2007 board question

What Does Window Dressing Mean? A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.

Differences between Horizontal and Vertical Analysis of financial statements

Though both horizontal and vertical analysis are done by the companies for the purpose of analysis of financial statements, and both are useful in analysis of trends for the financial statements of the company, however they both are different in following ways. Under horizontal analysis an analyst compares the financial statement of the company for two more accounting periods, it can be used on any item in the financial statement company so if company wants to see whether its sales for current year is good or not it will compare the sales for the year 2010 with sales for year 2009 or for previous years. It is a time series analysis in the sense that it shows comparison of financial data for several years against a chosen base year. It is also called dynamic analysis of thefinancial statements. Vertical analysis is done to review and analysis the financial statementsfor a year only and therefore it is also called static analysis. Under this method each entry for assets, liabilities and equities in a balance sheet is represented as a percentage of the total account. So if in asset side ofbalance sheet cash is $200, building is $400 and machinery is $600 and total of balance sheet is $1000, then cash will be 20 percent of total ofbalance sheet building will be 40 percent and machinery will be 60 percent. One of the advantages of using this method is that one gets an idea of composition of the balance sheet and then it can compared with previous years to see the relative annual changes in companys balance sheet.

The two simplest ways to analyze your financial statements are vertically and horizontally. A vertical analysis shows you the relationships among components of one financial statement, measured as percentages. On your balance sheet, each asset is shown as a percentage of total assets; each liability or equity item is shown as a percentage of total liabilities and equity. On your statement of profit and loss, each line item is shown as a percentage of net sales. A horizontal analysis provides you with a way to compare your numbers from one period to the next, using financial statements from at least two distinct periods. Each line item has an entry in a current period column and a prior period column. Those two entries are compared to show both the dollar difference and percentage change between the two periods.
Profit & Profitability Profit is the amount made........ profitability is the potential there to be made.

Profit is a figure in absolute terms. It is the number that sits at the bottom of the statement of financial performance. It is calculated by taking the income earned and deducting the expenses incurred in deriving that income. Profitability on the other hand is a measure of the profit compared to a number of relevant factors. Profitability tells us more about the efficiency and performance of a business.
In most simple way, Profit is simply the earnings minus expenses of any company. So, this is just a figure of performance whereas profitability shows companys ability to make profits. And this ability i.e. profitability is measured by checking the same profit figure on the scales of net assets, total worth etc., which we do while calculating profitability ratios like return on assets, return on equity etc.

2008 board questions

Objectives of income statement analysis The primary purpose of the income statement is to report a company's earnings to investors over a specific period of time. Using Income Statement Analysis to Calculate Expenses, Earnings, Financial Ratios and Profit Margins To a serious investor, income statement analysis reveals much more than a company's earnings. It provides important insights into how effectively management is controlling expenses, the amount of interest income and expense, and the taxes paid. Investors can use income statement analysis to calculate financial ratios that will reveal the rate of return the business is earning on the shareholders' retained earnings and assets (in other words, how well they are investing the money under their control). They can also compare a company's profits to its competitors by examining various profit margins such as the gross profit margin, operating profit margin, and net profit margin.