In: Accounting
Hello, I have to complete a horizontal and vertical analysis. The horizontal problem shows a comparative balance sheet and the vertical problem shows a common size income statement. I have never learned this before so I wanted to get some help. I have to solve the horizontal problem as comparative then common size, and then vice versa for the vertical problem. What steps do I take?
Vertical Analysis:
Vertical analysis reports each amount on a balance sheet as a percentage factor of anoter item. For example, the vertical analysis of balancesheet means every amount of balancesheet is restated to be a percentage of total assets.
If the value of stock is $100000, and total assets are $400000 then stock is to be presented as 25($100000/400000)
If the cash and cash equivalents are $8000, and total assets are $400000 then cash is to be presented as 2($8000/400000)
The total alue of assets will now be add upto 100.
If the bills payable are $80000 then it will be presented as 22($88000/400000)
The restated amunts from the vertical analysis of the balancesheet will be presesnted as a Commnsize balancesheet.
A comonsize balancesheet allows you yo compare your company balancesheet to another company balancesheet or to the average for the industry.
Vertical analysis of ana income statement results in every income statement amount being presensted as a percentage of sales.
If sales were $1000000 then they would be restated to be 100.
If the cost of goods sold is $780000 then they would be presensted to be 78($780000/1000000)
If If the interest expenses are $50000 it will be presesnted as 5(50000/1000000)
The restated amunts from the vertical analysis of the income statement will be presesnted as a Commnsize income statement.
Horizontal Analysis:
Horizontal Analysis looks at the amounts on financial statements over the past years.
For example if the cash reported on the balancesheet at December 2018, 2017,2016,2015 and 2014 will be expressed as a percentage of December 2014 amount.
Instead of dollar amount, you might see 134,125,110,103 and 100. This shows that the amount of cash at the end of 2018 is 134% of the amount at the end of 2014.
The same analysis will be done for each item on the balancesheet and for each item on the income statement.
This allows you to see how each item has changed in realationship to other items. Even horizontal analysis is referred as trend analysis.
I hope if you follow the above steps it will help you to slov e the problem.
Thank You....