The Name of ALLAH, The most Beneficent, The

most Merciful
 Horizontal Analysis
Introduction

Horizontal analysis is the method of function statement analysis which represents the
percentage income and percentage decrease in the relative financial statement of the
companies. In horizontal analysis the financial data of the companies is compared on base of
the comparative financial statement for fixing of the problems within the business.

Definition

Horizontal analysis is a process used to analyzed financial statement by compering the

specific financial information for a particular accounting period with information from other
period. Analysis uses such an approach to analyze historical trends.

Common size statements for Horizontal Analysis

In the horizontal ratio analysis common size of financial statements are used in which the
data is arranged in horizontal form in figure and percentage that the analyst easily fixed the
data and compare the change in statement on yearly bases. In which the data on yearly bases
provided side by side. These analysis helped to companies to fixed their goals and also
helpful for the shareholders to high light the weakness of the business programs and to find
the way for their improvement. The horizontal analysis is conducted on both balance sheet
and profit/ loss account.

Purpose of the horizontal analysis

Horizontal analysis is considered the most important the financial statement analysis and for
the annual reports.

 Horizontal analysis is used for annual budget making process.

 Horizontal is helpful for shareholders to check their performance and also to improve
their weak areas.
 Horizontal is very useful for investors to find the percentage change in the financial
position of the business.
  Horizontal vertical analysed to shareholder that if no any change occur into financial
statement of the business they should to fix their future and also make more
investment for high gain of profits.
 Horizontal vertical is used to find have each item in financial statement is changed,
why these items are changed and also determined these changes are favourable or
unfavourable for the business.

What is Historical Analysis?

It’s used in the review at a company financial statement over multiple periods it’s usually
depicted as percentage growth over the same line items from the base year. Horizontal
analysis allows financial statement used to easily spot trend and growth patterns.

Horizontal analysis Formula

The term horizontal analysis used as an approach to analyzed the historical data from the
income statement balance sheet and also cash flow statement by comparing to each other. It
show the change either in absolute term or as a %age change year over year (Y-o-y) in each
items.

The formula for horizontal analysis can be deducted the amount in base year from the amount
in base year from the amount in the comparison year.

Horizontal analysis % = (Amount in Comparison – Amount in base year)/Amount in

base year* 100)

For example:

Change in sales = (3000000 to 2800000) =200000

Percentage change= 200000/ 2800000*100=7.14%

Horizontal Analysis limitations

A: The basis limitation of horizontal analysis is that the aggregated information expressed in
the financial statement may have change over time and therefore will cause various to creep
up when amount balances are compared across period

B: The firm can make some year end change to their financial statement to improve their
ratios.

C: Horizontal analysis ignores the price level change due to inflation.

D: Horizontal analysis completely ignores the qualitative aspect of the business.

E: Finally, Horizontal ratio analysis does not resolve any financial problem of the company.

F: In Horizontal ratio analysis some firm take in to consideration all current liabilities but
completely ignore the bank overdraft.

Horizontal analysis techniques

Step 1: Use a comparative income statement and balance sheet for the period which choose
to compare the minimum need to choose periods to compare but it will be able to spot trend
much better it use at least three year.

Step2: Decide which approach is used for horizontal analysis, which have several options
such as,

 Direct Comparison
 Variance
 Percentage

Step3: Find result, the simple way to spot trend is to view the change from period to period
but if more suitable for substitution analysis.

Step4: Its analyst chooses various analysis either as dollar amount or a percentage for both
variance and percentage analyst must add the column to show change in both.

Step 5: Horizontal analysis or financial statement like income statement balance sheet and
cash flow statement at use the similar techniques.
Horizontal analysis trends percentage

The percentage is calculated by the first dividing the dollar change between the comparison
year and the base year by the line item value in the base year and then multiple with the value
of 100.

Horizontal analysis trend %age=Dollar change= Amount of the item in comparison

year

Horizontal analysis trend percentage can be find by finding the balance sheet, income
statement and cash flow statement by scheduling of current and fixed assets and statement of
retained earning.

