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Willis and Adams’ staff prepared detailed ratio analysis, trends, and common size balance sheet and income statements based on EarthWear’s unaudited financial statements. The procedures you perform will analyze the results of the computations and assess the overall financial condition of EarthWear. Review the ratio analyses contained on Work Paper 5-1. You can read the Advanced Module: Selected Financial Ratios in Chapter 5 of the text for a description of these ratios.You will be asked to provide further analyses of these ratios as you complete Work Paper 5-2.

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Financial managers employ a tool called common size analysis—also known as vertical analysis—to examine financial statements.

What is Types of Common Size Analysis?

There are two ways to analyze common sizes: vertically and horizontally.

  • Vertical analysis is the comparison of individual line items to a base item within the same financial period.
  • For instance, using total assets as the base item, we can divide the inventory line in the balance sheet to determine the percentage of inventory.
  • Horizontal analysis, on the other hand, refers to the analysis of specific line items and comparison to a similar line item in the previous or subsequent financial period.
  • Even though trend analysis using ratios is more detailed, common size analysis gives financial managers a quick way to examine financial statements.

To Learn more About common size analysis refer to:

https://brainly.com/question/24085898

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