Horizontal analysis examines trends in a company:

Question

Horizontal analysis examines trends in a company:

 

A. Over time.

 

B. Between income statement accounts in the same year.

 

C. Between balance sheet accounts in the same year.

 

D. Between income statement and balance sheet accounts in the same year.

Answer 1

The horizontal analysis could be performed for all the items in a particular financial statement, the analyst or investor may be interested in certain line items or develop ratios for particular accounts listed on the financial statements and therefore he/she would be focused on seeing the trend of these particular accounts.

If the objective is to analyze the profitability of the enterprise, appropriate figures such as the  
gross profit ratio or net profit trends should be the subject of the horizontal analysis.

The answer is D), although the periods involved may go beyond the current year.