Horizontal analysis deals with the data concerning the financial statements only where it begins as in the comparison of the values of the financial items in different periods. Horizontal Analysis Of Balance sheets: As the term suggests, horizontal analysis is to study how numbers evolve over a period. You compare numbers over two or more years. This shows whether a company is growing or losing cash. It helps to study the financial statements. It allows comparison of business performance with previous year’s performance. In conclusion horizontal analysis of financial statements gives an outline of business trend and change in a clear manner.
What is a Financial Statement?
Financial statements show a company’s financial health. They describe how much a company makes, spends, owns and owes. Companies rely on them to gauge their success. Banks and investors also use them before they make their decisions. Anyone studying finance or accounting needs to understand financial statements.
Types of Financial Statements
The most common financial statements are four types:
- Income Statement – This displays a company’s revenues and costs. It indicates whether the company has made a profit or loss.
- Balance Sheet: This shows what the company has (assets) and owes (liabilities). It also displays the owner’s equity.
- Cash Flow Statement: Tells where the business generated cash from and where it was spent.
- Statement of Changes in Equity – This report illustrates how money in the owner’s pockets changed over time.
Each financial statement is a vital part of the big picture of a company’s status. A proper financial statement analysis can only be performed when you aggregate several years of these statements together.” Horizontal analysis in accounting is one such effective way to achieve this.
The Importance of Financial Statements for Analyses
Students should develop an understanding of how to read these statements, particularly in India. They aren’t just for large organizations. Small businesses also use them. This topic has many questions in schools and colleges. You can also apply this knowledge in real life. When you are about to start a business, you require such reports.
Here, you also check how you performed in your business in 2023 and 2024 through horizontal balance sheet analysis or income statement check, and you use these reports.
Horizontal Analysis in Accounting
That sounds terrible unless you are looking for a way of performing horizontal analysis in accounting. You need to go through the steps and apply formulas to achieve the correct output. This requires you to have the horizontal analysis formula handy as well.
What is Horizontal Analysis?
It means measuring how quantities change over time. For example, you check the change if sales were ₹10,00,000 last year and ₹12,00,000 this year. You see both the volume and period move from one to the other. This will tell you if your sales are up or down.
How to Perform Horizontal Analysis?
Step 1: Choose the Period
Select Two or More Years for Comparison. The most common selection is this year and last year.
Step 2: Gather the Financial Statements
Consider comparative financial statements. These feature data from each year next to each other.
Step 3: Apply the Horizontal Analysis Formula
The formula is:
(Amount Year N — Amount Year N − 1) / Amount Year N − 1 x 100
This provides the percentage change.
Step 4: Document the Change Amount
Take the new one and subtract the old amount from it. Write the result.
Step 5: Calculate percentage change
Apply the formula above and articulate the growth or decline in percentage.
Step 6: Analyze the Result
See which numbers went down and which went up. Try to find out why. This gives useful insights.
| Item | 2023 (₹) | 2024 (₹) | Amount Change (₹) | % Change |
| Sales Revenue | 10,00,000 | 12,00,000 | 2,00,000 | 20% |
| Operating Expense | 4,00,000 | 4,50,000 | 50,000 | 12.5% |
| Net Profit | 2,00,000 | 2,50,000 | 50,000 | 25% |
From this table, you can see revenue has increased by 20%. That is a good sign. But expenses also increased. So, profit grew by 25%.
Why Students Should Know These Steps?
It helps with step-by-step methods, especially when preparing for your exams or if you want to be an accountant. In Indian exams, horizontal analysis न has questions like “how to do horizontal analysis” & “apply horizontal analysis formula to find changes.
This is a fundamental aspect of financial education and a way of thinking about corporate expansion. Rewrite this method again and again. That is how you improve horizontal analysis in accounting.
Horizontal Analysis vs Vertical Analysis
Horizontal and vertical analysis can help you understand the financial statements. But they are not the same. Many students mix them up. So, Let us clarify them dialogue-wise.
Introduction to Both Analyses
This is a horizontal one as it compares the financial statements over the years. It shows trends over time. It tests the tendency of change. In contrast, vertical analysis tests the size of each item in a single year. It represents each item as a component of a whole. Now, let’s go through them in detail one by one.
What is Horizontal Analysis?
As mentioned before, horizontal analysis measures growth from one year to another. It uses percentages to find growth. It answers questions like:
- Did sales increase this year?
- Did costs go down?
To calculate percentage change, you apply the horizontal analysis formula.
What is Vertical Analysis?
Vertical analysis is done only for a year. It establishes a baseline number such as “total sales” or “total assets.” Then, it considers other figures as a percentage of the base.
