A company's financial statements for a single accounting period can reveal important information about its performance and financial health. But comparing the financial statements of more than one period can provide better context and help identify any changes that may signal strengths or weaknesses. You can compare financial statements for more than one period by using horizontal analysis. With horizontal analysis, you compare the dollar change and the percent change of each item on a financial statement for two consecutive periods. A financial statement showing horizontal analysis of two consecutive periods is called a comparative financial statement.
Gather a company's financial statements for two consecutive accounting periods for which you want to perform horizontal analysis. For example, use a company's income statements from years one and two.
Write the dollar amount of each item from the older period's financial statement in a column to the right of the same item's dollar amount on the most-recent financial statement, which will be the comparative financial statement. For example, write "$100,000" in revenue from year one's income statement in a column to the right of the dollar amount of revenue on year two's income statement.
Subtract the dollar amount of each item in the older period from the dollar amount of the same item in the recent period to determine the change between the two periods. For example, subtract $100,000 in year one's revenue from $120,000 in year two's revenue, which equals a $20,000 increase in revenue between the two periods.
Write each result in a column to the right of the dollar amounts from the older period. Write negative results in parentheses. For example, write "$20,000" in the column to the right of $100,000 in revenue from year one.
Divide the dollar change in each item by the dollar amount of the item from the older period to determine the percentage change between periods. For example, divide the $20,000 increase in revenue by $100,000 of year one's revenue, which equals 0.2.
Move the decimal two places to the right in your result and round to one place to the right of the decimal to convert to a percent. For example, convert 0.2 to 20 percent, which is the percentage increase between the two periods.
Write each percentage change in a column to the right of each dollar change on the financial statement to complete the comparative financial statement. Write a result in parentheses if it's negative. For example, write "20 percent" in a column to the right of the $20,000 increase in revenue.
Tips & Warnings
- You can perform horizontal analysis for income statements and balance sheets.
- If the dollar amount of an item is available for one period, but not the other, you cannot compute the dollar or percentage change between periods.
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- How to Perform a Percentage Change Analysis on a Balance Sheet
- How to Compute Trend Analysis on a Balance Sheet
- How to Calculate Vertical Analysis Percentages
- Vertical Vs. Horizontal Financial Analysis
- Two Types of Financial Statements
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