Question

why do you think the preparation of vertical and horizontal analyses are a good starting point when analyzing financial statements.

Answer 1

Vertical and horizontal analysis are very important tools for financial statement analysis.

In horizontal financial statement analysis we try to compare one financial statement with other company's financial statements. But for getting efficient results the comparing statements should be from one same industry and same standard of business. So we try to compare our financial statement using percentage method.

Vertical analysis is a technique which shows the relationship between the same items in the financial statements And its identified as a percentage of the key item in the financial statement. And normally we consider sales as a key itemiand as 100%.because sales is the limiting factor for majority of businesses. And we try to find each and every items in financial statement in proportion to sales.

Eg: sale = 100 = 100%

Cost of goods sold = 70 = 70% of sales

So these analysis are very important for the businesses for comparing and analysis their financial statements. These tools enable the management to compare their performance with other companies and also able to analyse their own business division's performance too.