The Horizontal Method of Analyzing Financial Statements

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Using the Vertical Method to Analyze Financial Statements

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:03 Horizontal Method of Analysis
  • 0:35 What Is Horizontal Analysis?
  • 2:54 Balance Sheets
  • 3:33 Income Statements
  • 4:21 Retained Earnings Statements
  • 5:10 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed
Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson focuses on horizontal analysis, which is used to compare financial balances over time. Following this lesson, you'll be able to explain how to use the analysis for a balance sheet, income statement, and retained earnings statement.

Horizontal Method of Analysis

Have you ever been involved in organizing a fundraising campaign year after year? Well, if you've looked at what type of campaign raises the most money, you know about horizontal analysis. Say the one year you sold fruit, you increased your funds by 50% from the previous years when you did a car wash and a raffle. So, now you want to focus on fruit sales. This is an example of a decision you made based on the horizontal method of analyzing financial statements, known as horizontal analysis.

What Is Horizontal Analysis?

Horizontal analysis is done when an accountant compares different aspects of a business' finances over a certain period of time. It may be done over a month, season, quarter, year, or any other period of relevance. There are two methods for doing a horizontal analysis, which is sometimes referred to as a trend analysis. It can be done with dollars or percentages. Let's look at examples of each.

A dollar analysis looks at the amount of money left after a certain period. Say you're comparing quarters. You would look at the number of dollars left at the end of a quarter and compare that to other quarters.

For example, let's say we own an ice cream shop. We want to do a horizontal analysis on our slowest months, January through March, and we want to know if our off-season marketing effort is working. We will compare the first quarter of our fiscal year from 2014 to that quarter in 2015. A change in cash flow from $10,000 during the first quarter of 2014 to $15,000 during the same quarter of 2015 shows an increase of $5,000 (or $15,000 - $10,000). If nothing else has changed, we can surmise that our marketing effort is working.

A percentage analysis is where percentage differences in items are compared over certain time periods. Any dollar amounts are converted to percentages and used to make these comparisons.

Let's look again at the cash flows from our ice cream shop. We have a change in cash flow from $10,000 to $15,000. Our percentage analysis shows an increase of 50% (($15,000 - $10,000) / $10,000 = 0.5 or 50%). Again, this tells us that if nothing else changed during this time period, our marketing effort is working.

What else do these values tell you? Well, they help you figure out what is changing and why. Looking into these numbers further, you can see whether this is due to an increase in sales, reduction in costs, an anomaly, or even due to a change in marketing strategy. Most accountants report both numbers and percentages when doing a horizontal cost analysis. Typically, they're used to compare items from balance sheets, income statements, and retained earnings statements.

Balance Sheets

Balance sheets show us our total assets and total liabilities at a particular time. The difference would be the equity we have in our business. In our case it would be how much our ice cream shop is worth.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account