Horizontal or trend analysis of financial statements

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. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in dollars and percentage.

Dollar and percentage changes are computed by using the following formulas:

Horizontal analysis may be conducted for balance sheet, income statement, schedules of current and fixed assets and statement of retained earnings.

Example:

An example of the horizontal analysis of balance sheet, schedule of current assets , income statement and statement of retained earnings is given below:

Comparative balance sheet with horizontal analysis:

Comparative schedule of current assets:

Comparative income statement with horizontal analysis:

Comparative retained earnings statement with horizontal analysis:

In above analysis, 2007 is the base year and 2008 is the comparison year. All items on the balance sheet and income statement for the year 2008 have been compared with the items of balance sheet and income statement for the year 2007.

The actual changes in items are compared with the expected changes. For example, if management expects a 30% increase in sales revenue but actual increase is only 10%, it needs to be investigated.

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72 Thoughts on Horizontal or trend analysis of financial statements

  1. Yeng

    I know how to calculate the % change from year 1 to year. However, I am having difficulty understand the increase and decrease in each items on the income statement and balance sheet. Is the increase/decrease a weakness or strength and why it’s a strength or weakness?

  2. Accounting for Management

    Hi Yeng,

    Thank you for using accountingformanagement.org. The answer of your question is in the last two lines of the main article.

    Horizontal analysis does not fully discloses the weaknesses or strengths of a company. The following are the main purposes of horizontal analysis:

    (1). to see the trend of various income statement and balance sheet figures of a company.
    (2). to evaluate whether the management is achieving its objectives or not.
    (3). to investigate unexpected increases or decreases in financial statement items.
    (4). to evaluate overall performance of the company

    In a horizontal analysis the the changes in income statement and balance sheet items are computed (in dollars and percentage) and compared with the expected changes. For example, you start an advertising campaign and expect a 25% increase in sales. But if sales revenue increases by only 5%, then it needs to be investigated. Or if you find an unexpected increase in cost of goods sold or any operating expense, you can investigate and find the reason.

    To know about strengths and weaknesses of a company, different combinations of financial ratios are used.

  3. Madelyn S. Pascual

    What is the computation of its liquidity, solvency and profitability?

  4. Roshan

    Hi I just want to know how to calculate the % difference for horizontal analysis.

  5. Accounting for Management

    It is very easy Roshan. First calculate dollar change (or difference) from the base year and then translate it into percentage change.
    In the income statement given above, the sales figure of 2007 is $1,200,000 and the sales figure of 2008 is $1,400,000. The 2007 is the base year against which we are comparing the figures of 2008. The 2008 is therefore the comparison year. We would first compute the dollar change using the following formula:

    Dollar change = Amount of comparison year – Amount of the base year
    = $1,498,000 – $1,200,000
    = $298,000

    After computing the dollar change, we would compute the percentage change using the following formula:

    Percentage change (or difference) = (Dollar change / Amount of base year) × 100
    = ($298,000/1,200,) × 100
    = 24.83%

    The dollar and percentage changes of the items of balance sheet, schedule of current assets, or the statement of retained earnings are computed in the similar way.

    Thank you for using accountingformanagement.org

  6. amenda

    i wouid like to know wether we can use this method for all compnies annual reports

  7. amenda

    as well how to evaluate this

  8. Cedrick

    Is it possible that only sales, amount of the base year and current year are only given? As well as the percentage of increase or decrease of sales. Information of Assets and Liabilities are not given. Can we use the percentage of Assets and Liabilities of Vertical Analysis to Horizontal Analysis in this problem?

  9. Accounting for Management

    If you present a problem related to the situation you are talking about, we may be able solve it for you.

  10. souromita chatterjee

    Is the comparative balance sheet and comparative income statement solution of the same accounting problem?

  11. Accounting for Management

    Souromita! Are you talking about the example given above? If so, they are the solution of the same accounting problem. You can see that net operating income computed in comparative income statement has been used in the comparative retained earnings statement and the balance of the comparative retained earnings statement has been reported in the stockholders’ equity section of the balance sheet.

  12. Rizwan Amir

    What other methods are available for financial statement analysis? Which one is the best?

  13. Accounting for Management

    Thank you for your valuable suggestion Khan. We would be adding it in exercises and problems sections.

  14. LaShaun

    How do you prepare a horizontal analysis when you are only given the current years totals? Like for period Jan 1 2013-Dec 31, 2013

  15. Accounting for Management

    The method is same. The information on January 1 2013 may be used as the base.

  16. cassandra

    Thank you Accounting for Management. I have never saw a website as interactive as yours. I could easily grasp your explanations and appreciate every detail of your discussions. Can you put some info.regarding nonprofit organizations especially its IGPs on how to account for it and what relevant matters do i have to consider upon conducting a research about it. Thank you so much.

