Company Financial Statement Analysis & Interpretation of Financial Statements

how to do a horizontal analysis

It’s important to take enough periods and enough points of comparison into account to make the analysis meaningful. Looking at horizontal analysis, you can easily see why it’s also known as trend analysis. It helps you compare the financial position and performance of your business from one period to the next. Using your findings, you know what’s working well, and can easily see areas that need improvement and require attention. The Comparative Income Statement is drawn on the same principle as the Horizontal Balance Sheet. There are columns, as in a comparative balance sheet, to show the amount of income and expenditure for two years in or more along with the increase or decrease in amounts as also percentage increases or decreases.

how to do a horizontal analysis

We repeat this process for the third quarter, calculating the difference between this and the second quarter until we have compared all four quarters. Now that you know how to calculate percentage change, you can read about all the steps involved in horizontal analysis in the next section.

Cost Accounting

Solvency Ratios – Just as the name implies, these ratios reveal how solvent a company is, most specifically, how capable of paying its long-term debts. The comparability constraint dictates that your statements and documents need to be evaluated against companies similar to yours within the same industry. Horizontal analysis improves and enhances the constraints during financial reporting. By comparing historical financial information you can easily determine your growth and position compared to your competitors.

If analysis reveals any unexpected differences in income statement accounts, management and accounting staff at the company should isolate the reasons and take action to fix the problem. \nUnderstanding horizontal and vertical analysis is essential for managerial accounting, because these types horizontal analysis of analyses are useful to internal users of the financial statements , as well as to external users. Horizontal analysis is a process used in financial statements such as comparing line items across several years for the purpose of tracking the firms progress and historical performance.

Comparative schedule of current assets:

Comparability means that a company’s financial statements can be compared to those of another company in the same industry. Ideally, the horizontal and vertical analysis are combined to paint a comprehensive picture of a company’s financial performance over time. Since horizontal analysis is expressed in percentage change over time, it is often confused with vertical analysis. The two are entirely different with the primary difference between them being that horizontal examines the relationship between numbers across various periods and vertical analysis is only concerned with a single period. In this second example, I will do a horizontal analysis of Company B’s current assets based on the annual balance sheets. This type of analysis is mostly used by investors, financial analysts, and business managers. However, anyone who is interested in the future of a company will be interested in conducting a trend analysis to determine its likely trajectory.

The amounts from past financial statements will be restated to be a percentage of the amounts from a base year. The value of horizontal analysis lies in its usefulness in comparing the results of one company over time to determine whether its financial situation is improving. It is also useful for comparing the results of multiple companies in the same industry to determine which company has the best performance over time. It is most useful when comparing companies in the same industry, because metrics such as gross margin can vary widely from one industry to another.