K-L Fashions uses trade credit for purchases, but its sales consist almost entirely of credit card sales. Consequently, we see a very low accounts receivable balance compared with accounts payable. Some of the items that would normally be seen on financial statements have been consolidated to simplify the presentation. Financial statement analysis can be applied from two different directions. Vertical analysis is the application of financial statement analysis to one set of financial statements.
Horizontal analysis looks at financial statements and ratios over time.
Although owners of small businesses often are also the managers, the initial concern is with owners as investors in the business. Owners use financial statement data as a way to measure whether their money is working as hard in the business as it would in an alternative investment. The data can also tell how well you or your managers have managed the firm's assets. Net income is the after-tax return. It is the amount you have contributed directly to the business and amounts that you have reinvested via undistributed profits.