Trend Analysis / Horizontal Analysis in financial Statements
Definition and Explanation of Horizontal or Trend Analysis:
Comparison of two or more year’s financial data is known as horizontal analysis or trend analysis.
Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form as has been done in the example below. Showing changes in dollar form helps the analyst focus on key factors t hat have affected profitability or financial position. Observe in the example that sales for 2002 were up $4 million over 2001, but that this increase in sales was more than negated by a $4.5million increase in cost of goods sold. Showing changes between years in percentage form helps the analyst to gain perspective and to gain a feel for the significance of the changes that are taking place. For example a $1 million increase in sales is much more significant if the prior year’s sales were $2 million than if the prior year’s sales were $20 million. In the first situation, the increase would be 50% that is undoubtedly a significant increase for any firm. In the second situation, the increase would be 5% that is just a reflection of normal progress.
Horizontal analysis income statement example:
Balance Sheet:
Comparative Balance Sheet |
||||
Increase (Decrease) | ||||
2002 | 2001 | Amount | Percent | |
Assets |
||||
Current Assets: | ||||
Cash | $1,200 | $2,350 | $(1,150)* | (48.9)% |
Accounts receivable | 6,000 | 4,000 | 2000 | 50% |
Inventory | 8,000 | 10,000 | (2000) | (20.0)% |
Prepaid Expenses | 300 | 120 | 180 | 150.0% |
———- | ———– | ———- | ———- | |
Total current assets | $15,500 | $16,470 | (970) | (5.9)% |
———– | ———– | ———- | ——— | |
Property and equipment: | ||||
Land | 4,000 | 4,000 | 0 | 0% |
Building | 12,000 | 8,500 | 3,500 | 41.2% |
———– | ———– | ———- | ||
Total property and equipment | 16,000 | 12,500 | 3,500 | 28% |
———- | ———– | ———- | ——— | |
Total assets | 31,500 | 28,970 | 2,530 | 8.7% |
====== | ====== | ====== | ====== | |
Liabilities and Stockholders’ Equity |
||||
Current liabilities: | ||||
Accounts payables | $5,800 | $4,000 | 1800 | 45% |
Accrued payables | 900 | 400 | 500 | 125% |
Notes payables | 300 | 600 | (300) | (50%) |
———- | ———- | ———– | ——— | |
Total current liabilities | 7,000 | 5,000 | 2,000 | 40% |
———- |
———- |
———- |
———– |
|
Long term liabilities: | ||||
Bonds payable 8% | 7,500 | 8,000 | (500) | (6.3)% |
———- |
———- |
———- |
———- |
|
Total long term liabilities | 7,500 |
8,000 |
(500) |
6.3% |
———- |
———- |
———- |
———- |
|
Total Liabilities | $14,500 |
13,000 |
1,500 |
(11.5)% |
Stock holders equity: | ||||
Preferred stock, 100 par, 6%, $100 liquidation value | $2,000 | $2,000 | 0 | 0% |
Common stock, $12 par | 6,000 | 6,000 | 0 | 0% |
Additional paid in capital | 1,000 | 1,000 | 0 | 0% |
———- | ———- | ——— | ——– | |
Total paid in capital | 9,000 |
9,000 |
0 |
0% |
Retained earnings | 8,000 | 6,970 | 1,030 | 14.8% |
———- | ———- | ———- | ———- | |
Total stockholders’ equity | 17,000 | 15,970 | 1,030 | 6.4% |
———- | ———- | ———- | ——— | |
Total liabilities and stockholders’ equity | $31,500 | $28,970 | $2,530 | 8.7% |
===== | ====== | ====== | ====== |
*Since we are measuring the change between 2001 and 2002, the dollar amounts for 2001 become the base figure for expressing these changes in percentage form. For example, cash decreased by figures $1,150 between 2001 and 2002. This decrease expressed in percentage form is computed as follows:
$1,150 ÷ $2,350 = 48.9%
Other percentage figures in this example are computed by the same formula.
Income Statement:
Comparative income statement and reconciliation of retained earnings |
||||
Increase (Decrease) |
||||
2002 | 2001 | Amount | Percent | |
Sales | $52,000 | $48,000 | $4,000 | 8.3% |
Cost of goods sold | 36,000 | 31,500 | 4,500 | 14.3% |
———— | ———— | ———— | ———– | |
Gross margin | 16,000 | 16,500 | (500) | (3.0)% |
———— | ———— | ———— | ———— | |
Operating expenses: | ||||
Selling expenses | 7,000 | 6,500 | 500 | 7.7% |
Administrative expense | 5,860 | 6,100 | (240) | (3.9)% |
———— | ———— | ———— | ———— | |
Total operating expenses | 12,860 | 12,600 | 260 | 2.1% |
———— | ———— | ———— | ———— | |
Net operating income | 3,140 | 3,900 | (760) | (19.5)% |
Interest expense | 640 | 700 | (60) | (8.6)% |
———— | ———— | ———— | ———— | |
Net income before taxes | 2,500 | 3,200 | (700) | (21.9)% |
Less income taxes (30%) | 750 | 960 | (210) | (21.9)% |
———— | ———— | ———— | ———— | |
Net income | 1,750 | 2,240 | $ (490) | 21.9% |
====== | ||||
Dividends to preferred stockholders, $6 per share (see balancesheet above) | 120 |
120 |
||
———— | ———— | |||
Net income remaining for common stockholders | 1,630 | 2,120 | ||
Dividend to common stockholders, $1.20 per share | 600 | 600 | ||
———— | ———— | |||
Net income added to retained earnings | 1,030 | 1,520 | ||
Retained earnings, beginning of year | 6,970 | 5,450 | ||
———— | ———— | |||
Retained earnings, end of year | $ 8,000 | $ 6,970 | ||
======= | ======= |
Horizontal analysis of financial statements can also be carried out by computing trend percentages. Click here to read about trend percentage.
You may also be interested in other articles from “financial statement analysis” chapter:
- Horizontal and Vertical Analysis
- Ratios Analysis
- Horizontal Analysis or Trend Analysis
- Trend Percentage
- Vertical Analysis
Other Related Accounting Articles:
- Vertical Analysis and Common Size Statements
- Dividend Payout Ratio
- Trend Percentage
- Expense Ratio
- Proprietary Ratio or Equity Ratio
- Operating Ratio
- Working Capital Turnover Ratio
- Fixed Assets to Proprietor’s Fund Ratio
- Financial Accounting Ratios & Formulas
- Fixed Assets Turnover Ratio
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