## Horizontal Analysis

### Learning Outcomes

• Perform a horizontal analysis of a company’s financial statements

### Important information can result from looking at changes in the same financial statement over time, both in terms of dollar amounts and percentage differences. Comparative financial statements place two years (or more) of the same statement side by side. A horizontal analysis involves noting the increases and decreases both in the amount and in the percentage of each line item. The earlier year is typically used as the base year for calculating increases or decreases in amounts.

The presentation of the changes from year to year for each line item can be analyzed to see where positive progress is occurring over time, such as increases in revenue and profit and decreases in cost. Conversely, less favorable readings may be isolated using this approach and investigated further.

Jonick Company
Comparative Income Statement
For the Years Ended December 31, 2019 and 2018
Description 2019 2018 Change in dollars: 2018 to 2019 Change in percent: 2018 to 2019
Sales $994,000$828,000 166,00 20.0%
Cost of merchandise sold 414,000 393,000 21,000 5.3%
Gross Profit Single Line$580,000 Single Line$435,000 145,000 33.3%
Subcategory, Operating Expenses:
Salaries expense $77,000$64,000 13,000 20.3%
Rent expense 63,000 52,000 11,000 21.2%
Insurance expense 56,000 46,000 10,000 21.7%
Supplies expense 49,000 41,000 8,000 19.5%
Advertising expense 42,000 35,000 7,000 20.0%
Depreciation expense 35,000 29,000 6,000 20.7%
Utilities expense 28,000 23,000 5,000 21.7%
Total operating expense Single Line348,000 Single Line290,000 58,000 20.0%
Net income from operations $232,000$145,000 87,000 60.0%
Subcategory, Other revenue and expenses:
Gain on sale of investments $137,000$186,000 (49,000) -26.3%
Interest expense (55,000) (50,000) 5,000 10.0%
Income before income tax $314,000$281,000 33,000 11.7%
Income tax expense 66,000 50,000 16,000 32.0%
Net income Single Line$248,000 Double Line Single Line$231,000 Double Line 17,000 7.4%

A horizontal analysis of Jonick’s 2018 and 2019 income statements appears above. The first two columns show income statement amounts for two consecutive years. The amount and percentage differences for each line are listed in the final two columns, respectively.

The presentation of the changes from year to year for each line item can be analyzed to see where positive progress is occurring over time, such as increases in revenue and profit and decreases in cost. Conversely, less favorable readings may be isolated using this approach and investigated further.

In this sample comparative income statement, sales increased 20.0% from one year to the next, yet gross profit and income from operations increased quite a bit more at 33.3% and 60.0%, respectively. However, the final net income amount increased by only 7.4%. Changes between the income from operations and net income lines can be reviewed to identify the reasons for the relatively lower increase in net income.

Likewise, the following is a horizontal analysis of a firm’s 2018 and 2019 balance sheets. Again, the amount and percentage differences for each line are listed in the final two columns and can be used to target areas of interest. For instance, the increase of $344,000 in total assets represents a 9.5% change in the positive direction. Total liabilities increased by 10.0%, or$116,000, from year to year. The change in total stockholders’ equity of $228,000 is a 9.3% increase. There seems to be a relatively consistent overall increase throughout the key totals on the balance sheet. Even though the percentage increase in the equipment account was 107%, indicating the amount doubled, the nominal (just the number) increase was just$43,000. This increase in relation to total assets of $3.95 million is only 1% and could easily be just one piece of equipment, or a vehicle. All this is to say that as with all metrics and high-level analysis, a horizontal analysis like this is a way to identify areas of concern or even areas where things are going well, but further analysis is needed to determine what is really going on if anything.  2019 2018 Amount Percentage Assets Subcategory, Current assets: Cash$373,000 $331,000 42,000 12.7% Marketable securities 248,000 215,000 33,000 15.3% Accounts receivable 108,000 91,000 17,000 18.7% Merchandise Inventory 55,000 48,000 7,000 14.6% Prepaid insurance 127,000 115,000 12,000 10.4% Total current assets Single Line$911,000 Single Line$800,000 111,000 13.9% Subcategory, Long-term investments: Investment in equity securities$1,946,000 $1,822,000 124,000 6.8% Subcategory, Property, plant and equipment: Equipment (net of accumulated depreciation)$87,000 $42,000 45,000 107.1% Building (net of accumulated depreciation) 645,000 581,000 64,000 11.0% Land 361,000 361,000 Total property, plant and equipment$1,093,000 $984,000 109,000 11.1% Total assets Single Line$3,950,000Double Line Single Line$3,606,000Double Line 344,000 9.5% Liabilities Subcategory, Current liabilities: Accounts payable$120,000 $109,000 11,000 10.1% Salaries payable 244,000 222,000 22,000 9.9% Total current liabilities Single Line$364,000 Single Line$331,000 33,000 10.0% Subcategory, Long-term liabilities Mortgage note payable$83,000 $83,000 Bonds payable 828,000 745,000 83,000 11.1% Total long-term liabilities Single Line$911,000 Single Line$828,000 83,000 10.0% Total liabilities$1,275,000Double Line $1,159,000Double Line 116,000 10.0% Stockholders’ Equity Preferred$1.50 stock, $20 par$166,000 $166,000 Common stock,$10 par 83,000 83,000 Retained earnings 2,426,000 2,198,000 228,000 10.4% Total stockholders’ equity Single Line$2,675,000 Single Line$2,447,000 228,000 9.3% Total liabilities and stockholders’ equity $3,950,000Double Line$3,606,000Double Line 344,000 9.5%