1. Types of Financial Analysis
Financial statements are analysed by the users to establish certain crucial relationships
which help them to take sound decision by making comparisons. For example,
management may analyse the profitability of the business enterprises over a period of
time, to determine the trend of profits and take policy decisions based on profitability
trends. Similarly, a prospective investor may analyse the profitability of two or more
business enterprises to determine the comparative profitability, the profitability of two or
more business enterprises to determine the comparative profitability. According,
following types of analysis are made for financial statement analysis:
1. Intra-Firm Comparison: It is a comparison of financial variables of a business
enterprises over a period of time. It analyses the performance of a business over a
number of years and depicts trends of various financial factors. It is very useful for
management to take various policy decisions. It is also known as Time Series Analysis
or Trend Analysis.
2. Inter-firm Comparison: It is a comparison of two or more business enterprise. It
analyse and compares financial variables of two or more concerns to determine the
comparative strength and weaknesses of these enterprises. When single set of statements
of two enterprise are compared, it is known as Cross-Section Anlaysis. Sometimes,
financial statements of two or more enterprise are compared over a number of years, then
it is known as Cross-sectional Trend Analysis.
3. Industry Average or Standard Analysis: Time series analysis of number of
financial statements of different accounting years of a business enterprises. Cross-
sectional analysis involves analysis of financial statements of business enterprise for
same period. There is a third type of financial statement analysis which involves analysis
of financial statements of an accounting year of a business enterprise. Only one set of
financial statements of a business enterprise are analysed and financial relationship based
on this statements are compared with the ‘standard’ set for that firm or industry. For
example, actual profitability as revealed by the analysis of financial statements may be
compared with the normal expectations (or standards) in that industry.
4. Horizontal Analysis: It refers to analysis of changes in related items in
comparative statements. It involves comparison of statements of two or more
periods/enterprise. Tools used for horizontal analysis are comparative statements, trend
statements, common size statements of two or more enterprises periods.
5. Vertical Analysis: It refers to the relationship of each item to the total within a
single statement. For example, each balance sheet item may be expressed as percentage
of total assets and income statement items as percentage of net sales. Thus, it makes use
of common size statement tools for financial analysis. Unlike horizontal analysis, it
shows relationship within a single statement and, that too, in percentage form. As
vertical analysis is restricted to a single statement, it assumes significances only when
comparative common-size statements are prepared. Similarly, calculations of ratios from
financial statements of a single accounting year is part of a vertical analysis. But
comparison of ratios of different periods is a type of horizontal analysis.

2. Both horizontal and vertical analyses are useful in analysis of trends in financial
conditions and operating results of a business. But vertical analysis with both absolute
amount and percentage area also comparing one enterprise with another or with industry
averages. Such comparisons are easy to make with use of common size statements.
Distinction between horizontal analysis and vertical analysis
Horizontal Analysis Vertical Analysis
It requires comparative financial statements It requires a single statement of one period.
of two or more periods.
It provides information in absolute and It provides information in percentage for
percentage form. only.
It deals with same item of different periods. It deals with different items of same period.
It is generally used for time series analysis It is generally used for cross-section
analysis.
It is a part of comparisons It is step towards comparisons.