Horizontal Analysis: What Is It and Why Is It Important?
Horizontal analysis is comparing financial information from one reporting period (your base period) to similar financial information from other reporting periods to analyze historical trends.
How Does Horizontal Analysis Work?
When you compare information in one financial statement against similar information from other reporting periods, you can better understand your financial position and performance.
The Importance of Horizontal Analysis in Financial Reporting Standards
GAAP requires your financial statements to be consistent and comparable to one another—and that they’re able to be analyzed against similar companies. This requires you to follow the same accounting methods and principles for every reporting period.
Key Takeaways
Horizontal analysis is the comparison of similar financial information from one period to another period.
Identifying historical financial trends can help you understand what’s affecting your financial performance, seize opportunities and improve efficiency.
Horizontal analysis—when performed unethically—can mislead stakeholders from the company’s true financial position, performance and outlook.
Horizontal Analysis Formula
You can express your horizontal analysis as change percentages or absolute values. If you’re using change percentages, your base period is 100%.
This is the formula for a horizontal analysis:
Horizontal Analysis (Value) = (Amount in Comparison Period - Amount in Base Period) / Amount in Base Period.
OR
Horizontal Analysis (%) = (Amount in Comparison Period - Amount in Base Period) / Amount in Base Period X 100.
Horizontal Analysis Is Just One Feature of Financial Reporting
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