question archive Describe the Horizontal Analysis method for financial statements
Describe the Horizontal Analysis method for financial statements
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Describe the Horizontal Analysis method for financial statements. Provide a real life business example for the Horizontal Analysis method from the financial statements for a company and its main competitor. Explain how the Horizontal Analysis method for financial statements assists the investor in evaluating the company’s performance in comparison to its competitor’s performance.
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Answer:
Horizontal analysis is the analysis of financial statements, which assess the ratios and items over a period of time. It makes absolute or percentage comparisons. Where the items of succeeding year will be presented as the percentage of item from base year. This helps in comparison of financial statements. This also signals the trend of line items in the statements.
In this answer the horizontal analysis of PepsiCo Ltd and its competitor Monster Coporation Ltd is taken into account.
Horizontal analysis of income statement of PepsiCo Ltd
| Particulars | 2019 | 2018 | Change | Percent |
| Net revenue | $ 67,161 | $64,661 | $2,500 | 3.9% |
| Cost of sales | 30,132 | 29,381 |
751 |
3 |
| Gross profit | 37,029 | 35,280 | 1,749 | 5 |
|
Selling and administrative expenses |
26,738 | 25,170 | 1,568 | 6.2 |
| Operating Profit | 10,291 | 10,110 | 181 | 1.8 |
| Other pension and retire benefits | (44) | 298 | (342) | (114) |
| Interest expense | (1,135) | (1,525) | (390) | (26) |
| Interest income and other | 200 | 306 | (106) | (35) |
| Income before income taxes | 9,312 | 9,189 | 123 | 1.3 |
| Provision for income taxes | 1,959 | (3,370) | (5329) | (158) |
| Net icome | 7,353 | 12,559 | (5,206) | (41.4) |
Horizontal analysis of Balancesheet statement of PepsiCo Ltd
| Particulars | 2019 | 2018 | Change | Percent |
| Assets | ||||
| Current assets | ||||
| Cash and cash equivalents | $5,509 | $8,721 | (3,212) | 37% |
| Short term investments | 229 | 272 | (43) | (16) |
| Restricted cash | - | 1,997 | (1997) | (100) |
| Accounts and notes receivables | 7,822 | 7,142 | 680 | 10 |
| Inventories | 3,338 | 3,128 | 210 | 7 |
| Prepaid expense | 747 | 633 | 114 | 18 |
| Total current assets | 17,645 | 21,893 | (4,248) | (19.4) |
| Property plant and equipment | 19,305 | 17,589 | 1,716 | 10 |
| Amortizable intangible assets | 1,433 | 1,644 | (211) | (13) |
| Goodwill | 15,501 | 14,808 | (13,307) | 90 |
| Other indefinite livedintangible assets | 14,610 | 14,181 | 429 | 3 |
| Other indefinite livedintangible assets | 30,111 | 28,989 | 1,122 | 4 |
| Investments in non controlled affliates | 2,683 | 2,409 | 274 | 11.3 |
| Deferred income taxes | 4,359 | 4,364 | (5) | (.11) |
| Other assets | 3,011 | 760 | 2,251 | 269.1 |
| Total assets | 78,547 | 77,648 | 899 | 1.15 |
| Liabilties and equity | ||||
| Current liabilities | ||||
| Short term debt obligations | 2,920 | 4,026 | (1,106) | (27.4) |
| Accounts payable and other current obligations | 17,541 | 18,112 | (571) | (3.15) |
| Total current liabilities | 20,461 | 22,138 | (1,677) | (8) |
| Long term debt obligations | 29,148 | 28,295 | 853 | 3.01 |
| Defered income taxes | 4,091 | 3,499 | 592 | 17 |
| Other liabilities | 9,979 | 9,114 | 865 | 10 |
| Total liabilities | 63,679 | 63,046 | 633 | 1.00 |
| Committments and Contingencies | ||||
| PepsiCo common shareholder's equity | ||||
| Common stock par value | 23 | 23 | - | - |
| Capital in excess of par value | 3,886 | 3,953 | (67) | (1.6) |
