Session 14: Horizontal Analysis

Learning Objective

Guide the participants on how to perform Horizontal analysis.

Analysis Of Financial Statement

International accounting standards call for the presentation of comparative financial statements that gives the current year’s and past year’s financial information. A common starting point for studying such statements is horizontal analysis, which begins with the calculation of monetary amount changes and percentage changes from the previous to the current year. The percentage change must be calculated to show how the size of the change relates to the size of the amount involved.

Horizontal analysis is an easier way of comparing the performance of two different financial statements either within the same company or accounts of the other entities within the same industry. Horizontal analysis involves line by line comparison of the financial figures from two different sets of accounts.

The exhibit below shows how horizontal analysis can be conducted:

Balance sheet of Dean Transport Co. at 31 December 2002 and 2003

Income statement Account for Dean Transport Co. at 31 December 2002 and 2003

The 2002 results are regarded as the base year, so the results of 2003 are interpreted in line with those of 2003. As evidenced above it is easy to verify the trend in movement of various items of the financial statements.