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Horizontal analysis essay sample

Investors and managers need to understand how well a company is doing in order to make decisions. Investors have to make the decision whether or not they want to invest or sell their current investment. Management needs to know what moves to make in order to improve the future performance of the company. Horizontal analysis is a historical comparison of the financial statements. It compares financial reports from one accounting period to another. The main point of performing a horizontal analysis on your financial statements is to see how things have changed from one period to the next. The statements for two or more periods are used in horizontal analysis.

The earliest period is usually used as the previous period and the items on the statements for all present periods are compared with items on the statements of the base period. The changes are generally shown both in pesos and percentage. Formula of horizontal analysis or Increase (decrease) method Step 1: Peso change = Amount of the item in present year – Amount of the item in previous year. Step 2: Percentage change = Peso Change ÷ Amount of the item in the previous year x 100. Understanding Horizontal Analysis

The goal is to compare the figures of the current period with that of the past period. This helps the company and its shareholders analyse their performance and find out areas of improvement. Horizontal analysis is done for both income statements and balance sheets. The idea is the same. The figures for the different heads under the income statements and the balance sheets are placed side-by-side so that the reader can compare the two and understand how the company is doing. It also includes two more columns: the column denoting actual numerical change over two periods and another denoting percentage change over the two periods.

The first column gives the difference between the past period and the current period, while the percentage column shows what percentage of the past figure is the figure denoting the change. Horizontal analysis is an important part of financial statements and annual reports. It helps the shareholder understand the change and the percentage change. And if there is no improvement or, in fact, a reduction, then the board is compelled to explain the situation to the shareholder and what they intend to do in the future to fix it. Differences between Vertical and Horizontal Analysis

The main difference is that while horizontal analysis compares the figures under different heads in the income statement and the balance sheet, vertical analysis represents each figure as a percentage of the total along with the change in both over the past year. So, in vertical analysis, the figures are not only compared to the past year, but they are also represented as a percentage of the total cost or total assets/liabilities as may be the case. Horizontal Analysis of the Income Statement

Horizontal analysis of the income statement is usually in a two-year format, such as the one shown below, with a variance also shown that states the difference between the two years for each line item. An alternative format is to simply add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A third format is to include a vertical analysis of each year in the report, so that each year shows expenses as a percentage of the total revenue in that year.

Interpretation
1. Sales increased by 20% while net income decreased by 4. 44%.
2. The Gross Income has declined by (-3. 33%).
3. There were increases in both costs of goods sold (30%) and total expenses (41. 05%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income (4. 44%) 4. 364, 000 – 280, 000 = 84, 000 increase in the costs. 84, 000/280, 000 = 30% increase. This increase is more than the sales/revenue increase for the second year comparison. This means that it costs more to sell the product than they actually made. NOT GOOD. Conclusion

Horizontal Analysis of the Balance Sheet
Examining the balance sheet, horizontal analysis is used to compare historical data of assets, liabilities and owner’s equity accounts. Just like analysing the income statement, historical data comparison of the balance sheet can be done in whole or in part. Horizontal analysis of the balance sheet is also usually in a two-year format, such as the one shown below, with a variance showing the difference between the two years for each line item. An alternative format is to add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A less-used format is to include a vertical analysis of each year in the report, so that each year shows each line item as a percentage of the total assets in that year.

Interpretation
The total current assets of the company have increased by 219. 71% in 2015 as compared to 2014. The current liabilities have increased only to the extent of 27. 56%. This indicates that the company will have no problem to meet the day-to-day expenses. It also observed that the current financial position of the concern has considerably increased. Conclusion

Conclusion
1. Define increase decrease
2. Effects of it in business decision- how effective it is?
3. In this company ….. tren corp, the increase decrease indicates that the

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