Financial Statement and Reporting 1

Comparative Financial Statements

Module 6 Week 7 Comparative Financial

Statements: Horizontal and Vertical Analysis

Course Learning Outcomes:

At the end of this module, the students are expected to:
1. identify and define the comparative financial statements.
2. differentiate horizontal from vertical analysis.
3. analyze the financial statements using horizontal analysis.
4. analyze the financial statements using vertical analysis.

COMPARATIVE FINANCIAL STATEMENTS

Financial statements presenting financial data for two or more periods are called comparative
statements. Comparative financial statements usually give similar reports for the current period
and for one or more preceding periods. Comparative statements are considerably more
significant than are single-year statements (American Academy of Financial Management).
Various methods used in the analysis of financial statements include ratio, horizontal and
vertical analysis.

Horizontal Analysis
Horizontal analysis spotlights trends and establishes relationships between items that
appear on the same row of a comparative statement. Horizontal analysis
discloses changes on items in financial statements over time. Each item (such as
sales) on a row for one fiscal period is compared with the same item in a different
period. Horizontal analysis can be carried out in terms of changes in dollar
amounts, in percentages of change, or in a ratio format. Horizontal analysis may
be conducted for balance sheet, income statement, schedules of current and fixed
assets and statement of retained earnings (American Academy of Financial
Management).

Course Module
 Peso and Percentage Changes are computed by using the following formulas:

1. Dollar Change = Amount of the item in comparison year – Amount of the item
in base year

2. Percentage Change = Dollar Change x 100

Amount of the item in base year

Horizontal analysis is also referred to trend analysis, this is the comparison of

financial information such as net income or cost of goods sold between two
financial quarters including quarters, months or years. Often expressed in
percentages or monetary terms, it provides insights into factors that significantly
affect the profitability of an organization.

Comparative Balance Sheet with Horizontal Analysis

A.M.Y. Corporation
Comparative Balance Sheet
December 31, 2020 and 2019
Increase or (Decrease)
2020 2019 Amount Percent(%)
Assets
Current assets P1,100,000 P1,066,000 P 34,000 3.20 %

Long-term investments 190,000 355,000 (165,000) (46.50) %

Plant assets (net) 889,000 940,000 (51,000) (5.40) %

Intangible assets 100,000 100,000 -
Total Assets P2,279,000 P2,461,000 P (182,000) (7.40) %
Liabilities
Current Liabilities P 420,000 P 486,000 P (66,000) (13.60) %
Long-term liabilities 200,000 400,000 (200,000) (50.00)%
Total Liabilities P 620,000 P 886,000 P (266,000) (30.00) %

Stockholders’ Equity
6% Preferred stock,
P 100 par P 300,000 P 300,000 - -
Common stock,
P 10 par 1,000,000 1,000,000 - -
Retained earnings 359,000 275,000 P 84,000 30.50 %
Total Stockholders’ Equity P 1,659,000 P 1,575,000 P 84,000 5.30 %
Total Liabilities and
Stockholders’ Equity P 2,279,000 P 2,461,000 P ( 182,000) (7.40)%
 Financial Statement and Reporting 3
Comparative Financial Statements

Comparative Schedule of Current Assets

A.M.Y. Corporation
Comparative Schedule of Current Assets
December 31, 2020 and 2019
Increase (Decrease)
2020 2019 Amount Percent
Cash P 181,000 P 129,400 P 51,600 39.90%
Marketable securities 150,000 120,000 30,000 25.00%
Accounts receivable (net) 230,000 240,000 (10,000) (4.20)%
Merchandise Inventory 528,000 566,000 (38,000) (6.70)%
Prepaid expenses 11,000 10,600 400 3.80%
P1,100,000 P1,066,000 P 34,000 3.20%

Comparative Income Statement with Horizontal Analysis

A.M.Y. Corporation
Comparative Income Statement
For the Years Ended December 31, 2020 and 2019
Increase (Decrease)
2020 2019 Amount Percent
Sales P 2,996,000 P 2,400,000 P 596,000 24.80 %
Cost of Goods Sold 2,086,000 1,640,000 446,000 27.20%
Gross Profit P 910,000 P 760,000 P 150,000 19.70%
Selling expenses P 382,000 P 294,000 88,000 29.90%
General expenses 208,000 194,800 13,200 6.80%
Total Operating Expenses P 590,000 P 488,800 P 102,000 20.90%
Operating income P 320,000 P 271,200 P 48,800 18.00%
Other income 17,000 22,000 (5,000) (22.7)%
P 337,000 P 293,200 P 43,800 14.90%
Other expenses 12,000 24,000 (12,000) (50.0)%
Income Before Income Tax P 325,000 P 269,200 P 55,800 20.70%
Income tax 143,000 116,200 26,800 23.10%
Net Income P 182,000 P 153,000 P 29,000 19.00%

Course Module
Comparative Retained Earnings Statement with Horizontal Analysis

AMY Corporation
Comparative Retained Earnings Statement
December 31, 2020 and 2019
Increase (Decrease)
2020 2019 Amount Percent
Retained earnings, Jan. 1 P 275,000 P 200,000 P 75,000 37.50%
Net income for the year 182,000 153,000 29,000 19.00%
Total P 457,000 P 353,000 P 104,000 29.50%
Dividends
On preferred stock 18,000 18,000 - -
On common stock 80,000 60,000 20,000 33.30%
Retained earnings, Dec. 31 P 359,000 P 275,000 P 84,000 30.50%

The analysis in the above financial statements shows the 2017 and 2018 financial
analysis wherein 2017 is the base year. All accounts and amounts on the balance sheet
and income statement for the year 2018 have been compared with the accounts and
amounts of the balance sheet and income statement for the year 2017.

