Which of the following is the most direct method of focusing on changes in the company's balance sheet and income statement?
a. Calculating key ratios and comparing them from period to period
b. Comparing account balances in the statements from one period to the next
c. Performing a vertical analysis
d. Performing a horizontal analysis
d
FEEDBACK: a. Incorrect. By examining ratios, it is possible to see whether resulting changes in liquidity, efficiency, solvency, and profitability are as expected, but it is not the most direct method of focusing on changes.
b. Incorrect. This method compares numbers in the statement from one period to the next, but it is probably the least effective way to analyze changes.
c. Incorrect. Vertical analysis converts balance sheets and income statements to change statements for industry and other comparison by converting financial statement numbers to percentages.
d. Correct. With horizontal analysis, the changes in amounts from period to period are converted to percentages.
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