FABM 2 NOTES 5 Horizontal and Vertical Analysis

Financial Statement Analysis provides the framework in analyzing the past, present,
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS and current performance of any business entity. There are several methods that are
AND MANAGEMENT 2 NOTES 5 commonly used in financial statement analysis.

COMMONLY USED TOOLS FOR FINANCIAL STATEMENT ANALYSIS

TOPIC HORIZONTAL AND VERTICAL ANALYSIS
1.Horizontal analysis – assessment of an entity’s financial condition and
Content The learners will be able to demonstrate understanding of
Standard methods or tools of analysis of financial statements to include performance across time.
horizontal analysis, vertical analysis, and financial ratios to test the level
of liquidity, solvency, profitability, and stability of the business. 2. Vertical analysis – evaluation of an entity’s financial condition and performance
Performance The learners will be able to solve exercises and problems that compared to a “base” amount.
Standard require computation and interpretation using horizontal analysis,
vertical analysis, and various financial ratios
Competencies Perform vertical and horizontal analysis of financial statements
HORIZONTAL ANALYSIS
of single proprietorship. (ABM_FABM12-Ig-h-13)

It is an analysis of financial statements over a series of years. It is also called “Trend

Analysis”. The objective for evaluating a series of financial over a period is to know
the increase or decrease that has taken place for each line item being analyzed in
Financial Statement Analysis is the process of evaluating risks, performance, financial
the financial statement.
health, and prospects of a business by subjecting financial statement data to
computational and analytical techniques with the objective of making economic
decision.

Today’s economy is undergoing constant and significant change because of

unexpected phenomena like climate change and the COVID-19 pandemic.

To compete effectively and strategically, it is important for businesses of all sizes to

make use of the tools that will assess the financial performance of the business.

Tools for financial statement analysis have a role to play in a company’s financial
management, business process management and overall strategic and competitive
Source: www.educba.com
planning.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
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FABM 2 NOTES 5 Horizontal and Vertical Analysis
Statement of Comprehensive Income Horizontal Analysis Statement of Financial Position Horizontal Analysis
Masabor Bakeshop Masabor Bakeshop
Statement of Comprehensive Income Statement of Financial Position
For the Year Ended December 31, 2019
For the Year Ended December 31, 2019
( With Comparative Figures for 2018)
( With Comparative Figures for 2018)
Increase or (Decrease)
2019 2018 Amount Percent Assets Increase or (Decrease)
2019 2018 Amount Percent
Net Sales P 510,070 P 482,040 P 28,030 5.81% Current Assets
Less:Cost of Sales 235,000 230,000 5,000 2.17%
Cash on Hand P 10,000 P 10,000 P 0 0.00%
Gross Profit P 275,070 P 252,040 P 23,030 9.14%
Accounts Receivable 100,000 120,000 (20,000) (16.67%)
Add: Other operating income 86,297 68,640 17,657 25.72%
Gross profit and other operating income P 361,367 P 320,680 P 40,687 12.69% Inventories 150,000 90,000 60,000 66.67%
Total Current Assets P 260,000 P 220,000 P 40,000 18.18%
Less: Operating Expenses
Advertising expense 55,000 45,000 10,000 22.22% Non-Current Assets
Supplies expense 15,000 13,000 2,000 15.38% Property and Equipment 200,000 100,000 P 100,000 100.00%
Salaries expense 33,000 36,000 (3,000) (8.33%)
Utilities expense 12,000 10,000 2,000 20.00%
Total Operating Expense 115,000 104,000 11,000 10.58%
Total Assets P 460,000 P 320,000 P 140,000 43.80%
Net income before tax P 246,367 P 216,680 P 29,687 13.70%
Less: income tax 61,592 54,170 7,422 13.70% Liabilities and Owner's Equity
Net income after income tax P 184,775 P 162,510 P 22,265 13.70%
Current Liabilities
Accounts Payable P 100,000 P 20,000 P 80,000 400.00%
Notes Payable 80,000 80,000 0 0.00%
The illustration presented showed a comparative Statement of Comprehensive Total Current Liabilities P 180,000 P 100,000 P 80,000 80.00%
Income for the years 2019 and 2018. The increase or decrease in each of the account
Non-Current Liability
item of the statement of financial position is shown in both peso value and
Mortgage Payable 40,000 20,000 20,000 100.00%
percentage.
Total Liabilities P 220,000 P 120,000 P 100,000 83.33%
2 step formula:
Vina Dela Cruz, Capital 240,000 200,000 40,000 20.00%

1. Compute for the amount of change Total Liability and Owner's Equity P 460,000 P 320,000 P 140,000 43.75%
Amount of change = Current year amount – base year amount (Previous Year)

2. Compute for the percentage of change

Percentage of change = (Amount of change / Base year amount) x 100

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FABM 2 NOTES 5 Horizontal and Vertical Analysis
Masabor Bakeshop VERTICAL ANALYSIS
Statement of Comprehensive Income
For the Year Ended December 31, 2019 It is a technique for evaluating financial statement data that expresses each item in
a financial statement as a percentage of base amounts. It allows one to see the real
performance of the entity compared to operations of prior years.
2019 2018
Amount Percent Amount Percent

Net Sales P 510,070 100.00% P 482,040 100.00%

Less:Cost of Sales 235,000 46.07% 230,000 47.71%
Gross Profit P 275,070 53.93% P 252,040 52.29%
Add: Other operating income 86,297 16.92% 68,640 14.24%
Gross profit and other operating income P 361,367 70.85% P 320,680 66.53%

Less: Operating Expenses

Advertising expense 55,000 10.78% 45,000 9.34%
Supplies expense 15,000 2.94% 13,000 2.70%
Salaries expense 33,000 6.47% 36,000 7.47%
Utilities expense 12,000 2.35% 10,000 2.07%
Total Operating Expense 115,000 22.55% 104,000 21.57%
Net income before tax P 246,367 48.30% P 216,680 44.95%
Less: income tax 61,592 12.08% 54,170 11.24% Source: www.educba.com
Net income after income tax P 184,775 36.23% P 162,510 33.71%

Below is Masabor Bakeshop common-size income statement using Vertical Analysis.

