In which situations would you use horizontal and veritcal analysis
when reveiwing financial statements?

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Clarification of Question by baseball2-ga on 07 Apr 2005 13:36 PDT

I need a quick answer on this one...if at all possible:)

Hi again!!


Horizontal analysis (trend analysis) evaluates a series of financial
statement data  over a period of time. The purpose of  horizontal
analysis is to determine the increase or decrease that has taken
place. This change may be expressed as either an amount or a
percentage.

Vertical analysis evaluates financial statement data  expressing each
item in a financial statement as a percent of a base amount. Vertical
analysis compares line items on a financial statement over an extended
period of time. This helps us spot trends and restate financial
statements to a common size for quick analysis. Vertical analysis is
an excellent analytical tool when comparing two companies of unequal
size.

So you can use horizontal analysis in order to find answers to the
following questions:
Why is there an increase in the stock of the company? Has the company
changed its inventory policy?
Why did taxation increase so tremendously? Were there any changes in
taxation? Is it reflected by the increase in sales? Profit?
Why is there an increase in the fixed assets and at the same time
decrease in the long-term debt? How were these assets financed?
And many more question which can be elaborated by the management or
which can be used as the basis for discussions.

Vertical analysis can be defined as the study of the relationship of
each financial statement entry to its logical base. And you can use it
to compare two different companies, an analyst can compare the
percentage mark-up of asset items and how they have been financed.

In general, we can use vertical and horizontal analysis for easy
identification of changes within financial balances.

Sources:
"Evaluating Financial Performance":
http://www.exinfm.com/training/course01.doc

"Financial Statement Analysis":
http://www.brescia.edu/academics/syllabus/spring05/acc202/ch19.ppt#1

"Financial Statement Analysis":
http://northonline.sccd.ctc.edu/pbouker/ACC220_Folder/Ch13FinStateAnalysis.doc

"Vertical and Horizontal Analysis Technique":
http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page37.htm


I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards.
livioflores-ga

Excellent!