SAAccountingSyllabus dot point

How do horizontal, vertical and trend analysis turn raw statements into comparisons?

Apply horizontal, vertical and trend analysis to compare financial statements over time and within a period

Horizontal analysis measures change between periods in dollars and percentages; vertical analysis expresses each item as a percentage of a base within one statement; trend analysis indexes several years to a base year.

Generated by Claude Opus 4.76 min answerUpdated 2026-05-29

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
Horizontal analysis
Vertical analysis
Trend analysis
Choosing the right tool

What this dot point is asking

You need to calculate each type of analysis, present the result clearly, and explain what the comparison reveals about the business.

Horizontal analysis

Horizontal analysis looks across time, measuring how an item moved from one period to the next.

It answers "by how much did this change". A sales rise of \ $80,000 means more in context once you know it is a 20 percent increase on a \$ 400,000 base.

Vertical analysis

Vertical analysis looks within one statement, expressing each line as a percentage of a base.

Trend analysis

Trend analysis extends horizontal analysis over several years. The base year is set to an index of 100 and later years are expressed relative to it, so the direction over time is easy to read.

Three kinds of analysis on one business

Income statement extract

Item	Year 1	Year 2
Net sales	400,000	480,000
Cost of goods sold	240,000	312,000
Net profit	60,000	62,400

Horizontal (sales): change $= 480{,}000 - 400{,}000 = 80{,}000$ ; percentage $= \dfrac{80{,}000}{400{,}000} \times 100 = 20\%$ .
Vertical (Year 2): cost of goods sold $= \dfrac{312{,}000}{480{,}000} \times 100 = 65\%$ of sales; net profit $= \dfrac{62{,}400}{480{,}000} \times 100 = 13\%$ of sales. In Year 1, cost of goods sold was $\dfrac{240{,}000}{400{,}000} \times 100 = 60\%$ .
Reading it: sales grew 20 percent, but cost of goods sold rose from 60 to 65 percent of sales, squeezing the gross margin. Net profit grew only slightly because costs grew faster than revenue. Vertical analysis exposes the margin slip that the dollar figures alone hide.
Trend (sales indexed): with Year 1 as 100, Year 2 is $\dfrac{480{,}000}{400{,}000} \times 100 = 120$ .

Choosing the right tool

Horizontal and trend analysis answer questions about change over time; vertical analysis answers questions about structure within a period. Used together they reveal both the direction and the composition of performance, which is why examiners often ask for more than one in the same question.

Exam-style practice questions

Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

2024 SACE Stage 22 marksExplain one reason for the significant difference between the inventory turnover for the month of June (calculated earlier) and the inventory turnover for the year 2024 (7.4 times). The trend across years was 2022 9.1 times (40.1 days), 2023 8.6 times (42.2 days), 2024 7.4 times.

Show worked answer →

The two figures are not directly comparable because they cover different lengths of time. A monthly turnover measures cost of goods sold against average inventory for one month, while the annual figure spreads a full year of COGS over average inventory, so the annual figure will normally be much higher (or the monthly much lower) simply due to the period covered.

Within the annual trend, turnover has fallen each year from 9.1 to 8.6 to 7.4 times, meaning stock is taking longer to sell (days rising from 40.1 to 42.2). A valid reason for the slowdown could be a build-up of inventory, slowing demand, or seasonality, where June is a quieter month so a single month gives a distorted picture.

Markers reward recognising the period mismatch (one month versus a full year) as the core reason for the size difference, with a plausible business explanation.

2023 SACE Stage 22 marksFrom the comparative income statements for 2023 and 2022, identify the change in any two expenses and state the potential impact on the business for each.

Show worked answer →

This is horizontal analysis: compare each expense across the two years in dollar terms and interpret the change.

Choose any two clear movements, for example:

Insurance rose from $4,300 to$ 20,000 (up $15,700). Potential impact: a sharp increase in fixed costs that eats into profit and squeezes cash flow.
Advertising fell from $10,000 to$ 5,500 (down $4,500). Potential impact: lower promotion may reduce sales and brand awareness, contributing to the fall in revenue.

Other acceptable pairs include interest on mortgage rising (higher borrowing cost) or wages falling slightly (cost control).

Markers reward two correctly identified dollar changes and a sensible business consequence for each, linking the expense movement to profitability, cash flow or future sales.