The difference between vertical analysis and horizontal analysis
/What is Vertical Analysis?
Vertical analysis is the proportional analysis of a financial statement , where each line item on the statement is listed as a percentage of another item. This means that every line item on an income statement is stated as a percentage of gross sales , while every line item on a balance sheet is stated as a percentage of total assets .
What is Horizontal Analysis?
Horizontal analysis is the comparison of historical financial information over a series of reporting periods . It is used to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reasons for the difference.
Comparing Vertical Analysis and Horizontal Analysis
There are several important differences between the vertical and horizontal analysis concepts. They are as follows:
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Reporting periods covered . Vertical analysis is focused on the relationships between the numbers in a single reporting period, while horizontal analysis spans multiple reporting periods.
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Quality of analysis . The horizontal analysis method is more likely to spot anomalies, since it is relatively easy to identify spikes and drops within a report line item over an extended period of time. It is more difficult to do so when only using the information for a single reporting period.
