Financial statement analysis: Horizontal analysis
Horizontal analysis can be used with any financial statement. Business decision-makers use horizontal analysis to assess the soundness and performance of a company based on detected trends of increase and decrease. These trends are also used to project future performance and financial position.
The change in dollar amount of income before taxes is computed by subtracting the amount of income before taxes for 2016 from the amount of income before taxes from 2017.
|Change in income before taxes||=||2017 income before taxes||–||2016 income before taxes|
|=||$184,600 – $180,000|
Since 2017 income before taxes is greater than 2016 income before taxes, there is an increase of $4,600 in income before taxes.
The percentage increase in income before taxes is computed by dividing the change in income before taxes by the amount of income before taxes from 2016.
|Percentage change in income before taxes||=||Change in income before taxes2016 income before taxes|
|=||0.0256 (Rounded to four decimal places.)|
To convert 0.0256 to a percentage, multiply 0.0256 × 100% = 2.56%.
An increase in income before taxes is desirable.
In horizontal analysis, the percentage change from one period to another is watched very carefully and compared with other companies’ percentages and with industry averages. It is important to show increased net income, and it is also important to show results that compare favorably with those of competitors.
Thus, the answer is:
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