In a horizontal analysis, you use two years’ worth of financial information, calculating the percentage increase or decrease on a line-by-line basis for both the balance sheet and the income statement.
This page will use the financial statements for Lucky 7, Inc. to explain horizontal analysis. Below is the dollar amount of sales from the income statement for Lucky 7 for 2015 and 2016:
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| 2016 | 2015 |
| Sales | $520,000 | $485,000 |
For sales, the horizontal analysis is completed as follows:
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| 2016 | 2015 | Amount | Percent |
| Sales | $520,000 | $485,000 | $35,000 | 7.22% |
Calculations for increase/decrease in sales:
Calculations for percent increase/decrease in sales:
The completed horizontal analysis for the Lucky 7 income statement is shown below:
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| 2016 | 2015 | Amount | Percent |
| Sales | $520,000 | $485,000 | $35,000 | 7.22% |
| Cost of goods sold | $200,000 | $195,000 | $5,000 | 2.56% |
| Gross margin | $320,000 | $290,000 | $30,000 | 10.34% |
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| Operating expenses | $230,000 | $235,000 | ($5,000) | (2.13%) |
| Operating income | $90,000 | $55,000 | $35,000 | 63.64% |
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| Other income (expenses) |
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| Interest expense | ($24,000) | ($15,000) | ($9,000) | 60.00% |
| Interest income | $2,000 | $1,500 | $500 | 33.33% |
| Gain on sale of investments | $7,000 | $1,000 | $6,000 | 600.00% |
| Loss on sale of plant assets | ($5,000) | ($3,000) | ($2,000) | 66.67% |
| Total other income (expenses) | ($20,000) | ($15,500) | ($4,500) | 29.03% |
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| Income before income taxes | $70,000 | $39,500 | $30,500 | 77.22% |
| Income taxes expense | $21,000 | $9,875 | $11,125 | 112.66% |
| Net income | $49,000 | $29,625 | $19,375 | 65.40% |
A similar analysis is completed for the balance sheet, using total assets as the base amount. All line items will be calculated as a percentage of total assets.
Once the analysis is complete, you would review the data. Sales increased by 7.22%. A later lesson will look at this in greater detail to try to determine why sales have increased. For this particular analysis, you are looking at a change from 2015 to 2016; all other things equal, an increase in sales is a good sign.
Cost of goods sold also increased, but by a smaller margin. Sales tell you what the company received for the product, and cost of goods sold is what the company paid for the product. If sales rise at a higher rate than cost of goods sold, it tells you that the company's margin (gross margin or markup) has increased. This is a positive sign.
Operating expenses decreased by 2.13%. The company was able to increase sales and decrease operating expenses at the same time. The combination of these items can be seen in the gross margin, operating income, and net income. Sales increased by 7.22%, and
Looks like you will have good news to report to management!