Question

Do some research and tell the class why horizontal and vertical analysis methods are used. What can we learn from these statements? How can the results be compared to other corporations and why are ratios better than using dollars?

Answer 1

A horizontal analysis is used when when financial data has to be compared over a number of accouunting periods to analyse trends.A vertical analysis is used when each line item has to be analyzed in terms of a percenatage of a base figure in the statement.

From the horizontal statement, the trends over a number of years like increasing or decreasing profitability can be known. From the vertical statement, the ratios as a percentage of a base figure will help to analyze what percentage is dedicated to which cost item.

The results can be useful in comparison with other coporations as they will help to chart a growth chart in comparison to other organizations. The proportion to the base figure for other organizations for the selected cost items can be studied as well.

Ratios are better than dollars as the volume of business for organizations may differ however financial helath comparable to the organization's operations can be assessed using ratios.