6. Horizontal and Vertical Analysis

Formula for horizontal analysis (to get percent change):

((Current period amount - Base period amount) / base period amount) x 100

For horizontal analysis, if there is a negative amount in the base year and a positive amount in the year of analysis (or vice versa) what is the conclusion?

We cannot compute a meaningful percentage change.

For horizontal analysis, if the base year amount is 0, what is the conclusion?

Can’t compute a meaningful percentage change.

For horizontal analysis, if an account has an amount in the base year, but 0 in the analysis year what can we conclude?

The decrease is 100%

What is vertical analysis?

Comparison of a company’s performance to a base amount. Shows the percentage relationship of each financial statement account to a designated base account amount

What is usually the base amount for the income statement?

Revenues or net sales (sales - sales return and allowances - sales discounts)

Formula for vertical analysis:

(Financial statement account amount / Base amount (for example base amount for Income statement is usually Revenues or Net sales)) x 100

What is the base amount for the balance sheet?

Total assets

What are common size statements?

These are statements using vertical analysis where all items are expressed in percentages.  This makes the process of comparison a lot easier.