Analysis of the Operation and Financial Condition of the Enterprise

Analysis of the Operation and Financial Condition of the Enterprise review of the balance sheet items, the respective disclosures and theirconformity; clarification of the most ‘critical’ items (losses, overdue liabilities, high level ofdebtors from total assets, high percentage of liabilities compared to the level ofdebtors); checking compliance between the balance sheet and income statement (accordingto the amounts of retained earnings, building up of reserves); review of the income statement items and their comparison with the disclosures. Vertical and horizontal financial analysisThe main functions of the enterprise assets are as follows: provision and extension ofthe enterprise business operations and securing the fulfilment of the enterprise liabilities. Theamount and structure of enterprise assets are influenced by several factors: Enterprise size, area of operations and its goals; Technologies applied; Efficiency considerations; Marketing considerations; Type of sales organisation.The position of the enterprise capital is reflected in the accounting statement of theenterprise - its balance sheet. The capital structure and composition of an enterprise ischanging, they are affected by the business transactions performed.By analysing the position, the structure and the changes of the enterprise capital, thehorizontal and the vertical balance sheet analysis is used. Vertical analysisThe vertical balance sheet analysis shows the resources of the enterprise and thechanges in the structure of its sources in percentage by taking the total balance sheet amountas the base which is equal to 100 %.The vertical or structural analysis allows analysing the changes in the structure of theobject of research over a certain period as well as in comparison with the budget. The purposeof vertical analysis is as follows: Gives a notion of the accounting statements – in the form of relative values thatcharacterise the balance sheet and the structure of the profit and loss account; Allows to assess the fairness and correctness of the enterprise annual report; Points out the ‘problematic’ areas in the operations of an enterprise and enablesthe preparation of a further action plan.In other words, vertical analysis is the percentage of some financial statement itemsfrom the total assets or liabilities, respectively, and other total indicators, as well as thestructural changes of some balance sheet and income statement items. Analysis isexpressed in the form of ratios. According to this method an object is assumed to be100 %, and from this the relation between some sections and the total amount of theobject is determined by thus making up the structure of the object. In performance ofthe balance sheet vertical analysis all balance sheet items are expressed in percentagesagainst the total amount of the balance sheet, while in performing the income42