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Horizontal and Vertical

Analysis Details

Vertical or Common Size Analysis


A vertical analysis shows you the relationships
among components of one financial statement,
measured as percentages. On your balance
sheet, each asset is shown as a percentage of
total assets; each liability or equity item is shown
as a percentage of total liabilities and equity. On
your statement of profit and loss, each line item
is shown as a percentage of net sales.

A Vertical Analysis Example

Jafar's Colorful Kites Statement of Profit and Loss for the Year Ended Dec. 31, 2011
Amount
Percent
Sales
$ 18,000
100.00 %
Cost of Goods Sold
7,000
38.89 %
Gross Profit
$ 11,000 61.11 %
Selling Expenses
Advertising
$ 500
2.78 %
Commissions
750
4.17 %
Delivery Fees
1,200
6.67 %
Salaries
5,000 27.78 %
Total Selling Expenses $ 7,450 41.39 %
General & Administrative Expenses
Insurance
$ 800
4.44 %
Rent
1,200
6.67 %
Depreciation
200
1.11 %
Utilities
400
2.22 %
Total General & Administrative
Expenses
$ 2,600 14.44 %
Net Profit
$ 950
5.28 %

A Vertical Analysis Example

Jafar's Colorful Kites Balance Sheet December 31, 2011


Assets
Current Assets:
Amount
Percent Cash
$ 600
14.12 %
Inventory
2,000
47.06 %
Prepaid Insurance
250
5.88 %
Total Current Assets
$ 2,850
67.06 %
Fixed Assets:
Office Equipment
$ 1,800
42.35 %
Less: Accumulated Depreciation
(400)
(9.41) %
Total Fixed Assets
$ 1,400
32.94 %
Total Assets
$ 4,250
100.00 %

A Vertical Analysis Example

Jafar's Colorful Kites Balance Sheet December 31, 2011

Liabilities & Owner's Equity


Current Liabilities:
Accounts Payable
$ 1,800 42.35 %
Taxes Payable
500
11.76 %
Total Liabilities
$ 2,300 54.12 %
Owner's Equity
$ 1,950
45.88 %
Total Liabilities &
Owner's Equity
$ 4,250 100.00 %

Interpretation
In the statement of profit and loss, Jafar's gross profit is
sizable, at 61 percent. The selling expenses, though, are
eating up a huge chunk of the revenues, even more than
product costs; that could be an area in which to cut back.
General operating expenses take up a reasonable percentage
of sales, leaving Jafar with about a 5 percent bottom-line
profit.
As for the company's balance sheet, inventory makes up the
lion's share of his current assets, which could translate into
cash-flow problems down the line. Also, his company is
financed with more debt than equity. That's not uncommon for
new businesses, but all of this debt is current, which could
suck up all the current assets of the company.

Horizontal or Indexed Analysis


A horizontal analysis provides you with a way to
compare your numbers from one period to the
next, using financial statements from at least two
distinct periods. Each line item has an entry in a
current period column and a prior period column.
Those two entries are compared to show both
the peso difference and percentage change
between the two periods.

A Horizontal Analysis Example

Jafar's Statement of Profit and Loss for the Years Ended 12/31/2010 and 12/31/2011
2011 Amount 2010 Amount
Change in Dollars Percent Change
Sales
$ 18,000
$ 15,000
$ 3,000
20.00 %
Cost of Goods Sold
7,000
6,000
$ 1,000 16.67 %
Gross Profit
$ 11,000
$ 9,000
$ 2,000
22.22 %
Selling Expenses
Advertising
$ 500
$
200
$ 300
150.00 %
Commissions
750
400
$ 350 87.50 %
Delivery Fees
1,200
720
$ 480 66.67 %
Salaries
5,000
5,000
$
0.00 %
Total Selling Expenses $ 7,450
$ 6,320
$ 1,130 17.88 %
General Administrative Expenses
Insurance
$ 800
$
800
$
0.00 %
Rent
1,200
1,200
$
0.00 %
Depreciation
200
200
$
0.00 %
Utilities
400
280
$ 120 42.86 %
Total General & Administrative
Expenses
$ 2,600
$ 2,480
$ 120 4.84 %
Net Profit
$ 950
$ 200
$ 750 375.00 %

Interpretation
First, Jafar's sales went up by about 17 percent,
while his product costs went up by only around 14
percent. That helps add to his profitability on both
sides increased revenues and decreased costs.
Most of his selling expenses increased as well, but
that seems to have contributed to additional sales
without increasing as much as sales did. Jafar was
also able to keep most of his general operating
expenses under control, leading to much greater
profits in 2011 than the company saw the prior year.