The numbers in statements are informative, but only to a degree. It is entirely possible for a company to have a large profit margin but to be losing money or have strong revenue but low cash-flow. Analyzing the statements with different tools can provide insights into the numbers both from the point of internal users and external users. This is why tools such as horizontal and vertical analysis are used.
Horizontal analysis evaluates a series of financial statement data over a period of time. Vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount. Horizontal analysis is used for intracompany comparisons. Vertical analysis is used in both intra and intercompany comparison. Horizontal analysis is a tool that evaluates a series of financial statement data over a period of time. This is to determine the increase or decrease that has taken place which can be expressed as either an amount or a percentage. This tool can help determine the net sales, condensed balance sheets to show increases and decreases throughout the company. Another way the horizontal analysis could be used is to measure the increases and decreases in income for a company. Horizontal analysis seems to be a more effective for internal users that would need measure the company. Vertical analysis is a tool that expresses each financial statement item as percent of a base amount. It shows the relative size of each category in a balance sheet, as well as the percentage change in an individual asset, liability, and stockholders’ equity items. It can also be used to show cost of goods sold as a percentage of net sales. The vertical analysis enables a company to compare each other of different sizes because of the use of percentage. It isn’t the dollar amount it is the percent that the company has lost or gained that is shown. This would be useful for external users to see where the company stands in regards to other companies. With both analysis a company would be able to measure growth and declines within its self as well as where it stands with other companies. This knowledge would help a company to take a look at its own operations and how things are running.
Vincent Triola. Sat, Feb 13, 2021. Why we need different tools for analyzing the financial statements? Retrieved from https://vincenttriola.com/blogs/ten-years-of-academic-writing/why-we-need-different-tools-for-analyzing-the-financial-statements