Problem:
Vertical vs Horizontal analysis. Should someone put more emphasize on one type over the other? These two methods are only two methods in an entire arsenal of ways of analyzing a company. Both have benefits and limitations. Everybody has discussed what they are and some have expressed their purposes. But, how can they be used in practice?
As an auditor, I am required to perform analytical procedures on a company books and records looking for any unusual items that would warrant additional investigation. I tend to use horizontal analysis more frequently than vertical analysis. The reason is because I typically would have audited the books of a company the prior year and should be familiar with the transactions that comprise each amount. With this knowledge, I perform my calculations and look at the results. I will identify any item that fluctuated more than expected. And these amounts would receive higher attention and scrutiny when performing my current year audit. It is a rather straight forward procedure to focus my attention on the areas where the biggest change occurred.
This procedure is a straight year over year comparison. But, the question always comes up, should I use more than one year in making my analytical determination. How would I benefit from using multiple years of data? Would my decision have changed if I were to look 5 years of data instead of two? Would a multiple year analysis provide a different picture than simply using two years?