Common Size Statements (Vertical

Analysis)
& Horizontal Analysis
(Trend Analysis)
V.Ravichandran
What is a Common-size Financial Statement?

A Vertical Analysis of the Financial

Statements of a company, in which the
amount of individual items of a Balance
Sheet & Statement of Profit & Loss are
written is known as a Common-size Financial
Statement.
What is a Common-size Financial Statement?

• Common-size Statements are accounting statements expressed in

percentage of some base rather than rupees.
• – Kohler
• The amounts written are then converted into percentage by taking a
common base; which is, Revenue from Operations or Net Sales in case
of Statement of Profit & Loss and
• Total Assets or Total Equity and Liabilities in case of a Balance Sheet.
What is a Common-size Financial Statement?

• The percentages calculated by taking the respective

common bases are then compared with the
corresponding percentages of other periods, through
which meaningful conclusions can be drawn.
• A Common-size Statement can be prepared for inter-
firm and intra-firm comparisons or for Balance Sheet
and Income Statement.
Common Size Income Statement:

• A statement that shows the percentage relation of each income/expense to

the Revenue from Operations (Net Sales), is known as a Common-size
Income Statement.
• To express the amounts as the percentage of the total, Revenue from
Operations (Net Sales) is taken as 100.
• One may prepare a Common-size Statement of Profit & Loss (Income
Statement) for different periods of the same firm or for the same period of
different firms.
• With the help of the comparison between the Common-size Income
Statements of different periods, one can understand the efficiency in
earning revenues and incurring expenses.
Objectives of Common Size Income Statement

• Different objectives of a Common-size Income Statement are as

follows:
• 1. The basic objective of a Common-size Income Statement is to
analyse the change in individual terms of the Income Statement.
• 2. It is also prepared to study the trend in different items of Incomes
and Expenses.
• 3. Lastly, it is prepared for the assessment of efficiency.
What is a Common Size Balance Sheet?

• A statement that shows the percentage relation of each asset/liability to

the total assets/total of equity and liabilities, is known as a Common-
size Balance Sheet.
• To express the amounts as the percentage of the total, the total assets
or total equity and liabilities are taken as 100.
• With the help of a Comparative Common-size Balance Sheet of
different periods, one can highlight the trends in different items.
What is a Common Size Balance Sheet?

• A statement that shows the percentage relation of each asset/liability to

the total assets/total of equity and liabilities, is known as a Common-
size Balance Sheet.
• To express the amounts as the percentage of the total, the total assets
or total equity and liabilities are taken as 100.
• With the help of a Comparative Common-size Balance Sheet of
different periods, one can highlight the trends in different items.
• If a Common-size Balance Sheet is prepared for the industry, it
facilitates the assessment of the relative financial soundness and helps
in understanding the financial strategy of the organisation.
Objectives of Common Size Balance Sheet

• Different objectives of a Common-size Balance Sheet are as follows:

• 1. The basic objective of a Common-size Balance Sheet is to analyse
the changes in the individual items of a Balance Sheet.
• 2. It is also prepared to see the trends of different items of assets,
equity and liabilities of a Balance Sheet.
• 3. Lastly, it is prepared for the assessment of the financial soundness
of the organisation and to understand its financial strategy.
Horizontal Analysis
(Trend Analysis)
What is Horizontal Analysis?

Based on historical data, a horizontal

analysis interprets the change in financial
statements over two or more accounting periods.

It denotes the percentage change in the same line

item of the next accounting period compared to
the value of the baseline accounting period.
What is a Horizontal Analysis?

• While vertical analysis focuses on the relationships between

different variables in your financial statements,
• horizontal analysis focuses on changes to specific variables
over time by expressing the difference in their values as a
percentage or an absolute value.
• That’s exactly why it’s called horizontal analysis – you
compare the data from each period side by side to calculate
your results.
• This method of analysis is also known as trend analysis.
How do you perform a horizontal analysis of financial statements?

• Horizontal analysis is an approach to analyzing financial statements.

• It compares historical data, which includes ratios and line items, over a
series of accounting periods.
• The accounting period can be a month, a quarter, or a year.
• The horizontal method of analysis is used to identify changes in
financial statements over time and assess those changes.
• A base year is initially selected as a benchmark. Either the data of the
rest of the years is expressed as a percentage of the base year or an
absolute comparison is performed. The base year comparison is known
as base year analysis.
Horizontal Analysis: Explanation

• Horizontal analysis focuses on the dollar and percentage changes that occur in
specific accounts from year to year.
• Determining the percentage change is important because it links the degree of
change to the actual amounts involved. In this way, percentage changes are
better for comparative purposes with other firms than are actual dollar changes.
• For example, a $1 million increase in General Motors' cash balance is likely to
represent a much smaller percentage increase than a corresponding $1 million
increase in American Motors' cash balance.
• To calculate percentage changes, you can use the following formula:
• Percentage change = (Amount of dollar change / Base year amount) x 100
Horizontal Analysis
• The base year is always the first year in the comparison.
• For example, suppose that Safeway's total current assets were
$1,729,146,000 in 2018 and $1,861,389,000 in 2019.
• This represents a dollar increase of $132,243,000 and a percentage
increase of 7.65%, which is calculated as follows:
• Percentage change = ($1,861,389,000 - $1,729,146,000 /
1,729,149,000) x 100
• = 7.65%
Benefits of Horizontal Analysis

• 1. The Horizontal analysis performs the assessment of relative

changes in different items of the balance sheet over a period of time.
• 2. It shows the behavior of revenues, expenses, etc of the financial
statements for comparative periods.
• 3. With Horizontal Analysis, the impact of operational activities is
visible on the company’s financial condition during the period under
review.
• Thus, performing Horizontal Analysis helps in many ways, especially
when we are planning to investment or buying a business.