As the name suggests, trend analysis involves identifying trends and predicting outcomes, which requires analyzing data from multiple consecutive periods. In this article, you will learn about the horizontal analysis of financial statements and how to incorporate it into your company’s accounting practices. You will also learn how to do horizontal analysis using an income statement and a balance sheet.
This type of analysis reveals trends in line items such as cost of goods sold. First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences.
Horizontal analysis allows for the comparison of financial data over time, highlighting trends, patterns, and changes in performance. It helps identify growth or decline areas, assess strategies’ effectiveness, and make informed highest paying accounting jobs decisions. It enables businesses to track progress, evaluate financial stability, and identify potential risks or opportunities.
Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes. I’m Mike Dion, your guide through the maze of business finance and accounting.
For example, an investor may want to evaluate the performance of a company over the past year– relative to the base year in order, to decide whether it is worthwhile investing in this company or not. If the comparison year is year 3, then we will input the net income of year 3 and compute the percentage change between year 3 and year 1 (base year). There were rises of more than 12% in all categories of property other than transport equipment.
Calculate the Percentage Change
- Industry benchmarking involves comparing a company’s financial performance to industry peers or standards.
- Let’s illustrate these formulas with a practical example using revenue data for two consecutive years.
- In this discussion and analysis of operations, Safeway’s management noted that the increase was due to a growing trend toward mortgage financing.
- Performing horizontal analysis involves a series of structured steps that allow you to assess a company’s financial performance over multiple periods effectively.
Upgrade to one of our premium templates when needed and take your work to the next level. Insert a column to the right of ‘2022’ and click on the cell corresponding to the first revenue line item. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.
Vertical and horizontal analyses are both tools for financial statement analysis, but they differ in purpose. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information. As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric. Drag down the cell with the formula to copy it to the other current assets line items.
Horizontal Analysis in Reporting Standards
This involves drawing meaningful conclusions from the trends, patterns, and changes you’ve identified. Consider the context in which these changes occurred and their potential impact on the company’s overall financial health. Such analysis provides valuable insights into why any of these line items rose or fell sharply or markedly in year 2, compared to year 1. For example, net income could fall sharply in year 2, despite a rise in sales, due to a marked rise in the cost of goods sold, marketing expenses, administrative expenses, and/or depreciation expenses. For example, let’s take the case of the income statement – if the gross profit in year 1 was US$40,000 and in year 2 the gross profit was US$44,000, the difference between the two is $4,000. An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods.
Calculate % Change
The analysis of critical measures of business performance, such as profit margins, inventory turnover, and return on equity, can detect emerging problems and strengths. For example, earnings per share (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. In the final section, we’ll perform a horizontal analysis on our company’s historical balance sheet. We’ll start by inputting our historical income statement and balance sheet into an Excel spreadsheet. For example, if a company’s current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million. To illustrate the practical applications of horizontal analysis, let’s examine a real-world example involving a manufacturing company, ManufacturingCo, Inc.
These changes are expressed as percentages, making it easier to assess the significance of the differences. Now we can assume a sales growth percentage based on the historical trends and project the revenues under each segment. Therefore, total net sales are in the Oral, Personal & Home Care, and Pet Nutrition Segments. We best virtual bookkeeping services need to perform a horizontal analysis of the income statement of this company.
We will explore how ManufacturingCo, Inc. uses horizontal analysis for internal performance evaluation and regulatory compliance. Analyzing liability trends is essential for understanding how the company manages its financial obligations and its long-term financial health. By looking at the numbers provided by a company, you should see whether there are any large differences between one year and the next. It is also possible to perform this analysis with time series data to make direct comparisons with other companies. Horizontal analysis of income statements also produces worthwhile information. For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period’s amount $110, whereas a 10% decrease would be $90.
Here net income has decreased by $2,750 or 12% in year 3 when compared to year 1. Horizontal analysis is important because it allows you to compare data between different periods and makes it easier to identify changes in trends. This can be helpful in making decisions about whether to invest in a company or not.
