Horizontal Analysis Income Statement Interpretation

For example a 2 million profit year looks impressive following a 0 25 million profit year but not after a 10 million profit year.

Horizontal analysis income statement interpretation. To get a clear picture of the performance of our business we need to do a horizontal analysis of each item in our income statement. The statements for two or more periods are used in horizontal analysis. It is used for evaluating trends year over year yoy or quarter over quarter qoq. With horizontal analysis we look across the income statement at the year over year yoy change in each line item.

Trend analysis for income statement items using excel. Horizontal company financial statement analysis with a horizontal analysis also known as a trend analysis you can spot trends in your financial data over time. 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. The term horizontal analysis refers to the financial statement analysis in historical data from the income statement balance sheet and cash flow statement is compared with each other.

Horizontal analysis is the method of function statement analysis which represents the percentage income and percentage decrease. In order to perform this exercise you need to take the value in period n and divide it by the value in period n 1 and then subtract 1 from that number to get the percent change. A complete horizontal analysis of income statement might tell us that while our sales figure increased by 66 67 our profits declined by 10 over the previous year. It is a useful tool to evaluate the trend situations.

In horizontal analysis financial statements are converted into common size by taking any one year numbers as base and then showing all other years corresponding line item numbers as the percentage of that number in horizontal direction. Horizontal analysis of financial statements is one of the most important techniques to find out how a company is doing financially. Vertical analysis of income statement interpretation all the numbers are more or less the same with a difference in the range of 1 2 over the years the net income of the company has increased from 2016 to 2018 by 1 5. Horizontal analysis stresses the trends in.

In other words it indicates the change either in absolute terms or as percentage change year over year y o y in each of the line items. There can be many reasons for this.