Chapter 14, Problem 3Q

To determine

Horizontal Analysis: Horizontal analysis is prepared to make comparison between the financial statements to determine the changes in the financial statements for the previous year to the current year. The changes of the company are measured in dollars as well as in percentage.

Formula:

$\text{Percentage Change}=100\times \frac{\text{Later Period}\text{Amount}-\text{Base}\text{Period Amount}}{\text{Base Period Amount}}$

Vertical Analysis: Vertical analysis is prepared to analyze the relationship among various financial statements with a particular base amount. Use the following formula to calculate vertical analysis percentage:

Formula:

$\text{Vertical analysis percentage }=\left(\frac{\text{Specific item}}{\text{Base}\text{amount}}\right)\times 100$

This analysis is otherwise called as common-size statement.

To explain:

The differences between horizontal and vertical analysis