Question

Present, describe and illustrate the use of horizontal analyses. Form numerical examples to clarify your points. Form clear conclusions on the value gained from the analysis.

Answer 1

Answer

The horizontal analysis forms a crucial role while analysing the financial statement a particular company. The evaluation in case of the horizontal analysis is performed in order to understand the necessary change or variance which took place while comparing the financial statements of the company. Basically, statements of two or more period is implemented to perform horizontal analysis. The below example is provided regarding the comparative balance sheet of a particular organization.

Comparative Balance Sheet December 31, 2008 and 2007 Increase or (Decrease) 2008 ($) 2007 ($) Amount Percent Assets 533,000 177,500 470,000 3.2% Current assets 550,000 95,000 444,500 17,000* (82,500) (25,500) Long-term investments Plant assets (net) Intangible assets (46.5)% (5.4)% 50,000 50,000 (91,000) Total assets 1,139,500 1,230,500 (7.4)% Liabilifies Current liabilities Long-term liabilities 210,000 100,000 243,000 200,000 (33,000) (100,000) (13.6)% (50.0)% 310,000 443,000 Total liabilifies (133,000) (30.0)% Stockholders' Equity: Preferred 6% stock, $100 par Common stock, $10 par Retained earnings 150,000 500,000 179,500 150,000 500,000 137,500 30.5% 42,000 Total stockholders' equity 829,500 787,500 42,000 5.3% Total liabilies and stockholders' equity 1,230,500 (91,000) (7.4)% 1,139,500 550,000 - 533,000 = 17,000 (17,000 / 533,000) × 100 = 3.2%

From the formulation of the above table it can be interpreted that top-level management system of the company actually emphasizes on the percent change. The analysis and reason of such kind of changes which took place in the facts and figures are examined in a detailed manner before preparation of the final report. The values are gained by the process of deducting the previous year from the current and the resultant change is the output which may be positive or negative in nature.