Q3RQ - Horngren'S Financial And Managerial Accounting

Question

Question: What is horizontal analysis, and how is a percentage change computed?

Step-by-Step Solution

Answer

Answer

 

It was used for the analysis of horizontal data over the last years to make decisions.

Step 1: Definition

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons of percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

 

Step 2: How is a percentage change computed?

In horizontal analysis the percent change is computed by Subtracting the base period amount from the analysis period amount, dividing the result by base the period amount then multiplying that amount by 100.