Horizontal or Vertical Analysis

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Vertical and Horizontal Analyses

Vertical and Horizontal Analyses of a Single Proprietorship

One of the qualitative characteristics of a good financial statement is comparability—the ability to identify similarities and differences between financial statements over time.

Comparison Standards

  1. Intracomparability
    • Definition: The comparison of a company's financial statements over different periods (e.g., the current year compared to the prior year).
    • Example: The net income of XYZ Company in 2020 is compared with the total net income in 2019.
  2. Intercomparability
    • Definition: The comparison of a company’s financial statements against a direct competitor.
    • Example: The financial statements of Smart Telecom compared to Globe Telecom.
  3. Industry Standard
    • Definition: The company’s financial statements are compared to the industry’s average or standard.
    • Example: The financial statement of Jollibee compared with the industry standards for the food and beverage industry.

Horizontal Analysis (Trend Analysis)

Definition: Horizontal analysis involves comparing financial data across different periods, typically using the prior period as the baseline. The company reviews its own financial performance over time and analyzes changes in both monetary value and percentages.

Purpose: This type of analysis helps measure growth, consistency, or anomalies in a company’s financial performance and allows for comparison with competitors' growth.

Formula:

  • Peso Change = Current Year Balance − Prior Year Balance
  • Percentage Change = (Peso Change / Prior Year Balance) × 100

Example

Year Sales
2018 P425,000
2019 P550,000

Peso Change = P550,000 − P425,000 = P125,000

Percentage Change = (P125,000 / P425,000) × 100 = 29.41%

Interpretation: Sales increased by P125,000 from 2018 to 2019, representing a 29.41% growth.

Note: The prior period (2018) serves as the baseline, and through horizontal analysis, significant changes can be easily identified.

Vertical Analysis (Common-Size Analysis)

Definition: Vertical analysis expresses each financial statement item as a percentage of a base figure. This approach allows for easy comparison of financial components across different-sized companies or periods.

Balance Sheet Vertical Analysis

The base figure is typically total assets or total liabilities and stockholders’ equity. Each asset or liability is expressed as a percentage of the total.

Income Statement Vertical Analysis

The base figure is generally sales, and all other items (e.g., cost of goods sold, operating expenses) are expressed as a percentage of sales.

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Formula

Percentage of Base = (Amount of Individual Item / Amount of Base Item) × 100%

Example: Vertical Analysis of Balance Sheet

If total assets = P1,000,000 and inventory = P200,000:

Inventory as a Percentage of Total Assets = (P200,000 / P1,000,000) × 100% = 20%

Conclusion

These analyses provide powerful tools for evaluating the financial performance of a single proprietorship, enabling owners and stakeholders to track trends, benchmark against industry standards, and compare financial results with competitors.

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