Part 2: Vertical Common-size Balance Sheet
Part 3: Horizontal Common-size Balance Sheet
Horizontal Common-size Balance Sheet / Statement of Financial Position
Horizontal analysis of balance sheet helps in determining the increase or decrease of each item of balance sheet over period of time. This is achieved by comparing each item of the balance sheet with the corresponding item pertaining to previous period or budget.
For this analysis usually a base period is selected in relation to which figures from other periods are analysed to compute increase or decrease in percentage form. Usually the earliest available year is used as a base period. For example inventory figures are available as follows:
2013: 150,000
2014: 180,000
If 2013 is the base period then horizontal analysis is calculated as follows:
Compute the change by subtracting the two figures:
180,000 – 150,000 = 30,000
Divide the change over the base period figure:
30,000 / 150,000 x 100 = 20%
Steps to prepare Horizontal Common-size Balance Sheet / Statement of Financial Position
Following is the comparative statement of financial position for the year 2014 and 2013 for the purpose of horizontal analysis:
| PakAccountants Inc. Statement of Financial Position |
||
| 2014 | 2013 | |
| Non-current Assets | ||
| Land | 120,000 | 120,000 |
| Building | 350,000 | 300,000 |
| Machinery | 180,000 | 195,000 |
| Total non-current assets | 650,000 | 615,000 |
| Current Assets | ||
| Inventory | 80,000 | 85,000 |
| Accounts receivable | 95,000 | 100,000 |
| Cash | 54,000 | 75,000 |
| Total current assets | 229,000 | 260,000 |
| 879,000 | 875,000 | |
| Shareholders’ equity | 500,000 | 420,000 |
| Long term liability | ||
| 8% Debentures | 210,000 | 250,000 |
| Current liabilities | ||
| Account payable | 85,000 | 75,000 |
| Tax payable | 62,000 | 71,000 |
| Accrued expenses | 22,000 | 59,000 |
| Total current liabilities | 169,000 | 205,000 |
| 879,000 | 875,000 | |
Step 1: Determine the base period to initiate the horizontal analysis. Usually the earliest period available is used as a base period which in our case is 2013.
Step 2: Select the item from 2013 (base) period and deduct it from the corresponding figure from 2014 period. For example Building asset in 2013 has 300,000. Deduct 300,000 from 350,000 to calculate the increase or decrease. In case of building it is 50,000 increase (350,000 – 300,000).
Step 3: Divide the difference calculated in Step 2 over the figure of base period to calculate the quotient i.e. 50,000 / 300,000 = 0.167
Step 4: Multiply the quotient with 100 to calculate the change in percentage form i.e. 0.167 x 100 = 16.7%
Following is the balance sheet with complete horizontal analysis of every item:
| PakAccountants Inc. Statement of Financial Position |
|||||
| 2014 | 2013 | Change | % Change | ||
| Non-current Assets | |||||
| Land | 120,000 | 120,000 | 0 | 0.0 % | |
| Building | 350,000 | 300,000 | 50,000 | 16.7 % | |
| Machinery | 180,000 | 195,000 | (15,000) | (7.7)% | |
| Total non-current assets | 650,000 | 615,000 | 35,000 | 5.7 % | |
| Current Assets | |||||
| Inventory | 80,000 | 85,000 | (5,000) | (5.9)% | |
| Accounts receivable | 95,000 | 100,000 | (5,000) | (5.0)% | |
| Cash | 54,000 | 75,000 | (21,000) | (28.0)% | |
| Total current assets | 229,000 | 260,000 | (31,000) | (11.9)% | |
| 879,000 | 875,000 | 4,000 | 0.5 % | ||
| Shareholders’ equity | 500,000 | 420,000 | 80,000 | 19.0 % | |
| Long term liability | |||||
| 8% Debentures | 210,000 | 250,000 | (40,000) | (16.0)% | |
| Current liabilities | |||||
| Account payable | 85,000 | 75,000 | 10,000 | 13.3 % | |
| Tax payable | 62,000 | 71,000 | (9,000) | (12.7)% | |
| Accrued expenses | 22,000 | 59,000 | (37,000) | (62.7)% | |
| Total current liabilities | 169,000 | 205,000 | (36,000) | (17.6)% | |
| 879,000 | 875,000 | 4,000 | 0.5 % | ||