Also known as trend analysis, this method is used to analyze financial trends that occur across multiple accounting periods over time—usually by the quarter or year. It’s often used when analyzing the income statement, balance sheet, and cash flow statement. A notable problem with the horizontal analysis is that the compilation of financial information may vary over time.

• This enables you to easily spot growth trends as well as any red flags that may need to be addressed.
• If interest expense is $50,000 it will be presented as 5% ($50,000 divided by $1,000,000).
• Now, not only can we express changes in percentages, but we can also express these changes in dollars, meaning we can see the percentage change of each line item as well as the dollar change of each of those financial statement items.
• All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts.
• Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
• Looking at and comparing the financial performance of your business from period to period can help you spot positive trends, such as an increase in sales, as well as red flags that need to be addressed.

Therefore, not only can we look at the relationship within one year, but we can also look at that changing relationship over time. To maximize your credit score increase you need to choose the best rent reporter for you. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn’t, this would need to be researched. Adding a third year to the analysis will be even more helpful, as you’ll be able to see if there is a definite trend.

Horizontal Analysis: Should You Be Using It in Your Business?

Now let’s discuss the differences between horizontal and vertical analysis. Horizontal analysis is the comparison of historical financial information over a series of reporting periods. It is used to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reasons for the difference.

• Horizontal and vertical analysis are two main types of analysis methods used for this purpose.
• It should be kept in mind that the data of two or more financial years can be compared only when the accounting principles are the same for the respective years.
• A business will look at one period (usually a year) and compare it to another period.
• Basically, they will be keen to know if the business has enough income to meet the annual interest and principal payments.
• To compete effectively and strategically, it’s important for businesses of all sizes to make use of the tools at their disposal.

This type of comparison is most often used to spot high-level, easily identifiable differences. For example, an analyst may get excellent results when the current period’s income is compared with that of the previous quarter. However, the same results may be below par when the base year is changed to the same quarter for the previous year. To illustrate, consider an investor who wishes to determine Company ABC’s performance over the past year before investing. Assume that ABC reported a net income of $15 million in the base year, and total earnings of $65 million were retained. The company reported a net income of $25 million and retained total earnings of $67 million in the current year.

Who is to blame for the delayed financials?

It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared. We learned about vertical analysis, which evaluates financial statement items as a percent of a base amount. We also learned about performing horizontal analysis, which evaluates percentage changes in financial statement items from one period to another.

• Also known as trend analysis, this method is used to analyze financial trends that occur across multiple accounting periods over time—usually by the quarter or year.
• With the financial information in hand, it's time to decide how to analyze the information.
• Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time.
• Horizontal and vertical analysis by Mitchell Franklin; Patty Graybeal; Dixon Cooper; and Amanda White is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
• The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time.
• If the company had an expected cash balance of 40% of total assets, they would be exceeding expectations.

Another method of analysis MT might consider before making a decision is vertical analysis. Although a change in accounting policy or the occurrence of a one-time event can impact horizontal analysis, these situations should also be disclosed in the footnotes to the financial statements, in keeping with the principle of consistency. Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts.

Vertical vs. Horizontal Analysis

Horizontal analysis compares financial information for one company with the same types of financial income for the same company in one or more previous years. They will want to control their expenses in the income statement and will use expenses as the percentage of sales. The comparison between the two ratios indicates that despite the rise in both revenue and cost of sales, the gross profit has changed only marginally. Horizontal Analysis is that type of financial statement analysis in which an item of financial statement of a particular year is analysed and interpreted after making its comparison with that of another year’s corresponding item. First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million.

• Horizontal analysis uses a line-by-line comparison to compare the totals.
• From the balance sheet's horizontal analysis you may see that inventory and accounts payable have been growing as a percentage of total assets.
• This tutorial will cover vertical analysis and horizontal analysis, used in the evaluation of financial statements.
• Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad.

For the income statement, we will be expressing each item as a percent of net revenue. 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. Further analysis via horizontal analysis https://www.bookstime.com/articles/vertical-and-horizontal-analysis will likely be required to unlock those insights, and make use of them in a strategic way. You can use horizontal analysis to examine (for example) your company’s profit margins over time, and create strategic spend projections to match projected revenue growth or hedge against seasonality or increased cost of materials.

Example of Vertical Analysis of a Balance Sheet

Again, we're looking at changes in the individual financial statement line items from one period to the next. Now that we've seen how to perform vertical analysis, let's turn our attention tohorizontal analysis, which is used to evaluate percentage changes in financial statements from one period to another. For https://www.bookstime.com/ instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business. The restated financial statement is known as common size financial statement.

For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated to be a percentage of total assets. Another similarity to horizontal analysis is vertical analysis’ utility during external as well as internal analysis. The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time. Vertical analysis is also known as common size financial statement analysis. Financial Statement Analysis is a process wherein accounts in the financial statements are analyzed and compared in relation to other accounts. Vertical analysis and horizontal analysis are common methods of financial statement analysis.