Here's a sample problem about horizontal analysis:

The following table shows the income statement of a company for the years 2021 and 2022. Perform a
horizontal analysis of the income statement and comment on the trends observed.
2021 2022
Revenue $500,000 $600,000
Cost of goods sold $200,000 $240,000
Gross profit $300,000 $360,000
Operating expenses $150,000 $180,000
Net income $150,000 $180,000
Solution:
Horizontal analysis involves comparing financial data of a company over time. We can calculate the
percentage change between two periods by using the following formula:
Percentage change = ((Current year's value - Previous year's value) / Previous year's value) x 100
Using this formula, we can calculate the percentage changes in the income statement for 2022 compared
to 2021 as follows:
2021 2022 % Change
Revenue $500,000 $600,000 20%
Cost of goods sold $200,000 $240,000 20%
Gross profit $300,000 $360,000 20%
Operating expenses $150,000 $180,000 20%
Net income $150,000 $180,000 20%
From the table above, we can see that all the items on the income statement have increased by 20%
from 2021 to 2022. This suggests that the company has experienced a consistent growth in revenue and
profitability over the period. The increase in revenue is driven by a corresponding increase in the cost of
goods sold, but the gross profit has still increased, indicating an improvement in the company's gross
margin. Similarly, the increase in operating expenses is likely due to the company's investment in growth
initiatives or expansion activities. Overall, the horizontal analysis suggests that the company has
performed well and is on a positive trajectory.

The following table shows the balance sheet of a company as of December 31, 2022. Perform a vertical
analysis of the balance sheet and comment on the trends observed.
Amount
Current assets:
Cash and cash equivalents $50,000
Accounts receivable $75,000
Inventory $100,000
Total current assets $225,000
Non-current assets:
Property, plant, and equipment $400,000
Intangible assets $100,000
Total non-current assets $500,000
Total assets $725,000
 Amount
Current liabilities:
Accounts payable $60,000
Accrued expenses $30,000
Total current liabilities $90,000
Non-current liabilities:
Long-term debt $200,000
Total non-current liabilities $200,000
Total liabilities $290,000
Shareholders' equity:
Common stock $100,000
Retained earnings $335,000
Total shareholders' equity $435,000
Total liabilities and equity $725,000
Solution:
Vertical analysis involves expressing each item on a financial statement as a percentage of a base figure.
For the balance sheet, the base figure is typically total assets or total liabilities and shareholders' equity.
We can calculate the percentages of each item on the balance sheet as follows:
Amount % of Total
Current assets:
Cash and cash equivalents $50,000 6.90%
Accounts receivable $75,000 10.34%
Inventory $100,000 13.79%
Total current assets $225,000 31.03%
Non-current assets:
Property, plant, and equipment $400,000 55.17%
Intangible assets $100,000 13.79%
Total non-current assets $500,000 68.97%
Total assets $725,000 100.00%
Current liabilities:
Accounts payable $60,000 8.28%
Accrued expenses $30,000 4.14%
Total current liabilities $90,000 12.41%
Non-current liabilities:
Long-term debt $200,000 27.59%
Total non-current liabilities $200,000 27.59%
Total liabilities $290,000 40.00%
Shareholders' equity:
Common stock $100,000 13.79%
Retained earnings $335,000 46.21%
Total shareholders' equity $435,000 60.00%