Differences between Horizontal and Vertical Analysis
Though both horizontal and vertical analysis are done by the companies for the purpose of analysis of financial statements, and both are useful in analysis of trends for the financial statements of the company, however they both are different in following ways.
Under horizontal analysis an analyst compares the financial statement of the company for two more accounting periods, it can be used on any item in the financial statement company so if company wants to see whether its sales for current year is good or not it will compare the sales for the year 2010 with sales for year 2009 or for previous years. It is a time series analysis in the sense that it shows comparison of financial data for several years against a chosen base year. It is also called dynamic analysis of the financial statements.
Vertical analysis is done to review and analysis the financial statements for a year only and therefore it is also called static analysis. Under this method each entry for assets, liabilities and equities in a balance sheet is represented as a percentage of the total account. So if in asset side of balance sheet cash is $200, building is $400 and machinery is $600 and total of balance sheet is $1000, then cash will be 20 percent of total of balance sheet building will be 40 percent and machinery will be 60 percent. One of the advantages of using this method is that one gets an idea of composition of the balance sheet and then it can compared with previous years to see the relative annual changes in company’s balance sheet.