Question
What is horizontal analysis of financial statements?
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Answer
Horizontal analysis: In such type of analysis, financial statements for a number of years are reviewed and analysed. Figures for two or more years are contained in such type of analysis and these figures are placed side-by-side to facilitate comparison. Such analysis indicates the increase or decrease in these itmes not in absolute figures but also in percentage form. Thus, it involves making comparisons and establishing relationship among related items of an enterprise for a number of years. When data about sales, cost of production, profits etc. are compared for two or more years ofa firm, they indicate the areas of strength and weakness of the enterprise. It also helps in knowing the trend of the business. Since such type of analysis is based on the data from year-to-year rather than only one year, it is also called, 'Dynamic Analysis'.
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