Horizontal analysis takes into consideration the financial statements of different years and analyzes how individual items in the financial statements has changed over time. It is also known as trend analysis or time series analysis as it focuses on changes of variables in different accounting years. It helps us to detect trends, patterns, cyclicality and compare those factors with the organizations of similar nature to understand the current position of the firm (John, 2017). The advantage of horizontal analysis is it expresses change in both amounts and percentage and facilitates the intra-company comparison. It helps to see how each item has changed with respect to change in other items. The steps in performing horizontal analysis are:
Calculate the absolute change by deducting amount of base (previous) year from the amount of comparing year.
Calculate the percentage change by dividing the absolute change by amount of base year and multiplying the result by 100.
Interpret the result.
Vertical Analysis
In vertical analysis, the relationship between different variables during an accounting period is measured. In this method, each item is expressed as a percentage of total (sales in case of income statement and total assets in case of balance sheet). It is used to determine the relationship between different variables of financial statement (Singh, 2016). The steps in vertical analysis are:
Assume sales or total assets as 100%.
Calculate the percentage of each item as a percentage of sales or total assets but dividing the amount of the selected item with sales/total assets and multiplying it by 100.
Interpret the result.
Example
Let us consider the following balance sheet for horizontal and vertical analysis:
Balance Sheet of XYZ Company for 2016 and 2017
2017
2016
Liabilities and Equity
Accounts Payable
307
303
Notes Payable
26
119
Other Current Liabilities
1,662
1,353
Total Current Liabilities
1,995
1,775
Long-term Debt
843
1,091
Common Stock
2,556
2,167
Total Liabilities and Equity
5,394
5,033
Assets
Cash
696
58
Account Receivable
956
992
Inventory
301
361
Other Current Assets
303
264
Total Current Assets
2,256
1,675
Net Fixed Assets
3,138
3,358
Total Assets
5,394
5,033
Horizontal Analysis
2017 (A)
2016 (B)
Absolute Change
Percentage Change
Liabilities and Equity
C=A-B
C/B*100
Accounts Payable
307
303
4
1.32
Notes Payable
26
119
-93
-78.15
Other Current Liabilities
1,662
1,353
309
22.84
Total Current Liabilities
1,995
1,775
220
12.39
Long-term Debt
843
1,091
-248
-22.73
Common Stock
2,556
2,167
389
17.95
Total Liabilities and Equity
5,394
5,033
361
7.17
Assets
Cash
696
58
638
1100.00
Account Receivable
956
992
-36
-3.63
Inventory
301
361
-60
-16.62
Other Current Assets
303
264
39
14.77
Total Current Assets
2,256
1,675
581
34.69
Net Fixed Assets
3,138
3,358
-220
-6.55
Total Assets
5,394
5,033
361
7.17
Vertical Analysis
From the above calculation, we can see that the account payables, total current liabilities, common stock, total current assets, cash has increased in the year 2017 while long-term debt and net fixed assets has decreased. The significant increase in cash is due to the collection of account receivable, issue of common stock, sale of goods and fixed assets. However the company is not utilizing the cash to meet the current liabilities which is not good for the business.
Similarly, the result of vertical analysis shows that the accounts payable, notes payable, account receivable, long-term debt, inventory and net fixed assets expressed in terms as percentage of total assets has lower value in 2017 than in 2016. On the other hand, total current liabilities, common stock, total current assets and cash has increased value. This indicates the company is performing well but it should use the cash in settling the current liabilities or invest it to maximize the return.
The analysis of the different items in income statement is also done following the similar procedure.
References
John. (2017, March 15). How to Perform Horizontal and Vertical Analysis of Income Statements. Retrieved from Vintage Value Investing: vintagevalueinvesting.com/perform-... 4
Singh, U. (2016, April). Analysis of Financial Statement. International Journal of Recent Research in Commerce Economics and Management (IJRRCEM), 3 (2), 1-10.
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Horizontal Analysis
Horizontal analysis takes into consideration the financial statements of different years and analyzes how individual items in the financial statements has changed over time. It is also known as trend analysis or time series analysis as it focuses on changes of variables in different accounting years. It helps us to detect trends, patterns, cyclicality and compare those factors with the organizations of similar nature to understand the current position of the firm (John, 2017). The advantage of horizontal analysis is it expresses change in both amounts and percentage and facilitates the intra-company comparison. It helps to see how each item has changed with respect to change in other items. The steps in performing horizontal analysis are:
Calculate the absolute change by deducting amount of base (previous) year from the amount of comparing year.
Calculate the percentage change by dividing the absolute change by amount of base year and multiplying the result by 100.
Interpret the result.
Vertical Analysis
In vertical analysis, the relationship between different variables during an accounting period is measured. In this method, each item is expressed as a percentage of total (sales in case of income statement and total assets in case of balance sheet). It is used to determine the relationship between different variables of financial statement (Singh, 2016). The steps in vertical analysis are:
Assume sales or total assets as 100%.
Calculate the percentage of each item as a percentage of sales or total assets but dividing the amount of the selected item with sales/total assets and multiplying it by 100.
Interpret the result.
Example
Let us consider the following balance sheet for horizontal and vertical analysis:
Balance Sheet of XYZ Company for 2016 and 2017
Horizontal Analysis
Vertical Analysis
From the above calculation, we can see that the account payables, total current liabilities, common stock, total current assets, cash has increased in the year 2017 while long-term debt and net fixed assets has decreased. The significant increase in cash is due to the collection of account receivable, issue of common stock, sale of goods and fixed assets. However the company is not utilizing the cash to meet the current liabilities which is not good for the business.
Similarly, the result of vertical analysis shows that the accounts payable, notes payable, account receivable, long-term debt, inventory and net fixed assets expressed in terms as percentage of total assets has lower value in 2017 than in 2016. On the other hand, total current liabilities, common stock, total current assets and cash has increased value. This indicates the company is performing well but it should use the cash in settling the current liabilities or invest it to maximize the return.
The analysis of the different items in income statement is also done following the similar procedure.
References
John. (2017, March 15). How to Perform Horizontal and Vertical Analysis of Income Statements. Retrieved from Vintage Value Investing: vintagevalueinvesting.com/perform-... 4
Singh, U. (2016, April). Analysis of Financial Statement. International Journal of Recent Research in Commerce Economics and Management (IJRRCEM), 3 (2), 1-10.