Page 94 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

The equality of the two totals in the trial balance does not necessarily mean that the accounting process has been
error-free. Serious errors may have been made, such as failure to record a transaction, or posting a debit or credit to
the wrong account. For instance, if a transaction involving payment of a USD 100 account payable is never

recorded, the trial balance totals still balance, but at an amount that is USD 100 too high. Both cash and accounts
payable would be overstated by USD 100.
You can prepare a trial balance at any time—at the end of a day, a week, a month, a quarter, or a year. Typically,
you would prepare a trial balance before preparing the financial statements.

An accounting perspective:

Uses of technology

The computers of persons in a given department or building are frequently connected in a Local
Area Network (LAN). These persons can then access simultaneously the programs and databases
stored in the LAN and can communicate with all other persons in the LAN through email. A more

advanced type of computer network is called Client/Server Computing. Under this structure, any
computer in the network can be used to update the information stored elsewhere in the network.
For example, accounting information stored in one computer could be updated by authorized
persons from a number of other computers in the system. The use of networks is designed to
improve efficiency and to reduce software and hardware costs.

Analyzing and using the financial results— Horizontal and vertical analyses
The calculation of dollar and/or percentage changes from one year to the next in an item on financial statements
is horizontal analysis. For instance, in the following data taken from the 2000 annual report of Hewlett-Packard
Company, the amount of inventory increased by USD 836 million from 1999 October 31, to 2000 October 31. This
amount represented a 17 per cent increase. To find the amount of the increase or decrease, subtract the 1999
amount from the 2000 amount. To find the percentage change, divide the increase or decrease by the 1999 amount.

Knowing the dollar amount and percentage of change in an amount is much more meaningful than merely
knowing the amount at one point in time. By analyzing the data, we can see that cash and cash equivalents declined
in 2000. Their decline at least partially explains the increases in some of the other current assets. We can also see
that the company invested in property, plant and equipment. Any terms in Hewlett-Packard's list of assets that you
do not understand are explained in later chapters. At this point, all we want you to understand is the nature of
horizontal and vertical analyses.
Vertical analysis shows the percentage that each item in a financial statement is of some significant total such

as total assets or sales. For instance, in the Hewlett-Packard data we can see that cash and cash equivalents were
15.3 per cent of total assets as of 1999 October 31, and had declined to 10.0 per cent of total assets by 2000 October
31. Total current assets (cash plus other amounts that will become cash or be used up within one year) increased
from 61.3 per cent of total assets to 68.3 per cent during 2000. Long-term investments and other non-current
assets accounted for 18.4 per cent of total assets as of 2000 October 31.
Increase or Percent of

Accounting Principles: A Business Perspective 95 A Global Text