Here's a breakdown:
* Horizontal analysis is a financial statement analysis technique that compares data from two or more periods. This helps to identify trends and changes in a company's financial performance over time.
* Comparative reports are the documents that display the results of horizontal analysis. They typically present the following information:
* Current period's data: This could be the most recent year, quarter, or month.
* Prior period's data: This could be the previous year, quarter, or month.
* Percentage change: This is calculated by subtracting the prior period's data from the current period's data, dividing the result by the prior period's data, and multiplying by 100. This percentage change helps to visualize the increase or decrease in the data between the two periods.
Example:
Let's say you're analyzing a company's revenue for the year 2023 compared to 2022. A comparative report would look like this:
| Item | 2023 | 2022 | % Change |
|---|---|---|---|
| Revenue | $1,000,000 | $800,000 | 25% |
This shows that the company's revenue increased by 25% from 2022 to 2023.
Benefits of using comparative reports in horizontal analysis:
* Easy to understand: The side-by-side format makes it simple to compare data from different periods.
* Highlights trends: You can easily identify trends in a company's financial performance.
* Useful for decision-making: This information can help managers make better decisions about the company's future.
By using comparative reports in horizontal analysis, you gain valuable insights into a company's financial performance over time.