The year being used for comparison purposes is called the base year (usually the prior period). The year of comparison for horizontal analysis is analysed for dollar and percent changes against the base year. A company will look at one period (usually a year) and compare it to another period. For example, a company may compare sales from their current year to sales from the prior year. The trending of items on these financial statements can give a company valuable information on overall performance and specific areas for improvement. The year of comparison for horizontal analysis is analyzed for dollar and percent changes against the base year.

This may mean the company is maintaining too high an inventory supply to meet a low demand from customers. They may want to decrease their on-hand inventory to free up more liquid assets to use in other ways. The dollar change is found by taking the dollar amount in the base year and subtracting that from the year of analysis. Martin loves entrepreneurship horizontal analysis formula and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

Horizontal and vertical analysis

Below are the results for the balance sheet and income statement, followed by an interpretation of the results. Horizontal analysis is often referred to as trend analysis, but the latter term has broader applications and is not specific to financial statements. 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 can assist in determining what is a definite pattern and what is a one-time occurrence. Later, this data could be used to conduct a more in-depth examination of financial performance. By dividing the net difference by the base figure, the percentage change comes out to 25%. To illustrate the practical applications of horizontal analysis, let’s examine a real-world example involving a manufacturing company, ManufacturingCo, Inc.

Income Statement and Balance Sheet Assumptions

Many companies do not split credit and cash sales, in which case net sales would be used to compute accounts receivable turnover. Average accounts receivable is found by dividing the sum of beginning and ending accounts receivable balances found on the balance sheet. The beginning accounts receivable balance in the current year is taken from the ending accounts receivable balance in the prior year. Vertical analysis serves as a more feasible technique compared to horizontal analysis. It is also useful for inter-firm or inter-departmental performance comparisons as one can see relative proportions of account balances, regardless of the size of the business or department.