A horizontal common-size statement, also called a variation analysis or trend analysis, compares key financial statement values and relationships for the same company over a period of years. The increase or decrease in each of the major accounts is shown as a percentage of the base-year amount and hence is sometimes referred to as the base-year financials.

 

A. Financial statements are evaluated over a period of time. Horizontal analysis is also called trend analysis. It determines the increase or decrease from one time period to another.

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B. A base period is determined in order to perform the analysis. This can be the immediate prior period or go back further in time.

C. The increase or decrease can be expressed as either a percent or as an amount. The basic calculations are:

1. Amount of change method: Current Period − Prior Period = Amount of Change

2. Percent change method: (Current Period − Prior Period) ÷ Prior Period = Growth Rate

3. Percent of prior period method: Current Period ÷ Prior Period = % Increase or Decrease​

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Example:

Jan, Inc. had the following information.

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Note in the figure above how the cost of sales is growing faster than sales. This can be inferred through a simple computation of percentage growth in cost of sales and comparing it to the percentage growth in sales. Horizontal or trend analysis helps the analyst examine relationships to detect strengths and weaknesses. In this example, management needs to focus on controlling costs. This analysis can reveal trends in the direction, rate, and magnitude of change. Further analysis also can examine trends in related areas, such as a disparity between an increase in sales and a proportionately greater increase in receivables.

 

Changes can be divided between year-to-year changes and longer-term trends. The analyst must use caution in interpreting results using horizontal common-size statements. Changes between years can be expressed in actual dollar amounts but are much more commonly expressed as percentages. When using percentages, the analyst must keep in mind the size of the basis for comparison. For example, a 400% increase in net income might sound remarkable until you learn that last year's income was $1,000. Expressing change as a percentage also loses meaning when the base is zero or below or the new value is zero. For example, if a company's net income in year 1 has a negative value and in year 2 has a positive value, there is no way to express the change as a percentage.

 

In a case such as this, a comparison must be made by examining the raw numbers. Data across a number of years also can be presented as averages. This method mitigates the effect of unusual fluctuation in data for specific years. That is, a rolling average over two or three years could be used as input to the horizontal analysis. In that way, an unusual year that affects multiple averages and trends could be spotted even when large variations in data are present.

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PRACTICE QUESTIONS

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1. Horizontal analysis is most likely to show:

A. Changes in account balances over time.

B. Changes in income per month.

C. Daily changes in profit loss.

D. Performance against competitors. 

 

2. Which amounts will show the same percentage increase or decrease when horizontal analysis is performed?

A. Sales revenue and net income

B. Total assets and total liabilities

C. Total assets and total liabilities plus stockholders’ equity

D. Current assets and current liabilities

 

3. In which scenario would a horizontal analysis be the best choice?

A. A bank wishes to compare progress among different companies.

B. A company wishes to market its growth to potential stockholders.

C. A vendor wishes to evaluate financial statement data in a given year.

D. An investor wishes to evaluate financial statement data by expressing each item in a financial 

     statement as a percentage of a base amount.

 

4. Because trend analysis evaluates financial data over time, it is also known as:

A. Horizontal analysis

B. Investment analysis

C. Revenue tracking

D. Forecasting

 

5. Horizontal analysis is used to prepare which of the following?

A. Data on competitors

B. Reports on year-to-year trends

C. Industry averages

D. Financial statement percentages

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6. Seino Trading Company reported net sales of $900,000, $950,000, and $1,420,000 in the Years 20x5, 20x6, and 20x7, respectively. If 20x5 is the base year, what is the trend percentage for 20x7?

A. 63%

B. 106%

C. 149%

D. 158%

 

7. The dollar value of a company's ending inventory on its balance sheet was $500,000, $600,000, and $400,000 for Years 1, 2, and 3, respectively. In preparing a horizontal analysis with Year 1 as the base year, the percentage change shown for Year 3 would be:

A. (25%)

B. (20%)

C. 20%

D. 80%

 

8. An analysis of financial statements of Maritime Containers Inc. revealed the following information for its liabilities over the past four years:

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Based on horizontal analysis, what is the percentage for accounts payable for Year 2 and by what percentage did it decrease over Year 1?

A. 77.52% and 22.48%

B. 112.95% and 12.95%

C. 88.53% and 11.47%

D. 11.47% and 88.53%

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9. The balance sheets of Delaware Drillers include the following current assets:

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Based on horizontal analysis, what is the percentage for accounts receivable for Year 3 and by what percentage did it decrease over Year 2?

A. 89.12% and 10.88%

B. 98.79% and 1.21%

C. 110.88% and 10.88%

D. 112.21% and 12.21% 

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10. Assume the following sales data for a company:

 

2018: $980,000     2017: $875,000     2016: $700,000

 

If 2016 is the base year, what is the percentage increase in sales from 2016 to 2017?

A. 140%

B. 125%

C. 40%

D. 25%

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ANSWER KEY

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1. A

2. C

3. B

4. A

5. B

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References:

    Wiley. (2023). Wiley CMA Exam Review 2023 Study Guide Part 2: Strategic Financial Management Set (1-year access). Wiley.

 

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