Question

Which financial analysis is also known as 'horizontal analysis'?

• A. Cash Flow Analysis
• B. Ratio Analysis
• C. Comparative Statements
• D. Common Size Statements

Hint:

Horizontal analysis compares the same item across different years. Common size statements are its vertical counterpart.

Answer 1

The Correct Option is C

Step 1: Understand the term.
Horizontal analysis compares the same item of the financial statements across two or more years, reading the figures along a row. It looks at the change in each item over time. It is also called time-series analysis.

Step 2: Check option 1 (Cash Flow Analysis).
Cash flow analysis studies the inflow and outflow of cash from operating, investing and financing activities. It is not a year-to-year comparison of statement items. So option 1 is WRONG.

Step 3: Check option 2 (Ratio Analysis).
Ratio analysis relates two figures of the same year to find a ratio, such as the current ratio. It is not a horizontal comparison. So option 2 is WRONG.

Step 4: Check option 3 (Comparative Statements).
Comparative statements place the figures of two or more years side by side, with the absolute change and the percentage change. This is exactly horizontal analysis. So option 3 is CORRECT.

Step 5: Check option 4 (Common Size Statements).
Common size statements show every item as a percentage of one base figure, such as total assets or net sales, in the same year. That is vertical analysis. So option 4 is WRONG.

Final Answer:
Horizontal analysis is done through comparative statements, which is option 3.
\[ \boxed{\text{Comparative Statements}} \]