ACCOUNTING 1 PROJECT 4
NikeCompany uses horizontal analysis when analyzing its financialstatements. Horizontal analysis is a financial statements analysismethod that reveals changes in the amounts of corresponding financialstatements items over a period. In a horizontal analysis, two or moreperiods are used in the analysis. In a horizontal analysis, changescan be articulated either in the form of dollars or percentage.Horizontal analysis can be conducted for financial statements likestatements of retained revenue, income statements, balance sheets,and schedules of current and fixed assets. Horizontal analysis canalso be based on the ratios resulting from the financial informationover the same duration.
Horizontalanalysis is very effective in determining whether the numbers arehigh or low in comparison to past records, and the results may beused for investigations as well as causes of alarm. For example,horizontal analysis can reveal when certain expenditures arecurrently high, and this may not be the case in the previous period.This will make directors or the management launch an investigation soas to establish the reason for the increase in expenses. Suchincrease may be due to embezzlement of funds, an increase in the costof raw materials or production costs, switching suppliers is also apossible cause or even the company might have started using betterquality raw material which are more expensive. Therefore, horizontalanalysis of financial statements is effective in revealing anydiscrepancies in costs thus, easy to detect any illegal andunethical activity that might be going on in a company at an earlystage. In this case, the horizontal analysis is used as an indicatorof any impending danger and in failure analysis.
Horizontalanalysis is also very effective in reviewing a company’sperformance. If an analysis is carried out for all financialstatements at the same time, they will reveal the complete impact ofoperational actions on the company’s financial state in the periodunder review. Therefore, horizontal analysis can be used to gauge howa company is progressing through comparison of the current financialstatements with the previous statements, and decisions can be madebased on the past results. Management will be able to tell whetherthe company is heading in the right direction or not. For example, ifthe current income is higher when compared with the previous incomes,then, the company’s performance can be considered to be positive.However, if the current income of a company is lower than theprevious incomes, then it shows that there is a problem in how thecompany is performing. The comparison of financial statements is thusimportant in determining the way a company is performing, andhorizontal analysis is effective in such actions.
Horizontalanalysis of financial statements is effective in offeringquantifiable and confirmable methods, which a business can use toproject future outcomes. Through this analysis, a business can easilyproject what is likely to happen shortly. For example, it would beeasy for a company to predict its future income through a comparisonof its current income with the previous incomes. If the trend ofincome flow is an upward trend, then, it is easy to predict that, inthe future, the company will have even higher incomes. Thisprediction can also be used by a company to determine whichstrategies should be put in place to help in realizing future goals.Furthermore, if correct historical information of a company isobtainable and there is a legitimate relationship between variables,then the horizontal analysis can be used in the anticipation ofevents. For example, if the trend of the company’s performance hasbeen on an upward trend, then, it is easy to predict that the companyis likely to win an award or a trophy as the best company in thefuture.
Horizontalanalysis of financial statements is also very effective in theprediction of interest rates, sales growth, inventory levels, andforecasting of market trends. Horizontal analysis helps in theprediction of sales growth through comparison of the current salesrevenues with the previous records of sales revenue. In case thecurrent sales revenues are higher than the previous sales, then it iseasy to predict with a high confidence level that future salesrevenue will increase in case the trend has been an upward one. Inaddition, it would be easy to predict market trends especially inthe company’s share market. If a comparison of the company’sprofitability of the current period with the previous periods showsthat the company has realized profits on an increasing trend,potential investors will have high confidence in the company and theprices of shares will go up.
Inconclusion, if data of a company is readily available in all fields,the applications of horizontal analysis seem to be limitless. Thehorizontal analysis uses numbers hence, it is very precise.Furthermore, horizontal analysis is based on confirmable data thus itis possible to subject it to thorough scrutiny for validation. It canbe argued that using the horizontal analysis is effective.