Horizontal analysis compares previous data with one or more statements regarding the same item. This can be displayed as an amount or percent of an increase or decrease. Vertical analysis measures a company’s condition and performance of a financial statement to a base amount. This can show us how a company has changed across time. Common-sized statements are all shown as percentages and no dollar amounts. This helps us to compare information about one company to another, or using it to compare with the industry average.
The importance of financial statements is to summarize all financial data of a business. Once all transaction have been recorded and summarized, reports are then generated for users. This information is also gathered to make sure that business’ are in compliance with generally accepted accounting principles (GAP). Example, in a proprietorship the primary financial statements are income statement, statement of owner’s equity, balance sheet, and statement of cash flows each represents a summary of financial data.
Income statement, summarizes revenue ND expenses for a given time period, like a month to a year. Statement of owner’s equity shows the change in owner’s equity for a time period as well. This report is generated once the income statement is completed because net income or net less will be used in owner’s equity. Balance sheet shows a total of current assets, liabilities, and owner’s equity, as a specific date. The total amount of owner’s equity is then used on the balance sheet. The statement of cash flows reports all the cash receipts/cash payments, for the given time eroded off business.
