Which statement correctly describes horizontal analysis?

• A. A It expresses the percentage change in line items from one period to the next.
• B. B It expresses changes as a percentage of a base value within a single period.
• C. C It compares ratios across different industries.
• D. D It forecasts future sales growth.

Answer: (A)

Horizontal analysis looks at how every line item changes over time by calculating the percentage change from one period to the next. This shows trends, such as steady sales growth or rising costs, by comparing consecutive periods. For example, if revenue moves from 100 to 110, that’s a 10% increase, signaling growth between those two periods. This approach is often called trend analysis because it tracks how figures evolve over multiple periods.

It’s different from vertical analysis, which expresses each item as a percentage of a base value within a single period (like each line item as a share of total assets or total sales in one period). It isn’t about comparing ratios across industries, nor is it about forecasting future sales growth.