Chapter Three

Vertical and Horizontal

Analysis

Course: Financial Analysis and Control

Course Code: BAAC4101
Specialization: Accounting
Department of Business Studies
 Outcome 3: Vertical and Horizontal Analysis
Contents:

Vertical analysis

 Common-size statements

Horizontal analysis

 Comparative statements

 Trend analysis

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 Vertical analysis
Common-size statements
The statements denote the relationship of different items of a financial statement
with a common item by stating each item as a percentage of that common item. The
percentage thus calculated can be used to compare with the results of
corresponding percentages of the previous year or of some other businesses, as the
numbers are converted to a common base. Thus, common size statements are
beneficial, both, in intra-firm comparisons over different years and also in making
inter-firm comparisons for the same year or for several years. This analysis is also
known as ‘Vertical analysis’.

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 Horizontal analysis
1. Comparative Statements: These statements show the profitability and financial position of a firm for different
periods of time in a comparative form to know about the position of two or more periods. It usually relates to
the two important financial statements, namely, balance sheet and statement of profit and loss prepared in a
comparative form. Comparative figures indicate the trend and direction of financial position and operating
results. This analysis is also known as ‘horizontal analysis’.

2. Trend Analysis: It is a technique of studying the operational results and financial position over a series of
years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the
percentage changes over time in the selected data. The trend percentage is the percentage relationship, in
which each item of different years bear to the same item in the base year.

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 Differences between Horizontal and Vertical Analysis
S.no Basis of Difference Horizontal Analysis
It refers to the comparison of an item of the
financial statement of one period or periods It refers to the comparison of itemitems of the
to its corresponding item of the base
1 Meaning accounting period.
Its purpose is to determine the change in an
item during an accounting period. The
change in the item is expressed either in
absolute figures or in percentage or in both
2 Purpose terms.
3 Usefulness It indicates growth or decline of the item.
Vertical Analysis
financial statement to the common item of
the same accounting period.
Its purpose is to determine the proportion of
item/items to the common item of the same
accounting period. The change in the item is
expressed either in ratio or in percentage
terms.
It helps in predicting and determining the
future relative proportion of an item to the
common item.
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 Common-Size Statement:
Advantages of Common-Size Statement:

(a) Easy to Understand: Common-size Statement helps the users of financial statement
to make clear about the ratio or percentage of each individual item to total
assets/liabilities of a firm. 

(b) Helpful for Time Series Analysis: A Common-Size Statement helps an analyst to find
out a trend relating to percentage share of each asset in total assets and percentage
share of each liability in total liabilities.

(c) Helpful in analyzing Structural Composition: A Common-Size Statement helps the

analyst to ascertain the structural relations of various components of
cost/expenses/assets/liabilities etc. to the required total of assets/liabilities and capital.

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 Limitations of Common-Size Statement:
(a)No Standard Ratio: Common-Size Statement does not help to take decisions
since there is no standard ratio/percentage regarding the change of
percentage in the various component of assets, liabilities, sales etc.

(b) Change in Price-level: Common-Size statement does riot recognise the

change in price level i.e. inflationary effect. So, it supplies misleading
information’s since it is based on historical cost.

(c) Following Consistency: If consistency in the accounting principle, concepts,

conventions is not maintained then Common Size Statement becomes useless.

(d) Seasonal Fluctuation: Common-Size Statement fails to convey proper

records during seasonal fluctuations in various components of sales, assets
liabilities etc. e.g. sales and closing stock significantly vary.
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Limitations of Common-Size Statement:
(e) Liquidity and Solvency Position: Liquidity and solvency position cannot be
measured by Common-Size Statement. It does not help to ascertain the Current
Ratio, Liquid Ratio, Debt Equity Capital Ratio, Capital Gearing Ratio etc. which are
applied in testing liquidity and solvency position of a firm.

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 Comparative income statement
The income statements of a concern are given for the year ending 31st December
2013 and 2014. Rearrange the figures in a comparative form and study the
profitability of the concern
Details 2013 2014
Net Sales 785,000 900,000
Cost of goods sold 450,000 500,000
Operating expenses :    
General and administrative expenses 70,000 72,000
Selling expenses 80,000 90,000
Non-operating expenses :    
Interest paid 25,000 30,000
Tax 70,000 80,000

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Solution: Comparative income statement
  2013 2014 Increase(+) Decrease(-)

Details Amount Amount Increase(+) Decrease(-)