The actual changes of amounts in all accounts are compared with the expected
changes. For example, if management target is an increase of 30% in sales revenue but
actual increase is only 10%, it needs to be investigated.

Vertical Analysis
Vertical analysis involves the conversion of items appearing in financial statement
columns into terms of percentages of a base figure to show the relative significance of
the items and to facilitate comparison. On the balance sheet, individual assets can be
expressed in terms of their relationship to total assets can be expressed in terms of their
relationship to total assets. Liabilities and shareholders’ equity accounts can be
expressed in terms of their relationship to the total of liabilities and shareholders’ equity.
On the income statement, each item is stated as a percentage of sales (American
Academy of Financial Management). In a vertical analysis, the percentage is computed
by using the following formula:

Percentage of base = Amount of individual item x 100

Amount of base
 Financial Statement and Reporting 5
Comparative Financial Statements

Comparative Balance Sheet with Vertical Analysis

AMY Corporation
Compartive Balance Sheet
December 31, 2020 and 2019

2020 2019
Amount Percent Amount Percent

Assets
Current assets P 1,100,000 48.3% P 1,066,000 43.3%
Long-term investments 190,000 8.3% 355,000 14.4%
Plant assets (net) 889,000 39.0% 940,000 38.2%
Intangible assets 100,000 4.4% 100,000 4.1%
Total Assets P 2,279,000 100 % P 2,461,000 100%

Liabilities
Current liabilities P 420,000 18.4% P 486,000 19.7%
Long-term liabilities 200,000 8.8% 400,000 16.3%
Total Liabilities P 620,000 27.2% P 886,000 36.0%

Stockholders’ Equity
6% Preferred stock P 300,000 13.2% P 300,000 12.2%
Common stock 1,000,000 43.9% 1,000,000 40.6%
Retained earnings 359,000 15.7% 275,000 11.2%
Stockholders’ Equity P 1,659,000 72.8% P 1,575,000 64.0%
Total Liabilities and
Stockholders’ Equity P 2,279,000 100% P 2,461,000 100%

Current Assets:
2020: (1,100,000/ 2,279,000) x 100 = 48.3%
2019: (1,066,000/ 2,461,000) x 100 = 43.3%

Course Module
Comparative Income Statement with Vertical Analysis

AMY Corporation
Comparative Income Statement
For the Years Ended December 31, 2020 and 2019

2020 2019
Amount Percent Amount Percent

Sales P 2,996,000 100% P 2,400,000 100%

Cost of Goods Sold 2,086,000 69.6% 1,640,000 68.3%
Gross Profit P 910,000 30.4% P 760,000 31.7%
Selling Expenses P 382,000 12.8% 294,000 12.3%
General Expenses 208,000 6.9% 194,800 8.1%
Total Operating Expenses P 590,000 19.7% P 488,800 20.4%
Operating Income P 320,000 10.7% P 271,200 11.3%
Other Income 17,000 .6% 22,000 .9%
P 337,000 11.3% P 293,200 2.2%
Other Expense 12,000 .4% 24,000 1.0%
Income Before Income Tax P 325,000 10.9% P 269,200 11.2%
Income tax 143,000 4.8% 116, 200 4.8%
Net Income P 182,000 6.1% P 153,000 6.4%

Cost of Goods Sold

2020: (2,086,000/ 2,996,000) x 100 = 69.6%

2019: (1,640,000/ 2,400,000) x 100 = 68.3%

Vertical analysis states financial statements in a comparable common-size format

(percentage form). One of the advantages of common-size analysis is that it can be
used for inter-company comparison of enterprises with different sizes because all items
are expressed as a percentage of some common number (American Academy of
Financial Management).
 Financial Statement and Reporting 7
Comparative Financial Statements

References and Supplementary Materials

Books and Journals
1. Trotman, Ken, Carson, Elizabeth, Morgan, Kate; Finanacial Analysis>; 2019;
Financial Accounting: An Integrated Approach.;

2. Gitman, Lawrence J;Finanacial Analysis; 2019; Principles of Managerial Finance;

Jurong, Singapore; Pearson Education, Inc.

3. Smart, Scott B., Megginson, William L.; Finanacial Analysis; 2009; Financial
Management: An Introduction ; Singapore; Cengage Learning Asia Pte Ltd

Online Supplementary Reading Materials

1. Difference Between Horizontal Analysis and Vertical Analysis;
http://www.differencebetween.net/business/difference-between-horizontal-and-
vertical-analysis/; 01December2019
2. Horizontal or trend analysis of financial statements;
https://www.accountingformanagement.org/horizontal-analysis-of-financial-
statements/; 01December2019
3. A Comparative Analysis of Vertical and Horizontal Fixation Disparity in Sentence
Reading; https://www.ncbi.nlm.nih.gov/pubmed/25839421; 01December2019

4. Analyzing Comparative Financial Statements;

https://courses.lumenlearning.com/sac-managacct/chapter/analyzing-
comparative-financial-statements/; 01December2019

Course Module
 Online Instructional Videos
1. Analyzing Comparative Financial Statements;
https://courses.lumenlearning.com/sac-managacct/chapter/analyzing-
comparative-financial-statements/; 01December2019

2. Vertical Analysis;
https://courses.lumenlearning.com/sacmanagacct/chapter/common-size-financial-
statements/; 02December2019