Horizontal Analysis- Horizontal analysis, also called trend analysis, refers to studying the behavior of individual financial statement items over several accounting periods.

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.

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