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Horizontal and Vertical Analysis

Vertical analysis or common size analysis is a method of financial statement analysis where each item is shown as a percentage of a base figure. For the income statement, items are shown as a percentage of total sales. For the balance sheet, items are shown as a percentage of total assets or liabilities. The formula for vertical analysis calculates the percentage by taking an individual item and dividing it by the base amount, then multiplying by 100. Vertical analysis allows for easier comparison of financial statements across companies and over time by showing the relative proportion of accounts.

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844 views5 pages

Horizontal and Vertical Analysis

Vertical analysis or common size analysis is a method of financial statement analysis where each item is shown as a percentage of a base figure. For the income statement, items are shown as a percentage of total sales. For the balance sheet, items are shown as a percentage of total assets or liabilities. The formula for vertical analysis calculates the percentage by taking an individual item and dividing it by the base amount, then multiplying by 100. Vertical analysis allows for easier comparison of financial statements across companies and over time by showing the relative proportion of accounts.

Uploaded by

Waleed Khalid
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Vertical analysis or common size analysis

What is Vertical Analysis Formula?


Vertical analysis is a kind of financial statement analysis wherein each
item in the financial statement is shown in percentage of the base figure.
This is one of the popular methods of financial statements used as it is
simple and also called a common size analysis. Here all the items in the
income statement are stated as a percentage of gross sales. All the items
in the balance sheet are stated as a percentage of the total assets.
Whereas the opposite of the vertical analysis of financial statement is
the Horizontal analysis always looks at the amount from the financial
statement over the horizon of many years.
 
Vertical Analysis formula
In the vertical analysis of financial statements, the percentage is
calculated by using the below formula:
Vertical Analysis formula = Individual Item / Base Amount *100
Vertical analysis formula for the Income Statement and Balance Sheet are
given below –
 Vertical Analysis Formula (Income Statement) = Income Statement
Item / Total Sales * 100
 Vertical Analysis Formula (Balance Sheet) = Balance Sheet Item /
Total Assets (Liabilities) * 100
To increase the effectiveness of vertical analysis multiple year’s statement
or reports can be compared and comparative analysis of statements can
be done. This analysis makes easier to compare the financial statements
of one company with another and across the companies as one can see
the relative proportion of accounts.
HORIZONTAL OR TREND ANALYSIS

Horizontal analysis (also known as trend analysis) is a financial


statement analysis technique that shows changes in the amounts of
corresponding financial statement items over a period of time. It is a
useful tool to evaluate the trend situations. The statements for two or
more periods are used in horizontal analysis.

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