Definition of Horizontal analysis:
Comparative study of a balance sheet or income statement for two or more accounting periods, to compute both total and relative variances for each line item. See also vertical analysis.
Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.
Generally accepted accounting principles (GAAP) are based on consistency and comparability of financial statements. Consistency is the ability to accurately review one company's financial statements over a period of time because accounting methods and applications remain constant. Comparability is the ability to review side-by-side two or more different companies' financials. Horizontal analysis not only improves the review of a company's consistency over time directly, but it also improves comparability of growth in a company to that of its competitors as well.
How to use Horizontal analysis in a sentence?
- It can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.
- Horizontal analysis is used in the review of a company's financial statements over multiple periods.
- Before beginning her analysis, the auditor requested a horizontal analysis of the companys holdings, to properly assess the companys financial activity during the time period she had been called in to review.
- Our horizontal analysis was in and we knew that we had to get things moving quickly if we were to get back on track.
- If you find yourself not being able to figure out what the horizontal analysis suggests you may want to get a second opinion.
- It is usually depicted as a percentage growth over the same line item in the base year.
- Horizontal analysis allows financial statement users to easily spot trends and growth patterns.
Meaning of Horizontal analysis & Horizontal analysis Definition