23.03.2023 - 05:14

Why is horizontal and vertical analysis important in analyzing the balance sheet and the income statement?

Why is horizontal and vertical analysis important in analyzing the balance sheet and the income statement?

Answers (1)
  • clubin
    April 10, 2023 в 02:35

    Horizontal and vertical analysis are important tools used in financial analysis to evaluate the performance of a company over time and to compare the financial performance of different companies. These tools are particularly useful in analyzing the balance sheet and income statement.

    Horizontal analysis involves comparing financial data from one period to another to identify trends and changes in a company's financial performance. This analysis helps to identify the areas of a company's financial performance that are improving or deteriorating over time. For example, by comparing the current year's income statement to the previous year's, a company can identify areas where expenses have increased or decreased, and where revenue has increased or decreased.

    Vertical analysis, on the other hand, involves comparing each line item of a financial statement to a common base item, usually total revenue for the income statement and total assets for the balance sheet. This analysis helps to identify the relative size and significance of each line item in relation to the base item. For example, vertical analysis of an income statement can help identify which expense items are consuming the most revenue.

    Together, horizontal and vertical analysis provide a comprehensive view of a company's financial performance, allowing analysts to identify trends and changes in financial data and to make informed decisions about the company's future prospects. By analyzing a company's financial statements using these tools, investors can gain a better understanding of the company's financial health and make informed investment decisions.

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