  17. Accounting for Management

    Thank you for your suggestions Cassandra. We shall work on it.

  18. Cindy

    What if the figures for the two years are both negative, like -$2000 in 2007 and -$1000 in 2008? That is an increase of $1000, but by the formula, the ratio will be negative. Shouldn’t it be positive for an increase? Just trying to make sense of it. Thanks!

  19. Rashid Javed

    Funny question Cindy.

  20. ernie nolasco

    Supposing the base year is zero and the comparison year is 100, how can i present this in the increase(decrease) column? I am confused? Thanks.

  21. Accounting For Management

    The percentage change cannot be computed if base year figure is zero.

  22. CHRIS

    how do i decide which is the base year? Is there any standard?
    secondly, is comparative balance sheet another name for horizontal analysis and common-sized balance sheet another name for vertical analysis?

  23. rose

    Hi, I know how to calculate the change, but im not sure how to explain the change in words.
    I need to compare the income statement of 2 different companies.. so how can i describe in word about the change?
    I dont know how to start it.. i want to compare Revenue, Net profit and EPS.. pls help!! thank U!!

  24. Delli J

    Hi, I would like to know if multiple years are given are each year minus from the base year then *100?

    Next question… if in a question the base year is given with the financial figure but the rest of years are already in percentages and you would like to find out the financial figures how can I do that?

  25. Delli J

    Need some help asap plsss!!!! And thanks in Advance.

  26. Tayyab Riaz

    What is the difference between comparative analysis and trend analysis?

  27. fely

    can somebody answer what is the effect if industry average is given?

  28. Rohan Kasob

    I think it is well.

  29. Miguel

    Hi,

    I am requested to make vertical and horizontal analyses of the Profit and Loss Statement and Balance Sheet for a company.
    Is the analysis have to be separate or all together?
    From my understanding a vertical analysis will analise different items, while the horizontal analisis other items. Can all these items be put together?
    please assist!

  30. Mahesh

    How to get Comparative balance for three year’s for horizontal analysis. I want to put last 3 year details.
    Pls assist

  31. anne

    What if two values to be compared are negative what will be the explanation: year 2001 treasury stock ($2435) and year 2000 (1438)

  32. Neo

    For a $100,000,000 investment how many years of the financial statements should we have to analyse?

  33. Davis

    Is it possible to project the next financial year’s statement of financial performance and financial position using the trend analysis. If yes, how?

  34. Chee

    Hi, is there a reason why the percentage is 100% even if the base year is 0 and the second year is 100? Because the calculation would be: (0/100)*100–referring to ernie nolasco’s case.

  35. evelyn

    Thank you for this! I am taking an accounting class and the textbook wasn’t clear on calculating the Increase/Decrease Percentage.

  36. Nita

    I was wondering, when we use data for more than 2 years, say we have the date from 2008 to 2012, do we calculate all the amount from 2009-2012 by comparing it to the data of 2008, or do we compare the 2009 to 2008, 2010 to 2009, 2011 to 2010, and 2012 to 2011?
    I’m having a difficulty to determined the growth of tax revenue in my thesis using the horizontal commpn size analysis because I had an argument with my professor about whether using just one year tl compare with the rest or else.
    Thank you so much 🙂

  37. Accounting For Management

    Normally a period is selected as base and all other periods are compared with the base. But there is no rigidity, it depends on the information you are interested in. For example, you can compare 2009, 2010, 2011, and 2012 with 2008 (base) if you want to measure the changes since 2008 or you can compare 2009 with 2008, 2010 with 2009, 2011 with 2010, and 2012 with 2011 etc. if you want to measure the changes from year to year. The year against which you compare a subsequent year becomes the base year.

    Hope this helps.

  38. edline

    How to total the percentage of horizontal analysis?

  39. sabar

    Hi,
    I would like to know how to get working capital, net sales revenue, net earning from income statement?

  40. FRED

    Kindly help me with this problem,
    Part 2 – Performance Evaluation

    The comparative condensed income statements of SPENCER Corporation are shown below.
    SPENCER CORPORATION
    Comparative Condensed Income Statements
    For the Years Ended December 31
    2013 2012
    Net sales $620,000 $500,000
    Cost of goods sold 450,000 400,000
    Gross profit 170,000 100,000
    Operating expenses 54,000 40,000
    Net income $116,000 $ 60,000

    Instructions
    (a) Prepare a horizontal analysis of the income statement data for SPENCER Corporation using 2013 as a base. (Show the amounts of increase or decrease.)
    (b) Prepare a vertical analysis of the income statement data for SPENCER Corporation in columnar form for both years.