For instance, if sales are ₹1,00,000, and the cost of goods is ₹40,000, then the cost is 40% of sales. This allows for comparisons where companies are different sizes in the same year.
| Feature | Horizontal Analysis | Vertical Analysis |
| Time Focus | Multiple years | Single year |
| Base | Previous year’s value | Total sales or total assets of same year |
| Use | Check trends | Check structure or proportion |
| Formula | (New – Old) ÷ Old × 100 | Item ÷ Total × 100 |
| Used For | Growth analysis | Ratio or internal analysis |
Why This Comparison Matters?
If you prepare for exams or engage in financial statement analysis, you must follow that. Theoretical question or Sum based on horizontal analysis vs vertical analysis — You may be asked to define the difference between horizontal analysis and vertical analysis.
Accountants do both types of analysis in practical jobs. So, learn both. But keep in mind: horizontal analysis displays the change over some time, and vertical analysis shows the item-wise proportion in a single year. They are both integral components of analysis.
Example of Horizontal Analysis With Comparative Financial Statements
For the horizontal analysis, let us look at the example using real numbers to understand our topic completely. This is the part that helps you apply everything that you learnt beforehand.
What Is a Comparative Financial Statement?
These financial statements present the numbers of two or more years side by side. You do so for horizontal analysis in accounting. These statements are used to prepare horizontal balance sheet analysis as well as horizontal income statements.
Example of Horizontal Income Statement
For example, say we have the data for a company:
| Income Statement Item | 2022 (₹) | 2023 (₹) | Change (₹) | Change (%) |
| Sales | 15,00,000 | 18,00,000 | 3,00,000 | 20% |
| Cost of Goods Sold | 8,00,000 | 9,00,000 | 1,00,000 | 12.5% |
| Gross Profit | 7,00,000 | 9,00,000 | 2,00,000 | 28.6% |
| Operating Expenses | 2,00,000 | 2,50,000 | 50,000 | 25% |
| Net Profit | 5,00,000 | 6,50,000 | 1,50,000 | 30% |
The horizontal analysis example in sales increased by 20%. Expenses increased as well, but profits climbed at a quicker pace. This further indicates how the business was doing.
Example of Horizontal Balance Sheet Analysis
| Balance Sheet Item | 2022 (₹) | 2023 (₹) | Change (₹) | Change (%) |
| Total Assets | 25,00,000 | 30,00,000 | 5,00,000 | 20% |
| Total Liabilities | 10,00,000 | 12,00,000 | 2,00,000 | 20% |
| Shareholder’s Equity | 15,00,000 | 18,00,000 | 3,00,000 | 20% |
This horizontal balance sheet analysis indicates the company is growing. Assets and equity went up. That is a healthy sign.
Why This Example Helps?
These examples help you with your studies and working in the accounting field if you prepare for exams. And they also help you understand how to do horizontal analysis. Indian students do a background study on such examples for a good scores in a study in addition to attaining a job.
Relevance to ACCA Syllabus
Horizontal analysis: Foundational in financial reporting and analysis so covered in a number of papers by ACCA such as FR (Financial Reporting), SBR (Strategic Business Reporting), PM (Performance Management) This helps ACCA students to identify financial trends over a period, compare the value in a specified period, and analyze performance figures which is important for financial decision-making and analysis of the enterprise. Integrated financial statements together give a comprehensive view of the business set up, this tool is really needed to assess and present financial statements as per international accounting standards.
Horizontal Analysis of Financial Statements ACCA Questions
Q1: Horizontal analysis compares primarily which of the following?
(A) Financial ratios of a company versus industry averages
B) Financial data across different firms
C) Financial statements under varying frameworks of accounting
D) Financial results for two or more periods
Ans: D) Results of financials of two or more than two periods
Q2: Which of the following is calculated in horizontal analysis to figure out trends?
A) Time Based Absolute Changes and %,
B) Current year data only
C) Common-size ratios
D) Variances compared with industry benchmark
Ans: A) Timing, absolute changes and percentage changes
Q3: Suppose net income has increased from ₹50,000 to ₹75,000 over a year; what is the percentage change in net income?
A) 25%
B) 33.3%
C) 50%
D) 60%
Ans: C) 50%
Q4: How does horizontal analysis benefit financial decision-making?
A) Segment-wise analysis across similar firms
B) It assesses adherence to regulations
C) It displays trends and patterns in financial performance
D) It translates all amounts into base year terms
Ans: C) Trends and patterns in Financial Performance
Q5: Which ACCA exam paper is really about financial statement analysis tools such as horizontal analysis?
