the balance sheet involves
converting each balance sheet component to a percentage of total assets. Careful analysis
requires considering changes in both percentages and absolute amounts. A vertical
analysis shows you the relationships among components of one financial statement,
measured as percentages.
Ratio Analysis- Ratio analysis involves studying various relationships between different
items reported in a set of financial statements. For example, net earnings (net income)
reported on the income statement may be compared to total assets reported on the balance
sheet. Analysts calculate many different ratios for a wide variety of purposes. Liquidity
ratios indicate a company’s ability to pay short-term debts. They focus on current
assets and current liabilities. Working capital is current assets minus current liabilities.
Current assets include assets most likely to be converted into cash or consumed in the
current operating period. Current liabilities represent debts that must be satisfied in
the current period. Working capital therefore measures the excess funds the company
will have available for operations, excluding any new funds it generates during the
year. Think of working capital as the cushion against short-term debt-paying problems.
By expressing the relationship between current assets and current liabilities as a ratio,
however, we have a more useful measure of the company’s debt-paying ability relative
to other companies. The current ratio, also called the working capital ratio, is calculated
as current assets divided by current liabilities. The quick ratio, also known as the acid-
test ratio, is a conservative variation of the current ratio. The quick ratio measures a
company’s immediate debt-paying ability. To compute the quick ratio, we divide the
quick assets over the current liabilities. Expressing financial statement information in the
form of ratios enhances its usefulness. Ratios permit comparisons over time and among
companies, highlighting similarities, differences, and trends.
Some multiprovider networks involve “vertical” exclusive arrangements that restrict
the providers in one market from dealing with non-network providers that compete in
a different market, or that restrict network provider participants’ dealings with health
plans or other purchasers. For example, a multiprovider network owned by a hospital
and individually contracting with its participating physicians might limit the incentives
or ability of those physicians to participate in other networks. Similarly, a hospital might
use a multiprovider network to block or impede other hospitals from entering a market or
from offering competing services.
In evaluating whether such exclusive arrangements raise antitrust concerns, the Agencies
will examine the degree to which the arrangement may limit the ability of other networks
or health plans to compete in the market.
For example, if the multiprovider network has exclusive arrangements with only a
small percentage of the physicians in a relevant market, and there are enough suitable
alternative physicians in the market to allow other competing networks to form, the
exclusive arrangement is unlikely to raise antitrust concerns. On the other hand, a
network might contract exclusively with a large percentage of physicians in a relevant
market, for example general surgeons. In that case, if purchasers or payers could not form
a satisfactory competing network using the remaining general surgeons in the market,
and could not induce new general surgeons to enter the market, those purchasers and
payers would be forced to use this network, rather than put together a panel consisting
of those providers of each needed service who offer the most attractive combination of
price and quality. Thus, the exclusive arrangement would be likely to restrict competition
unreasonably, both among general surgeons (the horizontal effect) and among health care
providers in other service markets and payers (the vertical effects).
The choice of method depends on which technique appears to provide the most relevant
information in a given situation. Financial statements should primarily focus on isolating
useful information to help make a decision.