Question

Contrast the use of horizontal and vertical financial statement analysis. Which analysis is more useful in making a good financial decision?

Answer 1

Under horizontal analysis looks at amounts on the financial statements over the past years. This means that all the current items of the financial statements are compared with the corresponding figures in the past years. This type of analysis is useful for comparing the year to year changes & for measuring the performance growth over the series of years. A base year is usually selected for comparing the current year results with those years results. Horizontal analysis focuses on trends and changes in financial statement items over time. Along with the dollar amounts presented in the financial statements, horizontal analysis can help a financial statement user to see relative changes over time and identify positive or perhaps troubling trends.

Under vertical analysis, all the items in a financial statement are shown as a percentage of a particular item in that financial statement. For example, on asset side of the balance sheet, all the items may be shown as a percentage of total assets of an entity. All the figures are then shown as the percentage of that key component.

Both the analysis are important for an organization to measure the performance of the company and for good decision making. Both types of analysis serves different purpose and are to the interest of the stockholder's of the company.