Horizontal analysis

Horizontal analysis, also known as trend analysis, is a technique used in accounting to compare financial

statements over a period of time. It involves the analysis of financial statements for multiple periods,

with the goal of identifying trends and patterns that can provide insight into a company's financial

performance.

To perform horizontal analysis, a company will typically prepare a set of financial statements for

multiple periods, such as two or more years. These financial statements may include the balance sheet,

income statement, and statement of cash flows. The company will then compare the financial

statements from each period to identify trends and patterns.

There are several different types of horizontal analysis that can be performed, including:

Percentage change analysis: This involves calculating the percentage change in each item on the

financial statements from one period to the next. For example, if a company's revenues increased from

$500,000 in 2020 to $600,000 in 2021, the percentage change would be 20%. This type of analysis can

be useful for identifying trends and patterns in a company's financial performance.

Common-size analysis: This involves expressing each item on the financial statements as a percentage of

a common base, such as total assets or total revenues. For example, if a company's total assets are
$1,000,000 and its cash is $100,000, its cash would be 10% of total assets. This type of analysis can be

useful for comparing the relative importance of different items on the financial statements, and for

identifying trends and patterns in a company's financial performance.

Ratio analysis: This involves calculating financial ratios based on the items on the financial statements.

There are many different financial ratios that can be calculated, and they are used to provide insight into

a company's financial performance and position. For example, the debt-to-equity ratio measures the

amount of debt a company has relative to its equity, while the return on assets measures the

profitability of a company. This type of analysis can be useful for comparing a company's financial

performance to industry benchmarks or to its own performance over time.

There are several benefits to performing horizontal analysis, including:

Identifying trends and patterns: By comparing financial statements over a period of time, horizontal

analysis can help to identify trends and patterns in a company's financial performance. This can provide

insight into the company's strengths and weaknesses, and can help to identify opportunities for

improvement.

Improving decision-making: By understanding the trends and patterns in a company's financial

performance, managers can make more informed decisions about how to run the business. For

example, if a company is experiencing declining profits, horizontal analysis can help to identify the

causes of the decline and suggest potential solutions.

Providing a historical perspective: Horizontal analysis can provide a historical perspective on a

company's financial performance, which can be useful for forecasting future performance. By

understanding the trends and patterns in the past, a company can make more informed predictions

about what to expect in the future.

Overall, horizontal analysis is a useful tool for analyzing a company's financial performance and position.

By comparing financial statements over a period of time, it can provide insight into trends and patterns,

and can help to improve decision-making and provide a historical perspective.