Methods of Analysis - Horizontal and Vertical - Assignment Example

Methods of Analysis Horizontal analysis is an accounting term which refers to the contrast of the historical financial data over an array of reporting course. Company’s can also make comparison on the basis of ratios obtained from the financial data. The analysis is basically a way in which simple information is obtained by considering a certain period. The figures of each following period can be written in comparison with the value in the base year as a percentage, with the value of the baseline year taken as 100%.

The horizontal analysis for an income statement is taken out by considering two years data. By taking out the difference between the both years, further calculation is conducted. Similarly, the balance sheet also requires the same technique for conducting the horizontal analysis. Vertical analysis is a relative analysis of the financial data. In this particular case, each category of the financial statement is classified as a percentage of other related items. Basically, all the items are listed according to the percentage value of the total sales.

Likewise, in the case of balance sheet, all the listed items are derived from the percentage value of the total assets. This analysis is very helpful as financial decision makers are capable of making the decision on the basis of account balances held within the single time span. With the help of ratio analysis, the decision makers take out quantitative analysis regarding the data provided by the firm’s financial statements. There are certain formulas used to calculate the ratios. The basic motive of analysis is to measure the performance of the firm in comparison to the competitors, the historical data, and even the industry as a whole.

In order to take out fundamental results, current year ratios are compared to the timeline results (Sinha, 2009). The main purpose of the analysis of financial statements is to recognize the advantages of the company and take the most out of them and to recognize the weakness of the company and take corrective measures (Cagan, 2005). In horizontal analysis, the dynamics and the tendency of the position of the financial statements are examined. On the basis of the observed changes, the security and business efficiency are estimated.

Whereas in vertical analysis enables insight into the structure of the financial statements. The structure of the financial information is very important in determining the business quality. Ratio analysis is divided into 2 groups; one group contains information within a certain period, typically one year. Group 1 uses data from the cash flow statement and income statement. Group 2 contains information from a particular moment and relates to data of the balance sheet. Thus, this measures the quality of the business (Lane, 2012).

A certain health care, due to the increased competition in the market, wants to compare their performance to that of their competitors. So the analysis which fits perfectly in this case is Vertical Analysis. In vertical analysis, expressing every item in the financial statements as a percentage of the base amount assists in the evaluation of the financial statements. The health care with this method of analysis would be able to compare their performance with the competitors easily as vertical analysis will be able to tell the changes in certain accounts of the health care over time.

For instance if the cash amount of the health care worth $20,000 and the total assets worth $100,000, then the amount of cash will be expressed as 20%. Likewise will be the case with the income statement of the income statement and the components of the income statement of the healthcare will be expressed as a percentage of the total sales. Thus, if the comparison with the competitors will become easier as the health care will be able to compare their percentages of balance sheet and income statements and make changes if they fall behind.

References Cagan, M. (2005). The best use of financial statements. The new your times company.Retrieved June 3, 2012 from http://www.netplaces.com/accounting/the-best-use-of-your-financial-statements/vertical-and-horizontal-analysis.htmlLane, Mark. A. (2012). Business Finance Online. Retrieved June 3, 2012 from http://www.zenwealth.com/BusinessFinanceOnline/RA/RatioAnalysis.htmlSinha, G. (2009). Financial Statement Analysis. New Delhi: PHI Learning Pvt. Ltd.