When to use horizontal analysis

 Horizontal analysis is used to follow the investor and analysis to check what has been
running a company financial performance over several year and to spot trend and
growth patterns.
 The uses of horizontal analysis enable analysis to check the relevant charges in
different line items over time and project them in to the future.
 Horizontal analysis is used in the review of company financial statements over
multiple periods.
 It’s used to depict as percentage growth over the same line item in the base year.

 Horizontal analysis allows financial statement user to easily spot trends and growth
patterns.
 Horizontal analysis shows a company growth and financial position by comparing the
competitors.
 Horizontal analysis used to manipulated to make the current period look better it
specific historical period of poor performance or chosen as a comparison.
Horizontal analysis advantages and disadvantages

Horizontal analysis advantages

 Horizontal analysis helps the analyst to make a proper comparison between two or
more firms over a period of time.
 Horizontal analysis is found to be more effective in comparison with the complete
data on the basis of management decision making power.
 Horizontal analysis is very help for the comparative analysis of data in order to
measure the performance of firm over the period of time.
 Horizontal analysis is useful to measure the short term liquidity position as well as
long term solvency position of the firm.
 Horizontal analysis is also helpful to measure the profitability position of an
enterprise.
 Horizontal analysis is used to find the firm over the year with the help of some related
financial trends ratios. (Operation ratio, Net profit ratio, Gross profit ratio etc).

Disadvantages of Horizontal analysis

 Horizontal analysis is not so easy to select the base year the normal year is taken as
base year.
 It is very difficult to apply a horizontal analysis a consistent accounting principle and
policy particularly when the trends of business accounting are constantly changing.
 Horizontal analysis is useless at the time of price level change.
 Horizontal analysis is not useful for comparison will present a misleading result.
 Horizontal analysis is the aggregation of information in the financial statement may
have change over time.
Horizontal analysis of income statement with example and
image

Horizontal analysis compares amount balances and ratio over different time period. The
analysis computes the percentage changes in each income statement amount at the far right.

ABC Corporation

Horizontal analysis of income statement

For the year ended......

Increase or decrease

Particulars 2008 2007 Amount %age

sales 1498000 1200000 298000 24.8%
Cost of goods sold 1043000 820000 223000 27.2
Gross profit 455000 380000 75000 19.7
General expenses 104000 97400 6600 6.8
Selling expenses 191000 147000 44000 29.9
Total operating income 160000 135600 24400 18.0
Other income 8500 11000 2500 22.7
Other expenses 6000 12000 6000 50.0
Income tax 71500 58100 13400 23.1
Net income 91000 76500 14500 19.0
Interpretation

The above analysis 2007 is the base year and 2008 is the comparison year. The item of the
income statement of 2007 is compared with the item of income statement of 2008.The
analysis compute the %age change in each income statement account at the far right. The first
number is considered as the change in profit. Net income declined by 19.0%.

Horizontal analysis of balance sheet with example

The balance sheet is the most important of the financial statements. The balance sheet
comprises assets, liabilities and equity it known as the financial position statement.
 ABC Corporation

Horizontal Analysis of Balance Sheet

As on 31st Dec,

Increase or decrease

Assets 2008 2007 Amount %age

Current assets 10361 7777 2584 10.8%
Property & equipments 15375 13068 2307 7.6
Other assets 658 540 711 4.8
Total assets 26394 21385 5009 6.8
Liabilities
Currents liabilities 6501 4385 2116 7.0
Long term debts 1250 1545 295 12.7
Other liabilities 372 256 116 9.60
Differed income tax 189 195 6 3.1
Total liabilities 8312 6381 1931 7.40
Interpretation

The horizontal analysis of balance sheet show the increase in liabilities of 2007as compare to
2006. Its income for Rs 1931 which show the high liquidity position of business its show
week position with reference to internal liquidity.

Horizontal analysis of cash flow statement

A company cash flow statement show how a company spend money and also from where a
company receive its money through the operational investing and financial activities of the
company.

ABC Corporation

Horizontal Analysis of cash flow statement

 For the year ended......

