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CMA Intermediate · Financial Management and Business Data Analytics · Comparative, Common-Size Financial Statements and Trend Analysis

Which of the following best describes horizontal analysis of financial statements?

Horizontal analysis compares the same line items across two or more periods and computes the absolute and percentage change. It differs from vertical or common-size analysis, which expresses items as a percentage of a base figure within one period.

  1. AExpressing each item of a statement as a percentage of a base item within the same year
  2. BComparing the same items across two or more periods to find absolute and percentage changesCorrect
  3. CComparing the ratios of one firm with those of another firm in a different industry
  4. DConverting all items of the statements into a single foreign currency

Explanation

Horizontal analysis places the figures of several periods side by side and measures the change in each item, in amount and in percentage. Expressing items as a percentage of a base within a single year is vertical (common-size) analysis, so option A is wrong.

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