Horizontal analysis is a technique for evaluating financial statement data
a. within a period of time.
b. over a period of time.
c. on a certain date.
d. as it may appear in the future.
The correct answer and explanation is :
The correct answer is:
b. over a period of time.
Explanation:
Horizontal analysis is a financial analysis technique used to compare financial statement data over multiple periods. It helps in identifying trends, growth patterns, and financial performance changes over time by evaluating increases or decreases in financial figures.
This method is typically applied to key financial statements such as the income statement, balance sheet, and cash flow statement. By analyzing changes in financial data from one period to another—such as year-over-year (YoY) or quarter-over-quarter (QoQ)—horizontal analysis provides insights into a company’s financial health, growth, or areas of concern.
Key Features of Horizontal Analysis:
- Comparative Assessment: This technique compares financial data over multiple periods, allowing businesses to track performance over time.
- Trend Identification: By examining trends in revenue, expenses, assets, and liabilities, companies can identify growth patterns or financial concerns.
- Percentage and Absolute Changes: Changes are usually expressed in absolute terms (dollar amounts) and percentages to facilitate comparison. The formula for percentage change is: [
\text{Percentage Change} = \frac{\text{Current Year Amount} – \text{Base Year Amount}}{\text{Base Year Amount}} \times 100
] - Decision-Making: Investors, analysts, and management use horizontal analysis to make informed decisions regarding investments, cost control, and strategic planning.
Example of Horizontal Analysis:
Suppose a company’s revenue was $500,000 in Year 1 and increased to $600,000 in Year 2. The percentage increase would be:
[
\frac{600,000 – 500,000}{500,000} \times 100 = 20\%
]
This indicates a 20% revenue growth over the period.
Overall, horizontal analysis is a crucial tool for evaluating financial performance over time and making strategic business decisions.