Question

Identify the calculation for vertical and horizontal analysis and explain how we use the information and what the calculations mean.

Answer 1

Vertical analysis compares financial statement by expressing each line item on the statement as a percentage of base line.

Formula for Vertical analysis is:

Line item % = (Line item value/Base item) x 100

An example of Vertical analysis for income statement for XYZ Company states as:

XYZ company
Income Statement Vertical Analysis
For year Ending Dec'31 2016, Dec'31 2017
	2016		2017
Sales	$              450,000	100%	$ 475,000.00	100%
Cost of goods sold	$              240,000	53.33%	$ 250,000.00	52.63%
Gross profit	$              210,000	46.67%	$ 225,000.00	47.37%
Wages	$              110,000	24.44%	$ 125,000.00	26.32%
Repairs	$                   2,500	0.56%	$       5,000.00	1.05%
Rent	$                10,000	2.22%	$    10,000.00	2.11%
Taxes	$                15,000	3.33%	$    17,000.00	3.58%
Office expenses	$                      500	0.11%	$          700.00	0.15%
Total expenses	$              138,000	30.67%	$ 157,700.00	33.20%
Net income	$                72,000	16.00%	$    67,300.00	14.17%

The net income as a % of sales has decline by 1.83 % which can attributed to increased expenses.

Management can consider both the % and dollar change in net income from this vertical analysis of both the years.

------------------------------------------------------------------------------------------------------------------------------------

Horizontal analysis compares financial information of a company and reflects the amount of changes in financial statement items over a specified period.

Formula for Horizontal analysis or Trend analysis:

1.

Dollar change = Amount of the item in comparison year – Amount of item in base year

2.

Percentage change = (Dollar change/ Amount of item in base year) x 100

Horizontal analysis can be conducted for balance sheet, schedule of current assets and fixed assets, income statement and statement of retained earnings.

An example of horizontal analysis for current assets:

Comparative Schedule of Current Assets
December 31, 2016 and 2017
	2016	2017	Increase or decrease
			Amount	Percentage
Cash	$                97,000	$          65,000	$          32,000	32.99%
Marketable securities	$                80,000	$          68,000	$          12,000	15.00%
Account Receivable	$              112,500	$        120,600	$          (8,100)	-7.20%
Merchandise inventory	$              250,000	$        270,000	$        (20,000)	-8.00%
Prepaid expenses	$                   7,000	$            6,000	$             1,000	14.29%
Total Current Assets	$              546,500	$        529,600	$          16,900	3.09%

In the above analysis 1016 is base year and 2017 is comparison year. All the current assets items of 1017 are compared with that of 2016 current assets items and expressed the changes in %.

Management can compare these real changes with forecasted changes and can further investigate.