Interpretation of Financial Statements

Horizontal analysis involves a line by line comparison of one set of data with another ? for example, the current year?s accounts with last year?s, or with this year?s budget. It is based on the fact that isolated figures are seldom of much use by themselves. Trend analysis is horizontal analysis extended over several years, often indexing the data to express the first set of figures as 100 and later periods related to that base. For example, profit is Â£10,000,000. Is this good or bad? (a) Profit for the previous 4 years was: Â£6,000,000 Â£7,000,000 Â£8,000,000 Â£9,000,000 (b) Profit for the previous 4 years was: Â£14,000,000 Â£13,000,000 Â£12,000,000 Â£11,000,000 ? Profit for the previous 4 years was: Â£10,000,000 Â£10,000,000 Â£10,000,000 Â£10,000,000 The comparison shows fairly clearly how the company is doing ? but even this can be improved upon. One way is to calculate the percentage increase/decrease from year to year: (a) 16.7% 14% 12.5% 11% (b) -7% -7.7% -8.3% -9% ? 0% 0% 0% 0% Using indexation: (a) 100 117 133 150 167 (b) 100 93 86 79 71 ? 100 100 100 100 100 vertical analysis