Show
Financial Statement implies the formal and final summary of the financial affairs of the concern, indicating the performance, profitability, position, etc. The process of thoroughly analysing the information given in the financial statement, so as to estimate the present and past financial position, operational efficiency of the concern, is called financial statement analysis or financial analysis. Financial Analysis can be of two types, i.e. Horizontal Analysis and Vertical Analysis Now let’s discuss the differences between horizontal and vertical analysis. Content: Horizontal Vs Vertical Analysis
Comparison Chart
Definition of Horizontal AnalysisHorizontal Analysis is that type of financial statement analysis in which an item of financial statement of a particular year is analysed and interpreted after making its comparison with that of another year’s corresponding item. It is a useful tool for gauging the trend and direction over the period. In this analysis, the line of items is compared in comparative financial statements or ratios over the reporting periods, so as to record the overall rise or fall in the company’s performance and profitability. Comparative financial statements reflect the profitability and financial status of the concern for various accounting years in a comparative manner. It should be kept in mind that the data of two or more financial years can be compared only when the accounting principles are the same for the respective years. In this analysis, the very first year is considered as the base year and the entities on the statement for the subsequent period are compared with those of the entities on the statement of the base period. The changes are depicted both in absolute figures and in percentage terms. Definition of Vertical AnalysisVertical Analysis refers to the analysis of the financial statement in which each item of the statement of a particular financial year is analysed, by comparing it with a common item. So, it is also known as common-size analysis. In vertical analysis, the line of items on a balance sheet can be expressed as a proportion or percentage of total assets, liabilities or equity. However, in the case of the income statement, the same may be indicated as a percentage of gross sales, while in cash flow statement, the cash inflows and outflows are denoted as a proportion of total cash inflow. For this purpose, common size financial statements are used, wherein the correlation of various items of the statement with a common item is denoted as a percentage of that common item, i.e. the bottom line With the help of this analysis, the percentages so computed can be directly compared with the result of the equivalent percentages of the past years or other companies operating in the same industry, irrespective of their size. So, common size financial statement not only helps in intra-firm comparison but also in inter-firm comparison. The difference between horizontal and vertical analysis can be drawn clearly on the following grounds:
ExampleHorizontal Analysis Vertical Analysis ConclusionFinancial Analysis is helpful in accurately ascertaining and forecasting future trends and conditions. The primary aim of horizontal analysis is to compare line items in order to ascertain the changes in trend over time. As against, the aim of vertical analysis is to ascertain the proportion of item, in relation to a common item in percentage terms. The two analysis are helpful in getting a clear picture of the financial health and performance of the company. What analysis tool compares an item in the financial statement to another item in the same financial statement?Horizontal analysis is used in the review of a company's financial statements over multiple periods. It is usually depicted as percentage growth over the same line item in the base year.
What do you call the process of comparing amounts in the financial statements within the same accounting period?Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends.
What is comparative analysis of financial statements?A comparative statement is a document used to compare a particular financial statement with prior period statements. Previous financials are presented alongside the latest figures in side-by-side columns, enabling investors to identify trends, track a company's progress and compare it with industry rivals.
What is horizontal analysis 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.
|