Analysis are done to understand what is going on in a company. It helps investors analyze and ascertain whether the company has had consistent growth over the years and if they are utilizing fund available in a balanced way. The horizontal analysis as the name suggest is the analysis done on horizontal basis for the same item of a company’s financial statements generally for two or more years. It analyses the trend of the company by calculating the change percentage between the same line item for various years. On the other hand the vertical analysis is done by comparing the line items vertically in a financial statement with the total of either sales (in income statement) or assets (in balance sheet). This is done for single year, analyses the changes over time and the effect of one line item to another as well as to the base amount (either total revenue or total assets).
Horizontal Analysis
Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The intent is 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 reason for the difference. (Bragg, 2017)
Let us understand this analysis with the help of the following balance sheet.
Table 1:
Form the table above we can understand that there was no change in the share capital but the reserve and surplus was increased by 44%. Other liabilities increased by 38%, liquidity increased by 18%, investment, net fixed asset and other assets by 18%, 56% and 15% respectively. This shows there was a healthy growth in all the asset side.
Vertical Analysis.
"The product of a vertical analysis is generally referred to as a common-size statement. Common-size balance sheets bring the composition of assets and liabilities into focus, while common-size income statements highlight the relationship between expense items and sales (Mautz Jr & Angell, 2006)”.
Let us take an example for vertical analysis.
Table 2:
Note: The percentage has been calculated by dividing the line item by total revenue and multiplying it by 100.
From table two we see that at 92 million sales, the cost of capital was 36 million, and with increase in revenue in year 2017 to 181 million, the cost of capital also decreased from 39% to 25% which show good cost management of the company. We can similarly analyze other aspects such as, dividend payout has increased from 21 million to 30 million, an increase by 23%. The retained earning has also increased from 67% to 68%. The income statement with the help of vertical analysis has helped understand that the company has performed well as compared to previous year.
In this way horizontal and vertical analysis helps to analyze the trend of a company and the income statement based on the total revenue. Based on the above analysis we see that the sales has increased resulting in increase in retained earning and dividend payout. The liquidity has also increased along with decrease in cost of capital. Although there is increase in liabilities and provision, investments in made in fixed assets and other assets have increased showing a good balance in the company statement.
Mautz Jr, D. R., & Angell, R. J. (2006). Understanding the Basics of Financial Statement Analysis. Commercial Lending Review , 27-34. Retrieved from proxy.lirn.net/MuseProxyID=mp03/Mu...
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Analysis are done to understand what is going on in a company. It helps investors analyze and ascertain whether the company has had consistent growth over the years and if they are utilizing fund available in a balanced way. The horizontal analysis as the name suggest is the analysis done on horizontal basis for the same item of a company’s financial statements generally for two or more years. It analyses the trend of the company by calculating the change percentage between the same line item for various years. On the other hand the vertical analysis is done by comparing the line items vertically in a financial statement with the total of either sales (in income statement) or assets (in balance sheet). This is done for single year, analyses the changes over time and the effect of one line item to another as well as to the base amount (either total revenue or total assets).
Horizontal Analysis
Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The intent is 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 reason for the difference. (Bragg, 2017)
Let us understand this analysis with the help of the following balance sheet.
Table 1:
Form the table above we can understand that there was no change in the share capital but the reserve and surplus was increased by 44%. Other liabilities increased by 38%, liquidity increased by 18%, investment, net fixed asset and other assets by 18%, 56% and 15% respectively. This shows there was a healthy growth in all the asset side.
Vertical Analysis.
"The product of a vertical analysis is generally referred to as a common-size statement. Common-size balance sheets bring the composition of assets and liabilities into focus, while common-size income statements highlight the relationship between expense items and sales (Mautz Jr & Angell, 2006)”.
Let us take an example for vertical analysis.
Table 2:
Note: The percentage has been calculated by dividing the line item by total revenue and multiplying it by 100.
From table two we see that at 92 million sales, the cost of capital was 36 million, and with increase in revenue in year 2017 to 181 million, the cost of capital also decreased from 39% to 25% which show good cost management of the company. We can similarly analyze other aspects such as, dividend payout has increased from 21 million to 30 million, an increase by 23%. The retained earning has also increased from 67% to 68%. The income statement with the help of vertical analysis has helped understand that the company has performed well as compared to previous year.
In this way horizontal and vertical analysis helps to analyze the trend of a company and the income statement based on the total revenue. Based on the above analysis we see that the sales has increased resulting in increase in retained earning and dividend payout. The liquidity has also increased along with decrease in cost of capital. Although there is increase in liabilities and provision, investments in made in fixed assets and other assets have increased showing a good balance in the company statement.
References
Bragg, S. (2017, August 16). ACCOUNTING CPE COURSES & BOOKS. Retrieved from AccountingTools: accountingtools.com/articles/2017/...
Mautz Jr, D. R., & Angell, R. J. (2006). Understanding the Basics of Financial Statement Analysis. Commercial Lending Review , 27-34. Retrieved from proxy.lirn.net/MuseProxyID=mp03/Mu...