Horizontal and vertical analysis balance sheet descriptions
Horizontal and vertical analysis are both methods of financial statement analysis:
- Horizontal analysis – Also known as trend analysis, horizontal analysis of a balance sheet is a financial statement analysis technique that shows changes in the amounts of financial statement items over a period of time. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with the same items on the statements of the base period. The changes are generally shown both in dollars and as a percentage.
- Vertical analysis – Vertical analysis is a financial statement technique that reports each amount on a financial statement as a percentage of another item. The vertical analysis of the balance sheet restates every amount on the balance sheet as a percentage of total assets. Results from vertical analysis of a balance sheet are presented as a common-size financial balance sheet. Common-size balance sheets are useful for comparing a company to other companies or to industry averages.
Difference between a vertical analysis balance sheet and a horizontal balance sheet analysis
Both horizontal and vertical balance sheet analysis are used in financial statement analysis. However they differ in a number of ways including:
- Both express results as a percentage
- Vertical analysis percentage expresses results as a percentage of total assets at the time the analysis was done.
- Horizontal percentage is the change in a particular item from one period to the next.
- Vertical analysis is used to compare a company to another company or an industry average
- Horizontal analysis is used to examine changes (trends) in different balance sheet items over a period of time.
- Vertical analysis is calculated as Balance sheet item/Total assets
- Horizontal analysis consists of two calculations. Dollar change = Amount of item in comparison year minus amount of item in base year. Percentage change = (Dollar change/Amount of the item in base year) x 100
Horizontal and vertical analysis are both useful tool in financial statement analysis. If you are unsure how to use them, use our accounting assignment help now.
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