Write the difference between horizontal and vertical analysis of financial statements.

The major differences between horizontal analysis and vertical analysis of financial statements are as follows −

Horizontal analysis

• Its main aim is to compare line items to calculate the changeover the time.

• In this, information is compared line by line to make decisions.

• It is useful when financial results of current/targeted years are compared with previous financial years.

• It states growth/decline of an item.

• It tells about changes in items over the time.

• It is used in intra comparison.

• It is used in income statements, balance sheets, retained earnings statements.

• It includes long term planning.

Vertical analysis

• Its main purpose is to compare change in percentages.

• In this, each line item is compared with another item in terms of percentages to make decisions.

• It is useful when the results are compared with competitors.

• It states forecasting and determining the relative proportion of an item.

• It tells about proportion of items to common items in a single year.

• It is used in both infra and inter comparisons.

• It is used in income tax, sales figures and operating costs.

• It includes short term planning.