How to Perform Horizontal and Vertical Analyses of Income Statements

In the above vertical analysis example, we can see that the income decreases from 1st year to 2nd year, and the income increases to 18% in the 3rd year. So by using this method, it is easy to understand the net profit as it is easy to compare between the years. We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to 2nd year. In the 3rd year, the COGS decreased compared to the previous years, and the income increased. To perform vertical analysis (common-size analysis), we take each line item and calculate it as a percentage of revenue so that we can come up with “common size” results for both companies.

Examine the pros and cons of the vertical analysis formula, and discover examples of how to calculate vertical analysis. With our financial data presented in Excel, we can start to calculate the contribution percentages on either the side or below the income statement. You can also use vertical analysis to identify business processes with exceptionally high costs or returns and use this to make decisions about the direction in which you choose to take your business in the future. Ultimately, the way in which you apply a vertical analysis of your accounts to your business will depend on your organisational goals and targets.

Vertical Analysis: Definition, Formula & Examples

All balance sheet accounts are presented as a percentage of the total assets and all income statement items are presented as a percentage of sales (Ott, Riddiough, & Yi, 2009). Sales is assumed to be equal to 100, for income statement and total assets is assumed to be common based equal to 100 in case of balance sheet. Vertical analysis is when different aspects of the financial statement are compared in terms of percentage of the total amount (Amihud & Lev, 1981). An example of this can be when you bought a car for say $50,000 and started comparing how much you paid for different parts of the car. You figured that the engine cost $5,000, you can say that it cost you 10% of the total amount. Like horizontal analysis, it is also compared usually on the income statement and balance sheet. With this analysis, we can see where the money is going and if it’s time to make an investment on a new technology, find an alternative supplier, reallocate cash or make the adjustment to inventory.

In your accounts and any growth or decline that may have occurred over set periods of time. Different organization statements can be compared as the comparison is made in percentage. We can even take this one step further by calculating the compound annual growth rate for each line item from 2014 to 2018. A Vertical Analysis can be completed on both an Income Statement and a Balance Sheet. Unlike Horizontal Analysis, a Vertical Analysis is confined within one year ; so we only need one period of data to derived the percentages and completed the analysis.

Company Financial Statement Analysis & Interpretation of Financial Statements

The balance sheet reveals the assets your company owns, the debts and other liabilities it owes and its obligations to you and your how to calculate vertical analysis co-owners. Assets include the short-term assets of cash and accounts receivable and the long-term assets of property and equipment.

To do that, we’ll create a “common size income statement” and perform a vertical analysis. For each account on the income statement, we divide the given number by the company’s sales for that year. The vertical analysis https://simple-accounting.org/ of financial statements can be done more comfortably using spreadsheet software like Excel or Google Sheets. Using Layer, you can also control data flows, update calculations, and share the results automatically.

Example of Horizontal Analysis Formula (With Excel Template)

For example, short-term debt is $50,000 and total liabilities are $200,000. Comparing these numbers to historical figures can help you spot sudden shifts. The same process would apply on the balance sheet but the base is total assets. The common-size percentages on the balance sheet explain how our assets are allocated OR how much of every dollar in assets we owe to others and to owners . Many computerized accounting systems automatically calculate common-size percentages on financial statements.