Question

Balance Sheet Horizontal and Vertical Analysis
	2018	2019	Horizontal	Vertical
Cash	28,421	1,274	-95.52%	0.13%
AR	225,019	333,558	48.24%	34.00%
Inventory	319,887	321,006	0.35%	32.72%
Prepaid Insurance	3,500	3,750	7.14%	0.38%
Total Current Assets	576,827	659,588	14.35%	67.23%
Equipment	385,000	385,000	0.00%	39.24%
Less: Acc. Dep.	21,150	63,450	200.00%	6.47%
Net Fixed Assets	363,850	321,550	-11.63%	32.77%
Total Assets	940,677	981,138	4.30%	100.00%
Accts Payable	331,822	401,693	21.06%	40.94%
W&P Taxes Payable	25,889	26,145	0.99%	2.66%
ST Portion MP	21,014	29,085	38.41%	2.96%
Total Current Liab.	378,725	447,923	18.27%	45.65%
Mortgage Payable	245,000	224,915	-8.20%	22.92%
Total Liabilities	623,725	672,939	7.87%	68.58%
Owner’s Equity	316,952	308,300	-2.73%	31.42%
Total L&OE	940,677	981,138	4.30%	100.00%

what areas of concern, if any, do these analyses highlight? Explain.

Answer 1

Solution

A] Horizontal Analysis

It provides comparison between the performances of the company across two time periods.

In the attached Balance Sheet for the year 2019 and 2018, following are the key observations

Account receivables: A growth of 48.24% indicates a bad performance in the year 2019. The company is not able to recover its dues from customers. (This analysis is considering that there is not corresponding growth in sales during the period). Increase in current assets in the form of receivables is not desirable as it blocks the cash.

Depreciation: 200% growth may indicate that some assets are put to use this year which are now getting depreciated.

Accounts Payable: Increase of 21% is good, indicating the company is able to avail credit from its suppliers.

Owners Equity: Reduction of -2.73% indicates that the company has suffered loss in the year 2019. This is an area of concern. Reason of loss however cannot be deduced from balance sheet alone.

B] Vertical Analysis

Ideally vertical analysis is used to compare two different companies for the same financial year.

In the attached Balance Sheet for the year 2019 and 2018, vertical analysis component of only 2019 is provided. No details of 2018 are provided.

Based on whatever is provided the analysis is as under:

Assets: Assets side consist of 32.77% as fixed assets and 67.23% as current assets, indicating a more working capital intensive business such as a sugar or steel industry etc.

Liabilities and Equity: Long term sources of finance account for 57.3% (22.92+31.42+2.96). Hence long terms funds are available to fund short term assets. However, reducing equity portion is a cause of concern.

(Note: It is advisable to have 2018 numbers for better vertical analysis)