Horizontal Analysis

Horizontal analysis is a financial statement analysis technique in which absolute change and percentage change in value of each line item of a financial statement is calculated over one or more accounting periods. Horizontal analysis may be performed on any financial statement i.e. balance sheet, income statement, cash flow statement and statement of changes in owners' equity.

To perform horizontal analysis of a financial statement for a given accounting period, the value of each line item at the end of or for the preceding accounting period is subtracted from its value at the end of or for the given accounting period. The figures obtained from this subtraction are presented in absolute change column. Percentage changes are then calculated by dividing absolute change in value of each line item by its value at the end of or for the preceding accounting period. A horizontally analyzed income statement is given below as an example:

Year Ended Dec. 31Change
20X120X2AbsolutePercent
Sales$416,000$587,000$171,00041.1
Cost of Sales255,000328,50073,50028.8
Gross Profit161,000258,50097,50060.6
Selling Expenses42,50061,20018,70044.0
Administrative Expenses62,00084,00022,00035.5
Operating Income56,500113,30056,800100.5
Income Tax19,20040,00020,800108.3
Net Income37,30073,30036,00096.5

Horizontal analysis helps in comparing the rate of change in performance or financial position of two or more businesses of different size. Horizontal analysis may also be performed on individual items of financial statements.

Written by Irfanullah Jan