How Do You Compute Horizontal Analysis Of A Balance Sheet?
Horizontal analysis, also called “trend analysis,” is used to discover trends in the earnings, assets and liabilities of a company over the course of several years. It compares each line of the balance sheet from year to year in terms of percentage change. To do a horizontal analysis, you will need the condensed balance sheets for the company that cover the years in question. Start with the first two years you have balance sheets for. Go to the first item, current assets. Subtract the value for the first year from the second. Negative values are usually denoted by parentheses rather than minus signs. As an example, take a company whose first two lines are as follows for 2005, 2006 and 2007: Year: – – – – – – – – – – 2005 – – – 2006 – – – 2007 Current Assets – – $2,300 – – $2,600 – – $3,000 Fixed Assets – – – $5,400 – – $5,100 – – $4,700 The current assets from the second year (2006) minus the first (2005) is: $2,600 — $2,300 = $300. Divide the difference between the years by the base
