Horizontal Analysis

Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that
shows changes in the amounts of corresponding financial statement items over a period of time. It is a
useful tool to evaluate the trend situations.
The statements for two or more periods are used in horizontal analysis. The earliest period is usually
used as the base period and the items on the statements for all later periods are compared with items on
the statements of the base period. The changes are generally shown both in dollars and percentage.
Dollar and percentage changes are computed by using the following formulas:
Horizontal analysis may be conducted for balance sheet, income statement, schedules of current and
fixed assets and statement of retained earnings.
Example:
An example of the horizontal analysis of balance sheet, schedule of current assets , income statement
and statement of retained earnings is given below:
Comparative balance sheet with horizontal analysis:
Comparative schedule of current assets:
Comparative income statement with horizontal analysis:
Comparative retained earnings statement with horizontal analysis:
In above analysis, 2007 is the base year and 2008 is the comparison year. All items on the balance sheet
and income statement for the year 2008 have been compared with the items of balance sheet and income
statement for the year 2007.
The actual changes in items are compared with the expected changes. For example, if management
expects a 30% increase in sales revenue but actual increase is only 10%, it needs to be investigated.
Vertical analysis (also known as common-size analysis) is a popular method of financial statement
analysis that shows each item on a statement as a percentage of a base figure within the statement.
To conduct a vertical analysis of balance sheet, the total of assets and the total of liabilities and
stockholders equity are generally used as base figures. All individual assets (or groups of assets if
condensed form balance sheet is used) are shown as a percentage of total assets. The current liabilities,
long term debts and equities are shown as a percentage of the total liabilities and stockholders equity.
To conduct a vertical analysis of income statement, sales figure is generally used as the base and all
other components of income statement like cost of sales, gross profit, operating expenses, income tax,
and net income etc. are shown as a percentage of sales.
In a vertical analysis the percentage is computed by using the following formula:
A basic vertical analysis needs an individual statement for a reporting period but comparative statements
may be prepared to increase the usefulness of the analysis.
Example:
An example of the vertical analysis of balance sheet and income statement is given below:
Comparative balance sheet with vertical analysis:
Current assets:
2008: (550,000 / 1,139,500) 100 = 48.3%
2007: (530,000 / 1,230,500) 100 = 43.3%
Comparative income statement with vertical analysis:
Cost of goods sold:

2008: (1,043,000/1,498,000) 100 = 69.6%
2007: (820,000/1200,000) 100 = 68.3%
Vertical analysis states financial statements in a comparable common-size format (percentage form). One
of the advantages of common-size analysis is that it can be used for inter-company comparison of
enterprises with different sizes because all items are expressed as a percentage of some common
number. For example, suppose company A and company B belong to same industry. A is a small
company and B is a large company. Company As sales and gross profit are $100,000 and $30,000
respectively whereas company Bs sales and gross profit are $1,000,000 and $300,000 respectively. If
vertical analysis is conducted and sales figure is used as base, it would show a gross profit percentage of
30% for both the companies as shown below:
Sales
Cost of goods sold
Company A and B
Comparative Income Statement
For the year ended.
Company A
Company B
100,000
100%
1,000,000
100%
70,000
70%
700,000
70%
30,000
30%
300,000
30%

Horizontal Analysis

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What are the two main types of financial statement analysis techniques discussed in the document?

What is horizontal analysis and how is it conducted?

Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that

Comparative balance sheet with horizontal analysis:

Comparative schedule of current assets:

Comparative income statement with horizontal analysis:

Comparative retained earnings statement with horizontal analysis:

Comparative balance sheet with vertical analysis:

Comparative income statement with vertical analysis:

Cost of goods sold:

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