Cash from operating activities Amount($)

Net income 23000
Depreciation expenses 4000
Increase in amount receivable (6000)
Decrease in inventory 9000
Decrease in A/P (5000)
Net cash provided by operating activities 25000
Cash from investing activities
Capital expenditures (28000)
Proceeds from sale of property 7000
Net cash used in investing activities (21000)
Cash flow from financial activities
Borrowing of long term debts 10000
Cash dividend (5000)
Purchase of stock (5000)
Net cash used in financial activities (3000)
Net increase in cash 1000
Cash at start of year 1200
Cash at the end of year 2200
Interpretation

Formula for calculation of cash flow statement

Free cash flow= net cash provided by operating activities – capital expenditures

=$25000-28000

=$(3000)

The amount show that cash left over from operations offer company pay for capital
expenditures. There can be variations of this calculation.

Horizontal analysis Growth

Horizontal analysis is used to check the company financial statement over different periods of
time. Its usually show the percentage growth over the same line item from the base year.
Horizontal analysis allows financial statement user to easily trend and growth patterns.
Horizontal analysis shows a company growth and financial position versus competitors.
Horizontal analysis can be deducted to make the current periods look better if the particular
historical period of poor performance is selected for comparison.

Applications of horizontal analysis

 Horizontal analysis is used to analyze the financial statement by comparing the

information for a certain accounting period.
 Horizontal analysis is used as a best technique to analyze the past performance along
with the company current financial position or growth.
 Horizontal analysis can also be used to bench mark a company with competitions in
the same industry.
 Investors used the horizontal analysis to determent the trends in a company financial
position and performance over time to determine whether they want to invest in that
company.

Vertical Analysis

In income statement the vertical analysis is existed between the items of the income
statement such as income and expenditures, Gross sales and net profit of the business. In
balance sheet the vertical analysis is calculated as a percentage of the total assets and the
liabilities. The vertical analysis of cash flow statement is conducted among the inflow and
outflow of the cash which represent the percentage of the total cash flow. Vertical analysis is
helpful for the analyst to compare the companies’ data from quarterly Semi, annually and
annually on base of figure and the percentage.

Definitions

“Vertical analysis can be used in business to show the relation between the variables of the
financial statement”.
 “Vertical analysis is the most fundamental method of financial statement analysis. In
vertical analysis all the item which existed into business lined up into financial statement in
form of percentage on base of the base figure”.

Financial statement for vertical analysis

All these companies, who cheat it financial position through vertical analysis always
designed its financial statement in column form and also post the data in columns in figure
and percentage. The vertical column financial statement provides the great variety of data to
the user of information for their best decision making. Vertical column is available in
common size financial statement of the companies that consisted on all data in figure and
percentage form. For the comparison of business to find change its financial position Vertical
analysis classified into two statements.

 Profit/Loss Account Analysis

 Balance Sheet Analysis

In vertical analysis the total amount of the columns is compared and multiplied by 100 to find
results in percentage.

Purpose of the vertical analysis

The main purpose of the vertical analysis to find the inter relationship between the item of
the statement and also check the volume of sales, Profit and total assets of the business.
Vertical analysis is very helpful for the internal check and control system that compare the
result with the specific determined bench mark rate. Vertical analysis helpful for internal
staff, accountant, managers and taxation authorities for the proper decision making and also
find the draw backs of the business and to fix the issues.

Difference between Horizontal and vertical analysis

 The primary difference between vertical and historical analysis is that vertical
analysis is focused on the relationship between the numbers in a single reporting
periods or on a particular time periods. Horizontal analysis looks at certain line item,
ratio or factor over several periods to determine the extent of change and their trends.
 In HORIZONTAL analysis the analyst always compare the financial statement of the
business for the more than two accounting periods. In horizontal analysis data is
arranged in side by side column on yearly bases.
 In VERTICAL analysis is done by analyst only for one accounting period and in
which data is arranged in the column form in figures and percentage. Vertical analysis
is also called the static analysis.
 In vertical analysis the assets, liabilities and equity is presented in form of percentage.
Vertical analysis show the financial position of the business on based of lined up
numbers. Horizontal analysis compares the figures under head of financial statement
and vertical analysis compared the numbers and percentage change on line up total of
items with reference to previous year.