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Horizontal Analysis
Horizontal Analysis Overview
Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The analysis is most commonly a simple grouping of information that is sorted by period, but the numbers in each succeeding period can also be expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.
A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, due to ongoing changes in the chart of accounts, so that revenues, expenses, assets, or liabilities may shift between different accounts and therefore appear to cause variances when comparing account balances from one period to the next.
When conducting a horizontal analysis, it is useful to conduct the analysis for all of the financial statements at the same time, so that you can see the complete impact of operational results on a company's financial condition over the review period. For example, in the two examples below, the income statement analysis shows a company having an excellent second year, but the related balance sheet analysis shows that it is having trouble funding growth, given the decline in cash, increase in accounts payable, and increase in debt.
Horizontal Analysis of the Income Statement
Horizontal analysis of the income statement is usually in a two-year format, such as the one shown below, with a variance also shown that states the difference between the two years for each line item. An alternative format is to simply add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A third format is to include a vertical analysis of each year in the report, so that each year shows expenses as a percentage of the total revenue in that year.
| 20X1 | 20X2 | Variance | |
| Sales | $1,000,000 | $1,500,000 | $500,000 |
| Cost of goods sold | 400,000 | 600,000 | (200,000) |
| Gross margin | 600,000 | 900,000 | 300,000 |
| Salaries and wages | 250,000 | 375,000 | (125,000) |
| Office rent | 50,000 | 80,000 | (30,000) |
| Supplies | 10,000 | 20,000 | (10,000) |
| Utilities | 20,000 | 30,000 | (10,000) |
| Other expenses | 90,000 | 110,000 | (20,000) |
| Total expenses | 420,000 | 615,000 | (195,000) |
| Net profit | $180,000 | $285,000 | $105,000 |
Horizontal Analysis of the Balance Sheet
Horizontal analysis of the balance sheet is also usually in a two-year format, such as the one shown below, with a variance showing the difference between the two years for each line item. An alternative format is to add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A less-used format is to include a vertical analysis of each year in the report, so that each year shows each line item as a percentage of the total assets in that year.
| 20X1 | 20X2 | Variance | |
| Cash | $100,000 | 80,000 | $(20,000) |
| Accounts receivable | 350,000 | 525,000 | 175,000 |
| Inventory | 150,000 | 275,000 | 125,000 |
| Total current assets | 600,000 | 880,000 | 280,000 |
| Fixed assets | 400,000 | 800,000 | 400,000 |
| Total assets | $1,000,000 | $1,680,000 | $680,000 |
| Accounts payable | $180,000 | $300,000 | $120,000 |
| Accrued liabilities | 70,000 | 120,000 | 50,000 |
| Total current liabilities | 250,000 | 420,000 | 170,000 |
| Notes payable | 300,000 | 525,000 | 225,000 |
| Total liabilities | 550,000 | 945,000 | 395,000 |
| Capital stock | 200,000 | 200,000 | 0 |
| Retained earnings | 250,000 | 535,000 | 285,000 |
| Total equity | 450,000 | 735,000 | 285,000 |
| Total liabilities and equity | $1,000,000 | $1,680,000 | $680,000 |
Similar Terms
Horizontal analysis is also known as trend analysis.
Related Topics
Current ratio
Debt to equity ratio
Financial statement analysis
Return on equity ratio
Vertical analysis