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Horizontal and Vertical Analysis | Accounting

Financial statement analysis involves reviewing a company's financial statements to improve economic decisions, utilizing tools like horizontal and vertical analysis. Horizontal analysis examines year-to-year changes in financial items, while vertical analysis focuses on relationships between items expressed as percentages of a base item. The key difference is that horizontal analysis compares multiple accounting periods, whereas vertical analysis analyzes a single year's data.

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Horizontal and Vertical Analysis
Financial Statement Analysis  Financial statement analysis (or financial analysis) is the process of reviewing and analysing a company's financial statements to make better economic decisions  Tools of financial statement analysis  Horizontal analysis  Vertical analysis  Ratio analysis  Graphical analysis  Regression analysis
Horizontal Analysis  Horizontal analysis also known as trend analysis is an analysis of the year-to year change in each financial statement item  Horizontal analysis (or trend analysis) refers to studying the behaviour of individual financial statement items over several accounting periods
Purpose of Horizontal Analysis  The purpose of horizontal analysis is to determine how each item changed, why it changed, and whether the change is favourable or unfavourable  It’s a way for analysts to compare accounts or performance metrics over time to see if the company is improving or declining
Vertical Analysis  Vertical analysis concentrates on the relationships between various financial items on a financial statement  To show this relationship each item on the statement is expressed as a percentage of a base item that also appears on the statement. On the balance sheet, each item is expressed as a percentage of total assets. On the income statement, each item is stated as a percentage of sales
Purpose of Vertical Analysis  To gain insight into the relative importance or magnitude of various items on the financial statements  Vertical analysis is applicable for internal performance review as well as for comparison to peers and bench-marking  Comparisons allows management and accounting staff at the company to isolate the reasons and take action to fix the problem
Difference between Vertical and Horizontal analysis  Under horizontal analysis an analyst compares the financial statement of the company for two more accounting periods, it can be used on any item in the financial statement company  Vertical analysis is done to review and analysis the financial statements for a year only and therefore it is also called static analysis. Under this method each entry for assets, liabilities and equities in a balance sheet is represented as a percentage of the total account
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