Methods of Analysis - Horizontal and Vertical Assignment

Methods of Analysis - Horizontal and Vertical - Assignment Example The horizontal analysis for an income statement is taken out by considering two years data. By taking out the difference between both years, a further calculation is conducted. Similarly, the balance sheet also requires the same technique for conducting the horizontal analysis. Vertical analysis is a relative analysis of the financial data. In this particular case, each category of the financial statement is classified as a percentage of other related items. Basically, all the items are listed according to the percentage value of the total sales. Likewise, in the case of a balance sheet, all the listed items are derived from the percentage value of the total assets. This analysis is very helpful as financial decision-makers are capable of making the decision on the basis of account balances held within the single time span. With the help of ratio analysis, the decision makers take out quantitative analysis regarding the data provided by the firm’s financial statements. There a re certain formulas used to calculate the ratios. The basic motive of analysis is to measure the performance of the firm in comparison to the competitors, the historical data, and even the industry as a whole. In order to take out fundamental results, current year ratios are compared to the timeline results (Sinha, 2009). The main purpose of the analysis of financial statements is to recognize the advantages of the company and take the most out of them and to recognize the weakness of the company and take corrective measures (Cagan, 2005). In the horizontal analysis, the dynamics and the tendency of the position of the financial statements are examined. On the basis of the observed changes, the security and business efficiency is estimated. Whereas in vertical analysis enables insight into the structure of the financial statements. The structure of the financial information is very important in determining the business quality. Ratio analysis is divided into 2 groups; one group cont ains information within a certain period, typically one  year. Group 1 uses data from the cash flow statement and income statement.   Group 2 contains information from a particular moment and relates to data of the balance sheet.   Thus, this measures the quality of the business.