| Reatined earnings | 61,946 | 59,947 | 1,999 | 3.3 |
| Accumulated other comprehensive loss | (14,300) | (15,119) | 819 | (5.41) |
| Repurchased stock in excess of par value | (36,769) | (34,286) | (2,483) | (7.2) |
| Total PepsiCo common shareholder's equity | 14,786 | 14,518 | 268 | 2 |
| Non controlling interests | 82 | 84 | (2) | (2.3) |
| Total equity | 14,868 | 14,602 | 266 | 1.8 |
| Total liabilities and equity | 78,547 | 77,648 | 899 | 1.15 |
Horizontal analysis of income statement of Monster Corporation Ltd
| Particulars | 2019 | 2018 | Change | Percent |
| Net revenue | $ 4,200,819 | $3,807,183 | $393,636 | 10.33% |
| Cost of sales | 1,682,234 | 1,511,808 |
170,426 |
11.27 |
| Gross profit | 2,515,585 | 2,295,375 | 220,210 | 10 |
|
Operating expenses |
1,115,646 | 1,011,756 | (896,110) | (89) |
| Operating Profit | 1,402,939 | 1,283,619 | 119,320 | 9.2 |
| Other income | 13,023 | 9653 | 3,370 | 35 |
| Income before income taxes | 1,145,962 | 1,293,272 | (147,310) | (11.3) |
| Provision for income taxes | 308,127 | 300,268 | 7,859 | 2.6 |
| Net icome | 1,107,835 | 993,004 | 114,831 | 11.56 |
Horizontal analysis of Balancesheet statement of Monster Corporation Ltd
| Particulars | 2019 | 2018 | Change | Percent |
| Assets | ||||
| Current assets | ||||
| Cash and cash equivalents | $795,957 | $637,513 | 158,444 | 25% |
| Short term investments | 533,063 | 320,650 | 212,413 | 66.2 |
| Accounts and notes receivables | 540,330 | 484,562 | 55,804 | 11.5 |
| Inventories | 360,731 | 277,705 | 83,026 | 30 |
| Prepaid expense | 54,868 | 44,909 | 9,959 | 22.1 |
| Prepaid income taxes | 29,360 | 37,831 | (8,471) | (22.39) |
| Total current assets | 2,316,309 | 1,804,170 | 512,139 | 28.38 |
| Investments | 12,905 | - | 12,905 | - |
| Property plant and equipment | 298,640 | 243,051 | 55,589 | 22.8 |
| Deferred income taxes | 84,777 | 85,687 | (910) | (1.06) |
| Goodwill | 1,331,643 | 1,331,643 | - | - |
| Other intangible assets | 1,502,105 | 1,045,878 | 456,227 | 43.6 |
| Other assets | 53,973 | 16,462 | 37,511 | 228 |
| Total assets | 5,150,352 | 4,526,891 | 623,461 | 14 |
| Liabilties and equity | ||||
| Current liabilities | ||||
| Accrued liabilities | 114,075 | 112,507 | 1,568 | 1.39 |
| Accounts payable | 274,045 | 248,760 | 25,285 | 10.16 |
| Other liabilities | 272,977 | 239,878 | 33,099 | 13.79 |
| Total current liabilities | 661097 | 601,145 | 59,952 | 9.97 |
| Defered irevenue | 287,469 | 312,224 | (24,755) | (7.9) |
| Other liabilities | 30,505 | 2,621 | 27,884 | 1,063 |
| Total liabilities | 63,679 | 63,046 | 633 | 1.00 |
| Committments and Contingencies | ||||
| Shareholder's equity | ||||
| Common stock par value | 3,182 | 3,155 | 27 | .855 |
| Capital in excess of par value | 4,397,511 | 4,238,170 | 159,341 | 3.75 |
| Reatined earnings | 5,022,480 | 3,914,645 | 1,107,835 | 28.29 |
| Accumulated other comprehensive loss | (32,387) | (32,864) | 477 | (1.45) |
| Common stock in treasury | (5,219,505) | (4,512,205) | (707,300) | (15.67) |
| Total PepsiCo common shareholder's equity | 4,171,281 | 3,610,901 | 560,380 | 15.5 |
| Total liabilities and equity | $5,150,352 | $4,526,891 | 4,697,661 | 103.77 |
The investors will get to know the financial performance of the company over the past years. They can also compare the trends and patterns of growth of the company with its competitors. It will project the differences in line items over the period of time. By looking at the horizontal analysis the investors will get to know the operational and financial performance of the company,comparing with its competitors.
