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Module 2 - Topic 3

Vertical and horizontal analyses are tools used to analyze financial statements. [1] Vertical analysis expresses each item as a percentage of a total amount, such as assets or sales. [2] Horizontal analysis compares amounts over multiple years as a percentage change from a base year. [3] Both tools can help identify trends that provide insights about a company's performance over time.

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64 views

Module 2 - Topic 3

Vertical and horizontal analyses are tools used to analyze financial statements. [1] Vertical analysis expresses each item as a percentage of a total amount, such as assets or sales. [2] Horizontal analysis compares amounts over multiple years as a percentage change from a base year. [3] Both tools can help identify trends that provide insights about a company's performance over time.

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PRINTABLE LEARNING MATERIAL

Module 2- Topic3: Horizontal and Vertical Analyses

LEARNING OUTCOME:
Perform vertical and horizontal analyses of financial statements of a single
proprietorship. (ABM_BF12-IIIb-8)

Based on the Course Hero, Horizontal and vertical analysis are two tools commonly
used to assess organizational performance. The Horizontal analysis helps identify
trends over time. Vertical analysis is useful in comparing performance between
entities.

Defining Vertical Analysis


According to Averkamp from the article of Accounting Coach, Vertical analysis
expresses each amount on a financial statement as a percentage of another amount.

 The vertical analysis of a balance sheet results in every balance sheet amount
being restated as a percent of total assets.
 The vertical analysis of an income statement results in every income statement
amount being restated as a percent of net sales.

Example of Vertical Analysis of a Balance Sheet:

January 1, 2020
Assets
Current Assets
Cash 100,000
Accounts Receivable
Inventory 100,000
Total Current Assets 200,000
Non-Current Assets
Transportation Equipment (Gross) 200,000
Less: Accumulated Depreciation
Total Non-Current Assets 200,000
Total Assets 400,000

Assets:

If a company's inventory is P100,000 and its total assets are P400,000 the inventory will
be expressed as 25% (P100,000 divided by P400,000). Cash is P100,000 and its total
assets are P400,000 the inventory will be expressed as 25% (P100,000 divided by
P400,000).

Transportation Equipment is P200,000 and its total assets are P400,000 the inventory
will be expressed as 50% (P200,000 divided by P400,000).

Therefore: 25% + 25% +50%= 100%: The total of the assets' percentages will add
up to 100%.

Liabilities and Equity:

January 1, 2020
Liabilities
Accounts Payable 100,000
Notes Payable 0
Total Current Liabilities 100,000
Long-Term Debt 60,000
Total Non-Current Liabilities 60,000
Total Liabilities 160,000
Owner’s Equity 240,000
Total Liabilities and Owner’s Equity 400,000

If the accounts payable is P100,000 they will be restated as 25% (P100,000 divided by
P400,000). The Long-Term Debt is P60,000, it will have restated as 15% (P60,000
divided by P400,000).

If the owner's equity is p240,000 it will be shown as 60% (P240,000 divided by


P400,000).

Therefore: 25%+ 15%+ 60% =100%. The sum of the liabilities and owner's equity will
also be 100%.

Example of Vertical Analysis of an Income Statement

If a company's net sales were P1,000,000 they will be presented as 100% (P1,000,000
divided by P1,000,000). If the cost of goods sold amount is P780,000 it will be
presented as 78% (P780,000 divided by sales of P1,000,000).
Defining Horizontal Analysis
From the article of Accounting Coach, Horizontal analysis looks at amounts from the
financial statements over a horizon of many years. Horizontal analysis is also referred to
as trend analysis. The amounts from past financial statements will be restated to be a
percentage of the amounts from a base year.

Example of Horizontal Analysis of a Balance Sheet:

December 2020
December 2019
(Comparison Difference Change
(Base Year)
Year)
(A) (B) (C) (D)

Assets

Cash 50,000 100,000 50,000 100%


Accounts Receivable 0 20,000 20,000 100%
Inventory 100,000 80,000 (20,000) -250%

Total Current Assets 150,000 200,000 50,000 33%

Transportation
20,000 20,000 0
Equipment (Gross)

Less: Accumulated
4,000 4,000 100%
Depreciation
Total Non-Current
20,000 16,000 (4,000) (20%)
Assets
Total Assets 170,000 216,000 46,000 27%

Formula: Amount in Comparison Year- Amount in Base Year X 100


Amount in Base Year

Analysis: The increase of 27% of total assets may be attributed to large changes in cash
and accounts receivable. Furthermore, the inventory decreases so that the company sells
inventory. (Lifted from: Santoyo, Alfredo, Lim, Edralin & Patiu, Liberty. (2018) Business Finance. MaxCor Publishing House Inc.)
Licensing & Attributions / References
 Averkamp, H (2021). Retrieved December 14, 2020, from
https://www.accountingcoach.com/blog/vertical-analysis-horizontal-analysis
 Course Hero, (2021) Retrieved December 14, 2020, from https://www.coursehero.com/sg/principles-of-
accounting/horizontal-and-vertical-analysis-methods/
 Santoyo, Alfredo, Lim, Edralin & Patiu, Liberty. (2018) Business Finance. MaxCor Publishing House Inc.

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