What is Vertical Analysis?Vertical analysis is the proportional analysis of a financial statement, where each line item on the statement is listed as a percentage of another item. This means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. Show
What is Horizontal Analysis?Horizontal analysis is the comparison of historical financial information over a series of reporting periods. It is used to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reasons for the difference. Comparing Vertical Analysis and Horizontal AnalysisGiven these descriptions, the main difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, while horizontal analysis spans multiple reporting periods.
A Comparative Income Statement shows the operating results for several accounting periods. It helps the reader of such a statement to compare the results over the different periods for better understanding and detailed analysis of variation of line-wise items of Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.
Example and Format of Comparative Income StatementLet’s understand the Comparative Income Statement with the help of an example. ABC Limited has provided the following information about its two accounting periodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more, i.e., 2016 and 2017. Prepare a Comparative Income Statement and interpret the basic findings.
Comparative Income Statement format of ABC Limited for the period ended 2016 and 2017
Based on the above Comparative Income Statement of ABC Limited, it can be analyzed how an increase in sales (25% over the previous year) has impacted the Net profit (increased by 100% in absolute terms over the previous year) and how various line items have contributed. Basic Analysis includes the following:
Thus we can see how Comparative Income Statement helps ascertain the changes of various components of expenses and identify the reason for changes that help the management in decision making in the future. Types of Comparative Income Statement Analysis You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked #1 – Horizontal AnalysisOne of the popular techniques of Comparative Income Statement shows the change in amount both in absolute and percentage terms over some time. It helps in easy analysis of trends and, as such, is also known as Trend Analysis. One can easily observe growth patterns and seasonality using the Horizontal Analysis TechniqueHorizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.read more. An Illustration showing Horizontal Analysis is depicted below: Colgate’s Horizontal AnalysisLet us now look at an example of Colgate’s Horizontal analysis. We can find the growth rate of Net Sales of 2015; the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. Likewise, we can find the growth rates of other line items using a similar formula. We note the following –
#2 – Vertical AnalysisAnother technique that exhibits Comparative Income Statement in terms of the relative size of line items is the Vertical Analysis. This technique enables easy comparison of Income statements of companies of different sizes. It shows each item on the Income Statement as a percentage of Base figures (usually the Sales figure) with the statement. Under this, all components of Income statements are shown as a percentage of sales, such as Gross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, Net Profit, Cost of Sales, etc., which makes it very handy to use even when comparing differently as it removes the Size biases and makes the analysis more straightforward and understandable. It is mostly used for individual statements for a reporting periodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more but can also be used for timeline analysis. An Illustration showing Vertical AnalysisVertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in percentage of the base figure. The formula is: (Statement line item / Total base figure) X 100read more is depicted below. Vertical Analysis of Colgate’s Income StatementBelow is the snapshot of Colgate’s Comparative Income Statement
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Recommended ArticlesThis article has been a guide to Comparative Income Statement. Here we discuss its examples and types of comparative income statement analysis (horizontal and vertical analysis). You may learn more about financial analysis from the following articles –
What is a horizontal and vertical analysis?Horizontal analysis is performed horizontally across time periods, while vertical analysis is performed vertically inside of a column. Horizontal analysis represents changes over years or periods, while vertical analysis represents amounts as percentages of a base figure.
Which analysis is used for evaluating a series of financial statement data over a period of time?Horizontal analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time.
What is financial statement analysis in particular?Financial statement analysis is the process an individual goes through to analyze a company's various financial documents in order to make an informed decision about that business.
Which analysis is based on year to year data?What is YoY? YoY stands for Year over Year and is a type of financial analysis that's useful when comparing time series data. Analysts are able to deduce changes in the quantity or quality of certain business aspects with YoY analysis.
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