Finance Analysis Paper (Research Paper Sample)

Running head: [FINANCIAL ANALYSIS]
[FINANCIAL ANALYSIS]
Student Name
Institution

Abstract
Financial analysis is an important aspect of financial management that various researchers have contributed to improving and explaining how it operates. Under financial analysis, various aspects are considered including the definition of financial analysis, how it is done, the different methods of carrying out financial analysis, the effectiveness of each method and their shortcomings, the limitations of financial analysis and of the researcher’s findings in this case and how to improve on the limitations.
The methods for financial analysis according to the various researchers are horizontal and vertical analysis and the ratio analysis. All of these methods use the financial information of the current and past reporting periods to make the interpretations.
Finally the researchers do not include certain important aspects of the business to present the accurate picture of the entity by the financial analysis. Consequently, the researchers should be improved on to include elements such as operational information in financial analysis since the image of a company is not just reflected in the financial information alone.
Financial analysis literature review
Financial analysis refers to the examination and interpretation of the figures presented by the financial statements in a better understandable manner to the management for decision making. Financial statement analysis is an extraordinarily potent tool for a diversity of users of financial information. Different forms of financial analysis have different objectives in learning about the financial situations of the entity (Lee, Lee, J.,& Lee, C 2009). Among these users are creditors, suppliers, investors and customers. There are two methods of analyzing financial statements; use of horizontal and vertical analysis and the ratio analysis, (Brigham & Ehrhardt 2013)
Making of the financial statements may be a very demanding process in terms of time, resources, accuracy, personnel and efficiency. Despite all these, the statements on their own are meaningless to the various users of these statements not unless they are analyzed and presented in a meaningful manner to represent the image of the entity concerned. As such it is important to research adequately on financial analysis.
Theme1: horizontal and vertical analysis of financial statements
Horizontal financial analysis involves identification of financial information over a series of reporting periods then making a comparison of the financial information obtained for the various periods. Vertical analysis, on the other hand, entails listing of listing of each item on the statement of financial position as a percentage of another item (Subramanyam & Wild 2013) In the vertical analysis, gross sales are the base for analyzing each line item in the income statement. Therefore, the major difference between horizontal and vertical analysis is that in horizontal analysis, information of different reporting periods is compared whereas in the vertical analysis only information from a single period is used.
Theme 2: Financial ratio analysis
Various ratios are used to portray different information about the business entity including profitability, solvency, capital adequacy and efficiency of the company’s operations. According to (Bragg 2012) The ratios used for financial analysis are: liquidity ratios- measure the ability of a company to continue in business after the settlement of its due debts. They are cash coverage ratio, current ratio, quick ratio and liquidity index; activity ratios- reflect the quality of management. Ratios have different purposes as far as financial interpretation is concerned. For example, current ratio shows the company’s ability to equipoise its short term or current due debts using its current assets without incurring losses. Long term solvency ratio depicts solvency of the company. It shows ability of company offset all its liabilities without incurring losses.
Theme 3: comparison between horizontal and vertical analysis and ratio analysis
A company may either choose ratio or horizontal and vertical analysis for its financial statements depending on aspects such as operations, size and management’s preference. It would be more effective for a company to use both the two methods for its analysis. However, at times, it may prefer to choose one. In making this choice it's evident that while horizontal and vertical analysis presents an image of a company’s operations and trend and helps in forecasting, it does not give certain information such as management quality and capital adequacy whereas ratio analysis provides such information. Considering ratio analysis, it may be hectic and so involving to calculate the various ratios to represent the required information as compared to horizontal and vertical analysis in which data is limited.( Brigham & Ehrhardt 2013)
Theme 4: limitations of financial statement analysis
Several issues can make the interpretation of financial statements inaccurate and ineffective. These include factors such as operational information, comparability between periods, comparability between companies, biasn...