In: Accounting
Horizontal analysis is analysing financial data such as balance sheet, Income statements and cash flow statement of a company over a period of time. It analyses more than one financial years data to evaluate the trend situations.
In horizontal analysis current year is taken as comparison year and last year is taken as base year. Figures are calculated as
Amount in comparison year - Amount in base year/Amount in base year*100
Vertical analysis
In vertical analysis vertical analysis, every line item on the financial statement is entered as a percentage of another item. For example in an income statement every other item is expressed as a percentage of sales
Vertical analysis formula is calculated as
Individual item/Base amount *100
In income statement sales is taken an base amount
In balance sheet Assets/ Liabilities become base amount respectively
Liquidity ratio
Current ratio
Formula : Current asset/Current liability
Liquidity or short-term solvency means ability of the business
to pay its short-term liabilities. The main question this ratio
addresses is: "Does your business have enough current assets
to
meet the payment schedule of its current debts with a margin of
safety for possible losses in
current assets?"
Profitability ratio
Return on Investments ratio ( ROI)
Formula = Return/Investment*100
this ratio tells the owner whether or not all the effort put
into the business has been worthwhile. It compares earnings/
returns/
profit with the investment in the entity