For SCI the Net Sales is the base or the 100%
The above illustration also a comparative Statement of Financial Position for the
years 2019 and 2018. Percentages in the above statement were computed using the To get the percentage of each amount, it is simply:
same formula. (Each item in SCI / Base ) x 100
2019 % 2018 % % of Change
By reading the result of horizontal analysis, we can able to note significant changes Net Sales(base) 510,070 100% 482,040 100%
(for instance, accounts receivable decreased by 16.7% in 2019, whereas, equipment Cost of Sales 235,000 46.07% 230,000 47.71% 1.64%
increased by 100%). These two changes, when taken together, indicate favorable
outcome. Interpretation: Comparing these two percentages, we see that Cost of Sales, as a portion to Net sales,
decreased by 1.64% in 2019 compared to 2018. This is also the reason why gross profit and net income
percentages for 2019 is greater compared with 2018.

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FABM 2 NOTES 5 Horizontal and Vertical Analysis
Statement of Financial Position using Vertical Analysis Watch also: Sir Chua’s Accounting Lesson on Playlist FABM2 about Analysis and
Masabor Bakeshop Interpretation of FS Horizontal and Vertical analysis.
Statement of Financial Position
For the Year Ended December 31, 2019

Horizontal Analysis vs. Vertical Analysis

Assets
Amount
2019
Percent Amount
2018
Percent
Source: www.investopedia.com
Current Assets
Cash on Hand P 10,000 2.17% P 10,000 3.13%
Accounts Receivable 100,000 21.74% 120,000 37.50% The primary difference between vertical analysis and horizontal analysis is that
Inventories 150,000 32.61% 90,000 28.13%
Total Current Assets P 260,000 56.52% P 220,000 68.75% vertical analysis is focused on the relationships between the numbers in a single
Non-Current Assets reporting period, or one moment in time. Vertical analysis is also known as common
size financial statement analysis.
Property and Equipment 200,000 43.48% 100,000 31.25%

Total Assets P 460,000 100.00% P 320,000 100.00%

Liabilities and Owner's Equity For example, the vertical analysis of an income statement results in every income
Current Liabilities statement amount being restated as a percent of net sales. If a company's net sales
Accounts Payable P 100,000 21.74% P 20,000 6.25%
Notes Payable 80,000 17.39% 80,000 25.00% were $2 million, they will be presented as 100% ($2 million divided by $2 million). If
Total Current Liabilities P 180,000 39.13% P 100,000 31.25%
the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million
divided by sales of $2 million).
Non-Current Liability
Mortgage Payable 40,000 8.70% 20,000 6.25%

Total Liabilities P 220,000 47.83% P 120,000 37.50%

Vina Dela Cruz, Capital 240,000 52.17% 200,000 62.50%

On the other hand, horizontal analysis looks at amounts from the financial
statements over a horizon of many years. Horizontal analysis is also referred to
Total Liability and Owner's Equity P 460,000 100.00% P 320,000 100.00%
as trend analysis.
In SFP, the base are the TOTAL ASSETS for all assets and THE TOTAL LIABILITIES AND
EQUITY for all liabilities and capital. Assume that the base year for analysis is three years earlier. All of the amounts on
The formula for computing the statement of financial position percentage is: the balance sheets and the income statements for analysis will be expressed as a
(Each item in the SFP / Base) x 100 percentage of the base year amounts. The amounts from three years earlier are
presented as 100% or simply 100. The amounts from the most recent years will be
Example: For example, we can determine the percentage for the account item “Cash divided by the base year amounts.
on hand” by applying the above formula.
2019 % 2018 % % of Change For instance, if a most recent year amount was three times as large as the base year,
Cash on Hand 10,000 2.17% 10,000 3.13% .96% the most recent year will be presented as 300. This type of analysis reveals trends in
TOTAL ASSETS base) 260,000 100% 220,000 100%
line items such as cost of goods sold.

Interpretation: The portion to Total assets, there is a decreased of .96% on the

company’s cash on hand.

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FABM 2 NOTES 5 Horizontal and Vertical Analysis
KeyTASKaway:
Horizontal Analysis A. Horizontal Analysis
• Used to look at line by line account balance changes for specific accounting Accounts 2020 2019 Amount of Percentage of
periods change change
• Compares prior accounting period findings with a more current set of Sales 120,000 105,000
findings Cost of Sales 56,700 55,600
• Is often used by management to drive strategic decision-making. Gross Profit 63,300 49,400
Operating Expenses 23,000 30,000
Vertical Analysis Operating Profit 40,000 19,400
• Used to gauge a company's concentration or relationship between certain Interest Expenses 2,500 3,000
accounts Net Profit 37,800 16,400
• Restates account balances to proportional percentages.
Interpretation: ________________________________________________________________
• Is often used by investors or creditors to evaluate risk and corporate finance
profiles.
B. Vertical Analysis
Accounts Percentage of change
Assets
Current Assets 975,450
Non-Current Assets 524,550
TOTAL ASSETS (base) 1,500,000 100%
Liabilities
Current Liabilities 120,000
Non-Current Liabilities 701,000
Capital
Owner’s Capital, end 679,000
TOTAL LIABILITIES AND EQUITY 1,500,000 100%

Interpretation: __________________________________________________________________

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