  41. Fisayo

    How do I make my decision using the sales as an example?

  42. Eric

    Another question regarding base number zero. Base is zero the next year is -4,620,000. Would that mean my percentage changed is -4,620,000% ???

  43. Accounting For Management

    @ Eric
    We cannot compute a percentage change in such situations.

  44. milson

    What if the dollar changes is divisible to the amount of the item in base year, for example 131,971/5,100=25.9 x 100= 259, what would be the percentage?

  45. milson

    …and also what financial statement you can perform horizontal and vertical analysis. can we do it in statement of owner’s equity and cash flows? thank you and hope you an answer my questions. I just need to understand.

  46. Accounting For Management

    If the change is 131,971 and the base is 5,100 then increase would be 2587.67%.
    (131,971/5,100) x 100 = 2587.67%

  47. pardon

    Thanks for your support.If given a financial statement do we use both vertical analysis and horizontal analysis to analyse it or we just use one method.

  48. marge

    is the horizontal analysis also applicable to statement of changes in owner’s equity?

  49. Robert

    What if the base year is zero? Say for 2012 Accrued Expense is 0 and for 2013 Accrued expense is 120.. Will I have an increase of 120%?

  50. Accounting For Management

    @Robert

    If the base year amount is zero or negative, percentage change is not calculated.

  51. ayesha

    Please indicate how can i analyse the financial statements. as horizontal analysis , how did u achieve it is not clear. then vertical analysis . becasue i read than current year -base year/ base year is horizontal result. but which value is the final result that indicates the horizontal and which for vertical. pls explain step by step . worried 🙁

  52. Kevin

    Hi, I had problem with this
    The question is that: provide the sight in company’s main sources of income and their changes in the next 2 to 3 years. (Use trend analysis)
    I don’t know what should I do now when I have the first nine months statement financial statement ended at 30/9/2014?
    Can i compare it with the first 9 months of the year 2011-2013? And the first base period is the first nine months of 2011? Does it make sense?

  53. sadil

    Hi
    very useful information,, this is all about Horizontal analysis. what is vertical analysis if possible mention 1 or 2 examples here too.

  54. khausal

    can we use current year as the base year?

  55. Ichel

    is it possible to have a 2000% above in a horizontal analysis?

  56. Clemence

    Hie I need help I am given two year 2012 and 2013 then asked to carry out horizontal analysis using 2013 as base year. Is that possible because looking at figures they will be negative. Can the current year be base year?

  57. rachid

    Hi All
    Please, I went your advise regarding the horizontal and vertical analysis.
    As i know for the horizontal analysis i need to find the dollard change which is (Dollar change = Amount of comparison year – Amount of the base year) but if i have 5 years from 2010 to 2014 what i should do? i need to make 2011-2010, 2012-2010, 2013-2010, 2014-2010 is that correct?

    Thanks for help

    Regards
    Rachid

    1. Accounting For Management

      Are you instructed to use 2010 as the base year?

  58. AYISH

    Hi sir, i want to know how to calculate increase or decrease percentage in total for eg: 3.2%,(46.5)%.(5.4)% total is (7.4)% i want to know how i got (7.4%) as a ans. kindly help me thanks

  59. david

    how do i compute overall trend analysis for more than 2yrs. say 2010-2015 .

    is it correct to say (2015 value – 2010 value/2010 value *100)

  60. Awal Premi

    Thanks so much for all the free information and your hard work.

  61. Vibol

    Why is cash account in asset? Please explain about materiality, relevance, reliability, conservation, consistency, and conceptual framework of accounting by giving real example. Thank you

  62. aimi

    Hi..
    Can you explain what accounts have been increase or decrease and reasons why ?
    -Thanks in advance it can help to me a lot .

  63. Chassidy

    This forum needed shaikng up and you’ve just done that. Great post!

  64. Jess

    Hello, if the problem only request the horizontal analysis show Net Sales, Gross profit and operating income of a company, how would it all be calculated and or determined? Are the numbers given by looking at the income statement or are there any calculations needed? Please advise.

  65. ADCOMA

    Hello. Instead of using your formula for trend analysis is it still the same to use current year/base year to compute?

  66. Prabhjot Singh Sawhney

    Hi , i am supposed to do trend analysis of last 10 years of two companies ( and comparison ) between them so should i take one year as base year and calculate changes according to that or do it taking 2 2 years.

  67. Dennis Kutima

    I really love this article.
    I’ve found a hint to my accounting mayhem.

    Quite encouraging.

  68. Ali

    how to calculate a statement of changes equity in percentage? your help is very important for me

  69. Zara

    Thanx a lot its really very helpful

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