A) PM
B) FR
C) SBR
D) All of the above
Ans: D) All of the above
Relevance to US CMA Syllabus
Horizontal analysis in the us CMA syllabus is of utmost importance, especially in Part 1 (Financial Planning, Performance & Analytics). CMAs use this tool to analyze variations in income statements and balance sheets across periods. It provides insights to inform management decisions on performance, budgeting, and forecasting. The requisite skills in conducting horizontal analysis and interpreting the horizontal analysis are required skills for CMAs in management accounting positions.
Horizontal Analysis of Financial Statements CMA Questions
Q1: X-Sectional Study of Financial data
B) In the same business as another firm
B) Two sets of accounting rules
C) Over multiple accounting periods
D) Using vertical percentages
Ans: C) Across several accounting periods
Q2: If horizontal analysis is done on which base you have to take?
A) The most recent year
B) A base year
C) The industry average
D) The company’s budget
Ans: B) A base year
Q3: If we have raised accounts payable from ₹40000 to ₹60000 in a year, then what will be the percent change in the accounts payable?
A) 33.3%
B) 40%
C) 50%
D) 60%
Ans: C) 50%
Q4: What is the definition of horizontal analysis in management accounting?
A) To report taxes
B) Financial Trends Detection
C) Prepare the financial statements
D) To comply with GAAP
Explanation: B) To identify the financial trends
Q5: Is there horizontal analysis in CMA Part 1?
A) Cost Management
B) Little on the external financial statements
C) Technology and Analytics
D) Internal Controls
Ans: Global External Financial Reporting
Relevance in USA CPA syllabus
Horizontal analysis had made the information easy, especially in FAR (Financial Accounting and Reporting) and BEC (Business Environment and Concepts) sections for CPA candidates. CPAs use horizontal analysis to analyze performance across reporting periods to identify trends and anomalies that aid in audits, disclosures and data-informed decision-making. Understanding and explaining such patterns is one of the core competencies in financial reporting.
Horizontal Analysis of Financial Statements CPA Question
Q1: What do CPAs look at for revenue year-over-year?
A) Vertical analysis
B) Common-size analysis
C) Horizontal analysis
D) Cross-sectional analysis
Ans: C) Horizontal analysis
Q2: Which financial statement is horizontal analysis used for?
A) Only income statement
B) Only cash flow statement
C) The financial statements of all major financial statements
D) Only the balance sheet
Ans: C) All the primary financial statements
Q3: What is horizontal analysis, and why would a CPA conduct horizontal analysis of liabilities?
B) The values must be converted in the percentages
B) To detect fraud only
C: For spotting significant trends and shifts
D) To comply with tax laws
Ans: C) To identify important patterns and trends
Q4: Which of these is NOT a benefit of horizontal analysis?
A) Identifying unusual trends
B) Worry about YoY, percentage changes;
lctCaption CompanyisesComparison of companies in the industry
D) Causing early signals of financial distress
Ans: c) Compare ratio among competitors in the same niche
5: Ahead are tools like horizontal analysis, to name one of a few, needed for analysis of financial statements which CPA exam section may require these tools used extensively?
A) AUD
B) REG
C) FAR
D) Ethics
Ans: C) FAR
Relevance to CFA Syllabus
Horizontal analysis is one of the concepts found across CFA Level I and Level II syllabi (Financial Reporting and Analysis part). CFAs rely on it to analyze a company’s financial performance and evolution in pertinent metrics over periods. Investment analysts use horizontal analysis for forecasting, valuation, and risk assessments, making it a crucial skill in equity and credit analysis.
Horizontal Analysis of Financial Statements CFA Questions
Q (1): What are you looking to achieve in horizontal analysis from the investment analysis perspective?
A) Comparative compliance in accounting
B) Perform a time variation performance statistics analysis
C) Makeable numbers Bigger standard size
D) Compare trade norms
Ans: B) To see trends in performance over time
Q2: My sales revenue went from 2 million dollars to 2.6 million dollars. How would I calculate the growth rate?
A) 20%
B) 25%
C) 30%
D) 35%
Ans: B) 30%
Q3: What does it mean that the percent change of net income is negative?
A) Inflation impact
B) Decline in profitability
C) Tax compliance issue
D) Higher non-cash expenses
Ans: B) Profitability decline
Q4: What does a horizontal analysis indicate?
A) Quantitative modelling
B) Time-series analysis
C) Qualitative research
D) Cash ratio computation
Ans: a) Time-series analysis
Q5 Which/What area of horizontal analysis is covered under CFA Level in Financial Statement Analysis?
A) Level I
B) Level II
C) Level III
D) All Levels