  (RO) (RO) (RO) Percentage

Net sales 785,000 900,000 115000 14.65
Less cost of goods sold 450,000 500,000 50000 11.11
Gross profit 335,000 400,000 65000 19.4
Operating expenses :        
General & Administrative 70,000 72,000 2000 2.8
Selling expenses 80,000 90,000 10000 12.5
Total operating expenses 150,000 162,000 12000 8
Operating profit 185,000 238,000 53000 28.65
Less : other deductions        
Interest received 25,000 30,000 5000 20
Net profit before tax 160,000 208,000 48000 30
Less Tax 70,000 80,000 10000 14.28
Net profit after tax 90,000 128,000 38000 42.22 10
Common size balance sheet
The following is the Balance sheet of Oman International. Prepare a common size Balance sheet
Liabilities 2015(RO) 2016(RO)
Equity Share Capital (of R0 10 each)  240 240
General Reserve  96 182
Long Term loans  182 169.5
Creditors 67 52
Outstanding expenses 6 -
Other Current liabilities  9 6.5
Total Liabilities 600 650
     
Assets    
Plant assets net of accumulated less
depreciation  402 390
Cash 54 78
Debtors 60 65
Inventories 84 117
Total Assets 600 650

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Solution: Common size Balance sheet of Oman International

Particulars 2015 2016

Liabilities:  RO'000 % RO'000 %
Equity Share Capital (of RO 10 each)  240 40 240 36.92
General Reserve  96 16 182 28
Long-term Loan  182 30.33 169.5 26.08
Creditors  67 11.17 52 8
Outstanding Expenses  6 1 - 
Other Current Liabilities  9 1.5 6.5 1
Total Liabilities  600 100 650 100
Assets:        
Plant less Accumulated Depreciation  402 67 390 60
Cash 54 9 78 12
Debtors  60 10 65 10
Inventories  84 14 117 18
Total Assets
  600 100 650 100

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Comparative Income Statement
Prepare Comparative Income Statement from the following information:
2017-18 2016-17
Particulars
RO. RO.
Freight Outward 20,000 10,000
Wages (office) 10,000 5,000
Manufacturing Expenses 50,000 20,000
Stock adjustment -60,000 30,000
Cash purchases  80,000 60,000
Credit purchases  60,000 20,000
Returns inward  8,000 4,000
Gross profit -30,000 90,000
Carriage outward 20,000 10,000
Machinery 300,000 200,000
Charge 10% depreciation on machinery 10,000 5,000
Interest on short-term loans 20,000 20,000
10% debentures 20,000 10,000
Profit on sale of furniture 20,000 10,000
Loss on sale of office car 90,000 60,000
Tax rate 40% 50% 13
 Solution: Comparative Income Statement
for the year ended March 31, 2017 and 2018
Note 2016-17 2017-18 Absolute  Percentage
Particulars No. (RO) (RO) Change Change

      (RO)  

1. Revenue from Operations   216,000 92,000 124,000

- - 57
2. Other Income   10,000 20,000 10,000 100
3. Total Revenue (1 + 2)   226,000 112,000 -114,000 -50

4. Expenses          

a. Purchases of Stock-in-Trade   80,000 140,000 60,000 75

b. Change in Inventories   30,000 -60,000 -90,000 -300

c. Employee Benefit Expenses   5,000 10,000 5,000 100

d. Finance Costs   21,000 22,000 1,000 4.54
e. Depreciation and Amortisation  
5,000 10,000 5,000 100
Expenses
f.Other Expenses   80,000 130,000 50,000 62.5
 Total Expenses   221,000 252,000 31,000 14
5. Profit before Tax (3 – 4)   5,000 -140,000 -83,000 16.6 14
 
Working Notes:

1. Calculation of Net Sales

Net Sales = Cost of Goods Sold + Gross Profit - Sales Return
or, Net Sales = Purchases + Manufacturing Expenses + Change in Inventory + Gross Profit - Sales Return
Net Sales (2017) = 80,000 + 20,000 +30,000 + 90,000 - 4,000 = Rs 216,000
Net Sales (2018) = 140,000 + 50,000 - 60,000 - 30,000 - 80,000 = Rs 92,000
2. Calculation of Finance Cost
Finance Cost = Interest on short-term loans + Interest on 10% Debentures
Finance Cost (2017) = 20,000 + 1,000 = Rs 21,000
Finance Cost (2018) = 20,000 + 2,000 = Rs 22,000
3. Calculation of Other Expenses
Other Expenses = Freight Outward + Carriage Outward + Loss on sale of office car
Other Expenses (2017) = 10,000 + 10,000 + 60,000 = Rs 80,000
Other Expenses (2018) = 20,000 + 20,000 + 90,000 = Rs 130,000
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Comparative Balance sheet
Following are the balance sheets of Alpha Ltd. as at March 31st, 2016 and 2017:
2016 2017
Particulars
RO. RO.
I. Equity and Liabilities    
Equity share capital 200,000 400,000
Reserves and surplus 100,000 150,000
Long-term borrowings 200,000 300,000
Short-term borrowings 50,000 70,000
Trade payables 30,000 60,000
Short-term provisions 20,000 10,000
Other current liabilities 20,000 30,000
Total 620,000 1,020,000
II. Assets    
Fixed assets 200,000 500,000
Non-current investments 100,000 125,000
Current investments 60,000 80,000
Inventories 135,000 155,000
Trade receivables 60,000 90,000
Short term loans and advances 40,000 60,000
Cash at bank 25,000 10,000
Total 620,000 1,020,000
     

