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Which type of financial statement analysis is the most effective, horizontal and vertical analyses? Why

From an investor’s point of view, I believe that horizontal analysis is more important. Horizontal analysis looks at trends and changes from different accounting periods. This data can tell an investor whether sales and earnings are increasing or decreasing. A company that is trending downward in earnings is more likely to produce bad results as an investment. In contrast, a company with growing sales or earnings will generally have a greater potential for growth in the future. Vertical analysis only uses data from a single accounting period, and cannot show trends to predict future price movements of the security.

Vertical analysis compares amounts from the 3 categories on the balance sheet, including assets, liabilities, and owner’s equity. It is more useful for comparing companies within the same industry. An investor can use vertical analysis to compare the key stats between companies to determine the industry leader

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