Horizontal Analysis | Financial Statement Analysis

Horizontal analysis is an important tool for analyzing a company's financial statements. Horizontal analysis involves the creation of trend statements or percentage change statements to see how each line item on the income statement or balance sheet is changing over time.

A trend income statement, for example, expresses each line item on the income statement as a percentage of a base figure. If you were to set 2015 as the base year, then 2016's sales, cost of goods sold, SG&A expense, etc. would each be expressed as a percentage of the corresponding figure for 2015. For instance, sales in 2016 might be 112% of sales from the base year (2015).

A percentage income statement, on the other hand, shows the percentage change in each line item from one period to the next. For example, it might show that sales increased 10% over the past year. If you were to see on a percentage change balance sheet that receivables increased 85%, this would raise the question of why receivables increased so much faster than sales. Auditors use such relationships to detect financial irregularities.

Horizontal analysis is called "horizontal analysis" because you move horizontally (from left to right, or from right to left) as you calculate the change in each line item.
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[kasifali]

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[davide-mz]

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[R-T-]

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