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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


    Horizontal analysis can be mis-used to report skewed findings. This can happen when the analyst modifies the number of comparison periods used to make the results appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous month, but are actually quite poor when compared to the results for the same month in the preceding year. Consistent use of comparison periods can mitigate this problem.

    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