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
December 31, 2002, and 2001
(dollars in thousands)

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
For the year ended December 31, 2002, and 2001
(dollars in thousands)

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:

  1. Horizontal and Vertical Analysis
  2. Ratios Analysis
  3. Horizontal Analysis or Trend Analysis
  4. Trend Percentage
  5. Vertical Analysis

Other Related Accounting Articles:

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