Question

Horizontal and vertical analysis is a great tool. Do you think it's more beneficial if amounts are expressed in dollar amounts or percentages?

Answer 1

If amounts are shown as % they are more beneficial. For example suppose in previous years are sales were $100000 and cost of goods sold was $60000 so we had a profit of $40000. Now this year our sales increased to $200000 and our cost of goods sold increased to $140000. So our new profit is $60000.

Now if we go by amount only then we will conclude that business is doing better than previous year as our profit is increased by $20000.

But if we see in % terms earlier we had a 40% profit but now it has been reduced to 30%. This is because % increase in cost was more than in sales.

So analysing % gives us a better analysis of business and help in identifying problems.

I hope you understood

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