What is Horizontal Analysis of Financial Statements?

The analysis computes the percentage changes in each income statement amount at the far right. The key advantage of using horizontal analysis is that it allows for the visual identification of anomalies from long-running trends. By presenting data on a comparative basis, changes in the data are more readily apparent. In addition, the use of horizontal analysis makes it easier to project trends into the future. Yet another advantage of this form of data presentation is when trends can be compared to those of competitors or industry averages, to see how well an organization’s performance compares with that of other entities. Using the formula described above, calculate the horizontal analysis formula for each item you selected.

This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. These trend percentages indicate the changes taking place in the organization and highlight the direction of these changes. In horizontal analysis, we find the percentage change from one year another one. For instance, the percentage of sales is increasing each year compared to the base year.

Key Differences Between Horizontal and Vertical Analysis

A notable problem with the horizontal analysis is that the compilation of financial information may vary over time. It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared. Horizontal Analysis measures Running Law Firm Bookkeeping: Consider the Industry Specifics in the Detailed Guide a company’s operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. The term “Horizontal Analysis” refers to the method of analyzing financial statements where historical data from the income statement, balance sheet, and cash flow statement are subject to comparison.

These give the analyst insight into how much the line-item value has changed from the base period to the period being analyzed. Horizontal analysis should therefore be used in conjunction with other analytical tools like vertical (common-size) analysis and financial ratios to get a more comprehensive picture of the situation at hand and its likely trajectory. We’ll start by inputting our historical income statement and balance sheet into an Excel spreadsheet. The accounting period covered could be one-month, a quarter, or a full fiscal year.

Comparison Period to Base Period Percentage Change Example

For example, a horizontal analysis of the cost of insurance might list the cost on a quarterly basis for the past few years, while a vertical analysis would present it as a percentage of sales only for the current period. Horizontal analysis is a method for calculating the relative changes in financial performance over time. It involves comparing financial information from one year to another and analyzing the differences between them. This type of analysis will help you identify trends and measure how well a company performs against its competitors or previous years.

• When a business takes an unusual position in regard to reporting standards, its financial statements will not be as readily comparable to those of its competitors.
• Access and download collection of free Templates to help power your productivity and performance.
• Your accounting team has prepared the P&L statement for the year 2018, and you want to assess how the current performance compares to that of 2017.
• Side by side they do this to determine if the company’s performance is improving or declining.

This calculation helps identify trends and fluctuations in financial performance, which is useful in making informed business decisions. That’s exactly why it’s called horizontal analysis – you compare the data from each period side by side to calculate your results. For example, you can compare your company’s revenue from last year to this year or your company’s net income from last year to this year.

How to Perform a Horizontal Analysis

Trends or changes are measured by comparing the current year’s values against those of the base year. On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company’s financial statements over time.

Horizontal analysis can also be used to compare growth rates and profitability over a specific period across firms in the same industry. To conduct a horizontal analysis of Goldman Sachs’ 2021 performance compared to 2020, first subtract the line items for the base year of 2020 from those for the target year of 2021. Then, divide the change by the base year amount and multiply by 100 to get the percentage change.

The consistency guidelines mean a company must use the same accounting principles across different accounting periods. If it changes its practice, it must disclose it in its financial statement notes. This method allows you to compare values from different financial statement periods in dollar terms. You can simply subtract figures one from one accounting period to the baseline accounting period. Horizontal analysis of financial statements can be performed for comparing data across multiple quarters in the same year, quarterly analysis on a year-on-year basis, and yearly comparisons. In this example, the sales have increased 59.3% over the five‐year period while the cost of goods sold has increased only 55.9% and the operating expenses have increased only 57.5%.

The Horizontal Analysis Formula is a very useful tool for comparing different years and understanding how a company is performing. By using this formula, businesses can identify areas where they need to make changes to improve their performance. Although this type of analysis is not a comprehensive approach, it can help as a starting point to evaluate a potential investment opportunity. Similarly, horizontal analysis allows the impact of one financial metric on another. For instance, if a company records a decrease in its sales, the analysis will show its impact on cash flows as well. Horizontal income statement analysis is typically done in a two-year manner, as shown below, with a variance that shows the difference between the two years for each line item.