Horizontal Analysis: Comparative Financial Statements and Trend Analysis

Analysis of current financial data provides helpful financial information for decision makers. However, analysis of the current situation will not be enough for the decision makers. Decision makers need an estimate of future financial condition and performance of the companies. They need relevant future information.

Horizontal analysis is applied for comparing the current financial data with the previous ones. In horizontal analysis the change is compared on the same item (account) basis. On the other hand, if vertical analysis is applied, each item is presented as a percentage of a base figure in the related financial statement.

Yes it is. Horizontal analysis of financial statements shows significant changes of a company. Those variations provide a basis for financial statement users. The historical trend data makes it easy to forecast the future and make a proper plan. 

Horizontal analysis of financial statements shows significant changes of a company. Those variations provide a basis for financial statement users. The historical trend data makes it easy to forecast the future and make a proper plan.

For implementation of horizontal analysis, initially financial statements must be stated in report format. Financial statements that are included in horizontal analysis should cover the same periods of time.

If different measurement bases are applied annually, then it will be hard to make any conclusions from the results. Comparability is related with classification and presentation of the financial information. If different classifications and presentations are applied, it will be impossible to make a financial analysis because all findings will be misleading.

Yes it may. Findings in the horizontal analysis may highlight problematic areas to the financial statement users. The objectives of the horizontal analysis users are:
a. To see the trend of financial statement accounts and evaluate the overall performance
b. To evaluate the achievement of business goals, and investigate the unexpected variances with using budgets

The objective of the financial analyst is not only to select the items, s/he should also determine the effects of these items on financial performance and position. Additionally, influential factors on those changes (sometimes no changes) must be identified. For identifying those factors, the analysts investigate the footnotes and gather some internal and external information about the company.

Trend analysis provides valuable information about whether company’s accounts are improving or deteriorating. Thus, it provides an important basis for past performance and growth. If sufficient enough data is gathered through trend analysis, financial statement users are able to make more reliable and correct future estimates

No.Trend analysis does not require complex calculations. You first select a series of financial statements. Then consolidate them in a report format and select the initial year as a base.

Because potential problem with trend analysis is accounts with zero balances. Assume that a company has the following information for investment property.

Because Interpretation of the findings in any financial analysis depends on the knowledge of the analyst about the company, economic environment, industry and financial statements. Interpretations, therefore, will not be the same. However, even though the interpretations may differ, they must cover some main trends and findings. 

Yes. There is.In finance, there is a slight change in the financing structure of the business. A change in the financing structure of the enterprise from debt financing to equity financing appears to be. It is observed that the long-term borrowings decreased in parallel with the decrease in the fixed assets of the company. The reasons for this should be investigated

In case of this circumstance, There is a low-level increase in total assets which end up with a low amount of financing. There is a decrease in noncurrent assets which conclude a low level of new investment. If this company is a mature one it can be acceptable, if not it may indicate a growth problem.

Fluctuations over the years in the net profit of the business draw attention. These fluctuations should be investigated with the findings of the profitability analysis that is covered in teh another chapter. Profitability analysis will serve the general picture, but the details can better be captured by horizontal analysis

Financial analyzes, other studies and calculations are made to assist decision making processes of decision groups. Therefore, the findings should be presented. Although a very good analysis is made, the failure to present this analysis well will decrease the value of the work done. One of the important visual tools used in the presentation of financial analysis results is graphics

The graphs facilitate comparison of performance and financial structure over time, highlighting changes in significant aspects of business operations. In addition, graphs provide the analyst with a visual overview of risk trends in a business

Yes it is.Horizontal analysis is suitable for  inter firm comparisons. Intra firm comparisons provide useful information for understanding the historical trend. Trend information provides a meaningful basis for those who want to make predictions about the future.

Trend information provides a meaningful basis for those who want to make predictions about the future.

Horizontal analysis also has some problems that may lead some inaccurate conclusions. Great care must be taken in choosing the base year. If the management chooses a non-representative year as a base year, it will affect the results of financial analysis.