Question

Discuss vertical and horizontal analysis and what the managerial accountant is comparing

Answer 1

Vertical common size financial statement covers one years operating results and expresses each component as a percentage of total.This means,for example,that fixed assets will not be stated as a dollar amount but rather will be stated as a percentage of total assets.Each expense item will be stated as a percentage of sales.A vertical common-size income statement might state each classification of sales or expense item as a percentage of total sales or it might state general and administrative expenses and selling expenses each as a percentage of total operating expenses.

The analyst might also compare a company's common size income statement with industry common size statement to reveal a problem.For instance,if cost of goods sold as a percentage of total sales is higher than other firms in the same line of business it could indicate that inventory shrinkage.

Horizontal trend analysis is used to evaluate trends over a period of several years for a single business.The first year is the base year,and amounts for subsequent years are presented not as a dollar amounts but as the percentage of the base year amount,with the base year assigned a value of 100% or 100.