October 4, 2010
The Three Methods of Analysis
The process of restating and summarizing data by establishing ratios and trends is known as financial analysis. The analysis is carried on a company's financial as well as income statement. The main objective behind carrying out a financial analysis of a company is to know its current financial position and its returns compared to risks. Financial analysis also helps in future forecasting. Financial analysis has three sub-divisions: vertical analysis, horizontal analysis and financial ratios.
Horizontal analysis is one of the foremost techniques in financial management. This type of analysis is the financial statements of a company of successive years presented side-by-side. The goal of horizontal analysis is to compare the figures of the current period with that of the past period. This helps the company and its shareholders analyze their performance and find out areas of improvement.
Horizontal analysis is done for both income statements and balance sheets. The figures for the different headers under the income statements and the balance sheets are placed side-by-side, so that the reader can compare the two and understand how the company is doing. It also includes two more columns: the column denoting actual numerical change over two periods and another denoting percentage change over the two periods. The first column gives the difference between the past period and the current period while the percentage column shows what percentage of the past figure is denoting a change.
Horizontal analysis is an important part of the financial statements and annual reports. It places the facts very simple in front of the shareholder and makes the job of analyzing the improvements or the lack of it very simple for the shareholder. Horizontal analysis helps the shareholder understand the change and the percentage change. If there is no improvement or in fact a reduction then the board...