Horizontal analysis is also known as
a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.
The correct answer and explanation is :
The correct answer is:
c. trend analysis.
Explanation:
Horizontal analysis, also known as trend analysis, is a financial analysis technique used to evaluate changes in financial statement items over a period of time. It helps businesses and investors understand how financial performance has evolved by comparing data from different periods, typically using percentage changes.
How Horizontal Analysis Works
In horizontal analysis, financial data from multiple accounting periods are compared side by side. The analysis calculates the percentage change from one period to another, which provides insights into financial trends and helps identify patterns in revenue, expenses, assets, liabilities, and equity.
The formula for calculating the percentage change in horizontal analysis is:
[
\text{Percentage Change} = \left( \frac{\text{Current Year Value} – \text{Previous Year Value}}{\text{Previous Year Value}} \right) \times 100
]
For example, if a company’s revenue increased from $500,000 in Year 1 to $600,000 in Year 2, the percentage increase would be:
[
\left( \frac{600,000 – 500,000}{500,000} \right) \times 100 = 20\%
]
This means the company experienced a 20% growth in revenue.
Why Horizontal Analysis is Important
- Identifying Trends – It helps detect patterns in financial data, such as increasing revenues or rising costs.
- Performance Evaluation – Businesses can assess their financial growth over time.
- Budgeting and Forecasting – Companies use past trends to predict future performance.
- Comparative Analysis – Investors and analysts can compare a company’s financial performance with industry trends.
Unlike vertical analysis, which focuses on comparing financial statement items within a single period, horizontal analysis emphasizes changes over multiple periods, making it synonymous with trend analysis.