Vertical and Horizontal Analysis
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Vertical analysis indicates the relationship and percentage change between different years. In income statement of S Computer Services, total revenue is the base amount and all other items are a percentage of the total.
On the excel sheet, we see that the current assets of three years 2008, 2007, and 2006 are significantly different: 1862.5, 609.2, 1017.0. these rapid movement may be explainable as being correlated with a rise in sales, a decrease in sales, and a rise in sales again, and it might also be a starting point in a fraud examination. Source documents should be scrutinized to determine the source of this rapid change. One possibility of fraud in this case is fictitious sales, since cash and cash equivalents total rose significantly with no corresponding increase in selling expense.
Another way to compare these data is by using horizontal analysis which we compared percentage differences from one accounting period to the next. The percentage change is calculated by dividing the amount of change as well as the percentage in horizontal comparisons. In the case of S Computer Services, the data highlighted in red indicates red flags. On the balance sheet, from 2007 to 2008, there was a growth of 206% in current asset, and from 2006-2007, there was a negative growth of (67% ) in current asset. These financial statement red flags provide a general overview of the warning signs shareholders should take note of S Computer Services. These info suggest further in depth research must be conducted to assess the accuracy of these corporate documents. The red flags shown on the excel sheet may indicate several issues:
1. A rapid rise in current assets on the balance sheet suggest obsolete goods for which the firms records fictitious future sales.
2. The managers of the company may be under pressure to meet analysts or shareholders expectations.
3. A weak system of internal control, because strong governance and control can minimize errors in financial statement
In conclusion, we suggest our team to first get started looking into three accounts: cash and cash equivalents, unbilled revenue, and prepaid expenses and other receivables, because they have the highest change percentage in current asset categories.