Income Statement Analysis: How to Read an Income Statement

If owner’s equity is $240,000 it will be shown as 60% ($240,000 divided by $400,000). The vertical analysis of the balance sheet will result in a common-size balance sheet. The percentages on a common-size balance sheet allow you to compare a small company’s balance sheets to that of a very large company’s balance sheet. A common-size balance sheet can also be compared to the average percentages for the industry. There is a possibility of analysts making the current period to appear either good or bad. This depends on which period of accounting analysts begin from and also the number of accounting periods selected.

Looking at and comparing the financial performance of your business from period to period can help you spot positive trends, such as an increase in sales, as well as red flags that need to be addressed. Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis what is a horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant. A horizontal analysis, also referred to as ‘trend analysis’, is a procedure in the financial analysis where the amounts of financial information over a certain period of time is compared line by line in order to make related decisions.

Trend Analysis / Horizontal Analysis in financial Statements

FREE INVESTMENT BANKING COURSELearn the foundation of Investment banking, financial modeling, valuations and more. Percentage ChangePercentage Change can be defined as a % change in value due to changes in the old number and new number and the values can either increase or decrease and so the change can be https://www.bookstime.com/ a positive value (+) or a negative value (-). A horizontal line proceeds from left to right on a chart, or parallel to the x-axis. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.

As we see, we can correctly identify the trends and develop relevant areas to target for further analysis. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

Horizontal Analysis: Should You Be Using It in Your Business?

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed. A manager, on the other hand, is concerned with the day-to-day operations of the company, so he uses this evaluation technique to pinpoint areas for improvement. For instance, a manager might compare cost of goods sold and profit margin over a two or three-year span to see how efficient the company is becoming. This comparison of income statements will give the manager not only a benchmark for future performance; it will also help him understand what needs to be changed in the future.