The topic of horizontal analysis versus vertical analysis explains how they are both fundamental to financial statement analysis. Vertical analysis compares line items and ratios on a current financial statement making them easier to compare to other companies.
What is the difference between vertical analysis and horizontal analysis? Vertical analysis reports each amount on a financial statement as a percentage of another item. For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated to be a percentage of total assets.
Sometimes it can be difficult to interpret in a meaningful way all the dollar amounts presented in a set of financial statements. For example, if one company has liabilities of $10,000 and another company has liabilities of $10,000,000; is the first company less risky?
Key Difference – Horizontal vs Vertical Analysis Financial statements such as the income statement, balance sheet, and cash flow statement are important statements that should be studied extensively in order to arrive at conclusions regarding the performance of the current financial year as well as to assist planning the upcoming financial ...
By examining this example of a horizontal analysis it is possible to gain insight into the purpose and usefulness of this type of financial tool. By comparing figures or financial ratios from the financial statements over a particular period of time, such as two years or more, important trends and information can be obtained.