Difference between Horizontal Analysis and Vertical Analysis

You can use horizontal analysis to examine your company’s profit margins over time, and create strategic spend projections to match projected revenue growth or hedge against seasonality or increased cost of materials. The concepts of horizontal and vertical analysis have been primary contributing tools for the expansion of businesses for the past many years.

Horizontal analysis shows a company’s growth and financial position versus competitors. Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments.

Difference between Horizontal Analysis and Vertical Analysis

The company reported a net income of $25 million and retained total earnings of $67 million in the current year. The company’s present stock price and its trend will help in analyzing https://accounting-services.net/ a company’s performance. The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

On the other hand, the company will use total assets as the base amount to compare asset figures on the balance sheet. For example, if a company made net sales worth $30 million in 2017, and the cost of goods sold was $15 million. Vertical analysis helps to gauge the performance of a firm against competitors. Assuming that another company made $50 million in sales in 2017, and the cost of goods is $30 million. On paper, it looks like the company with $50 million in sales is doing better. This company also incurred expenses that were 60% of the total sales. Since the second company incurred more expenses, the first company has better performance.

Purpose

But note that the dollar amount of change is only $1,650 ($4,150 to $5,800). The vertical analysis of a balance sheet results in every balance sheet amount being restated as a percent of total assets. Vertical analysis uses current year financial data for comparison. There must be a single base line item and multiple comparison line items. In percentage analysis, financial data in percentage form is disclosed and compared.

The changes are depicted both in absolute figures and in percentage terms. You can see that the company’s total assets increased by $300,000. You can convert this difference to a percentage of the base year by dividing $300,000 by $600,000, which equals 0.5. This represents a 50% increase in total assets from last year to this year.

Overview: What is horizontal analysis?

Horizontal analysis, or trend analysis, is a method where financial statements are compared to reveal financial performance over a specific period of time. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet. Horizontal analysis – Also known as trend analysis, horizontal analysis of a balance sheet is a financial statement analysis technique that shows changes in the amounts of financial statement items over a period of time. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with the same items on the statements of the base period. The changes are generally shown both in dollars and as a percentage.

Under US GAAP, extraordinary items are permitted but restricted to infrequent, unusual and rare items that affect profit and loss. Horizontal analysis will be used for analysis the growth pattern of the business over a number of years.

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As the name implies, this technique is useful for analyzing trends in financial statements. Usually, the changes noted will be depicted both in dollar values and as percentages. Although both horizontal and vertical analysis is used in the analysis of financial statements, they have several differences. Both, however, are Difference Between Horizontal Analysis And Vertical Analysis important when it comes to business decisions based on the performance. When performing a vertical analysis on a financial statement, each line item is listed as a percentage of a base figure. The base figure can be total assets, total liabilities, or total equity, depending on which financial statement is being analyzed.