Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 13 - Financial Analysis: The Big Picture - Questions: 8

Answer

Horizontal analysis is a technique for evaluating a series of financial information over a period of time. In this analysis, we use the financial statements of two or more years of a company showing dollar and percentage, to make it easy to compare. The changes from period to period are better understandable by percentage to the base year. However, if an item has no value in the base year, or preceding year, and has a value in the next year, no percentage change can be computed.

Work Step by Step

Vertical analysis is a technique for evaluating financial statement data that expresses each item in a financial statement as a percent of a base amount. For example in a Balance sheet we may say current liabilities are 20% of total liabilities and long term loans (bonds etc) are 45% of total liabilities. Which means the common stock equity is 35% of total liabilities. Vertical analysis also enables us to compare companies of different sizes.
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