Horizontal Analysis quiz #1 Flashcards
Horizontal Analysis quiz #1
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What is horizontal analysis in financial accounting, and why is it useful for investors and creditors?
Horizontal analysis is a method of evaluating percentage changes in account balances from one year to the next. It helps investors and creditors identify trends and assess a company's financial health and efficiency by showing how specific accounts have increased or decreased over time. What is the formula for calculating the percentage change in horizontal analysis, and how is it applied?
The formula for percentage change in horizontal analysis is (current year amount - previous year amount) / previous year amount. This result is then multiplied by 100 to express it as a percentage. It shows the relative increase or decrease in an account balance from one period to the next. How can horizontal analysis reveal important trends in a company's financial statements?
Horizontal analysis can reveal trends such as increases or decreases in net sales, cost of goods sold, and gross profit. For example, if net sales increase by 12.7% but cost of goods sold increases by 21%, it indicates that costs are rising faster than sales, which can negatively impact gross profit and overall profitability. Can horizontal analysis be applied to both the income statement and the balance sheet? Explain your answer.
Yes, horizontal analysis can be applied to both the income statement and the balance sheet. It is used to compare account balances over multiple periods for any financial statement, helping users identify significant changes and trends in a company's financial position and performance. What is the main purpose of horizontal analysis in financial accounting?
Horizontal analysis evaluates percentage changes in account balances from one year to the next to help users identify trends and assess financial health. What are the two steps involved in calculating the percentage change for horizontal analysis?
First, compute the dollar amount of the change (current year amount minus previous year amount), then divide that amount by the previous year amount. How do you express the formula for percentage change in horizontal analysis in simple terms?
The formula is new minus old divided by old, or (current year amount - previous year amount) / previous year amount. Why is it important to pay attention to the direction (increase or decrease) of percentage changes in horizontal analysis?
The direction shows whether an account balance has increased or decreased, which can indicate positive or negative trends in a company's financial performance. How can horizontal analysis of net sales and cost of goods sold impact the interpretation of gross profit?
If cost of goods sold increases faster than net sales, gross profit may decrease, signaling potential issues with profitability despite higher sales. Can horizontal analysis be applied to both the income statement and the balance sheet? Explain.
Yes, horizontal analysis can be used on both the income statement and balance sheet to compare account balances over multiple periods and identify significant changes.
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