This means revenue will be set at 100% and all other line items within the income statement will represent a percentage of revenue. It is typical for an income statement to use revenue (or sales) as the comparison line item. These percentages are considered common-size because they make businesses within industry comparable by taking out fluctuations for size. The business will need to determine which line item they are comparing all items to within that statement and then calculate the percentage makeup. They can then use this information to make business decisions such as preparing the budget, cutting costs, increasing revenues, or investments in property plant or equipment. For example, a business may want to know how much inventory contributes to total assets. This can help a business to know how much of one item is contributing to overall operations. Vertical analysis compares line items within a statement in the current year. This is different from horizontal analysis, which compares across years. This allows a business to see what percentage of cash (the comparison line item) makes up total assets (the other line item) during the period.

For example, a business may compare cash to total assets in the current year. Vertical analysis shows a comparison of a line item within a statement to another line item within that same statement. Using Mistborn Trading (MT) as our example, if MT wanted to compare Revenue in the current year (year of analysis) of $120,000 to the prior year (base year) of $100,000, the dollar change would be as follows:ĭollar change = $120,000 – $100,000 = $20,000 The dollar change is found by taking the dollar amount in the base year and subtracting that from the year of analysis. The year of comparison for horizontal analysis is analysed for dollar and percent changes against the base year. The year being used for comparison purposes is called the base year (usually the prior period). If multiple periods are not used, it can be difficult to identify a trend. It is most valuable to do horizontal analysis for information over multiple periods to see how change is occurring for each line item. The trending of items on these financial statements can give a business valuable information on overall performance and specific areas for improvement. For example, a business may compare sales from their current year to sales from the prior year.

A business will look at one period (usually a year) and compare it to another period. Horizontal analysis (also known as trend analysis) looks at trends over time on various financial statement line items.

Horizontal Analysis by E.M. Leya