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 Solution: Comparative Balance Sheet
as on March 31, 2016 and 2017
2016 2017 Absolute Percentage
Particulars
(RO) (RO) Change Change
I. Equity and Liabilities        

1. Shareholder’s Fund        

a. Equity Share Capital 200,000 400,000 200,000 100

b. Reserves and Surplus 100,000 150,000 50,000 50
2. Non-Current Liabilities        

a. Long Term Borrowings 200,000 300,000 100,000 50

3. Current Liabilities        

a. Short Term Borrowings 50,000 70,000 20,000 40

b. Trade Payables 30,000 60,000 30,000 100
c. Short Term Provisions 20,000 10,000 -10,000 -50
d. Other Current Liabilities 20,000 30,000 10,000 50
Total 620,000 1,020,000 400,000 64.5
II. Assets        

1. Non-Current Assets        

a. Fixed Assets 200,000 500,000 300,000 150

b. Non Current Investments 100,000 125,000 25,000 25
2. Current Assets         

a. Current Investments 60,000 80,000 20,000 33.3

b. Inventories 135,000 155,000 20,000 14.8
c. Trade Receivables 60,000 90,000 30,000 50
d. Short Term Loans and Advances 40,000 60,000 20,000 50
e. Cash and Cash Equivalents 25,000 10,000 -15,000 -60 17
 Trend Analysis
From the following particulars extracted from Income statement of P Ltd., you are required to
  calculate trend percentages
Year Sales Wages Bad Debts Profit after tax
  RO RO RO RO
2003 350,000 50,000 14,000 16,000
2004 415,000 60,000 26,000 24,500
2,005 425,000 72,200 29,000 45,000
2,006 460,000 85,000 33,000 60,000

Solution: Trend Percentages (Base Year 2003 = 100)

Bad
Year Sales Trend Wages Trend Debts Trend Profit after tax Trend
  RO % RO % RO % RO %
2003 3,50,000 100 50,000 100 14,000 100 16,000 100
2004 4,15,000 118.57 60,000 120 26,000 185.71 24,500 153.125
2005 4,25,000 121.43 72,200 144.4 29,000 207.14 45,000 281.25
2006 4,60,000 131.43 85,000 170 33,000 235.71 60,000 375
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 Trend Analysis
Calculate trend percentages from the following figures of ABC Ltd., taking 2000 as
base and interpret them.
Year Sales Stock Profit before tax
2000 1,500 700 300
2001 2,140 780 450
2002 2,365 820 480
2003 3,020 930 530
2004 3,500 1160 660
2005 4000 1200 700

Solution: Trend Percentages (Base Year 2000 = 100)

Year Sales Trend Stock Trend Profit before tax Trend
    %   %   %
2000 1,500 100 700 100 300 100
2001 2,140 142.67 780 111.43 450 150
2002 2,365 157.67 820 117.14 480 160
2003 3,020 201.33 930 132.86 530 176.67
2004 3,500 233.33 1,160 165.71 660 220
2005 4,000 266.67 1,200 171.43 700 233.33

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 References:
1. https://
www.slideshare.net/AishwaryaMahadevan2/financial-statements-analysis-
73717154?next_slideshow=1

2. http://www.philoid.com/epub/ncert/12/273/leac204

3. http://
ncertbooks.prashanthellina.com/class_12.Accountancy.AccountancyPartII/
Chapter-4.pdf

4. http://ncert.nic.in/ncerts/l/leac204.pdf

5. http://www.researchzoneindia.com/palash/files/080618073408Final-Marc
20
h-2018.pdf
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VERSION HISTORY

Version No Date Approved Changes incorporated

01 Sem. (I) 2019/2020

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