328 Accounting: Business Reporting for Decision Making
VALUE TO BUSINESS• To calculate a trend, it is necessary to have at least three years of data.
• Trend analysis of a particular item involves expressing the item in subsequent years relative to a
selected base year. The base year is typically given a value of 100.
• Trend analysis is useful in identifying the significance of an item relative to a base amount.
• Identifying trends is useful in formulating predictions as to the future prospects of the entity.Vertical analysis
Vertical analysis is another method of converting the absolute dollar values in financial statements
into more meaningful figures. Whereas horizontal analysis compares reported figures over time, ver-
tical analysis compares the items in a financial statement to other items in the same financial state-
ment. When expressed in this way, the financial statements are often referred to as ‘common size’
statements. This involves using a reported item as an anchor point against which other items are
compared. When performing vertical analysis on the statement of profit or loss, the anchor point is
the revenue figure, and every item in the statement of profit or loss is expressed as a percentage of
the income item. When performing vertical analysis on the balance sheet, the anchor point is the
total asset figure, and every item in the balance sheet is expressed as a percentage of the total asset
figure.
The concept of vertical analysis is illustrated in figures 8.6 and 8.7 for JB Hi-Fi Ltd. The total asset
figure in the balance sheet (figure 8.6) is $895 013 000. So, every item in the statement is divided by
this total asset figure and multiplied by 100. For example, the plant and equipment constitutes 20 per
cent of the total asset figure ([$176 208 000/$895 013 000] × 100) with the current assets accounting
for 69 per cent of the total asset figure. As a percentage of total assets, total liabilities are 62 per cent
([$551 534 000/$895 013 000] × 100) with equity being 38 per cent. This informs us that the entity is
more reliant on debt to finance its assets than on equity.
ConsolidatedNotes2015
$’000% relative to
total assets
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Other current assets9
10
1449 131
81 480
478 871
7 4165
9
54
1
Total current assets 616 898 69
Non-current assets
Plant and equipment
Deferred tax assets
Intangible assets
Other financial assets12
13
14176 208
17 363
84 541
320
2
9
0
Total non-current assets 278 115 31
Total assets 895 013 100
Current liabilities
Trade and other payables
Provisions
Other current liabilities
Current tax liabilities
Other financial liabilities15
16
17325 604
40 585
4 566
9 474
10736
5
1
1
0
Total current liabilities 380 336 42