A single year's income statement tells you what happened. It does not tell you whether that was good, bad, improving, or getting worse — for that, a reader needs something to compare against. Comparative Financial Statements illustrate dollar changes over two or more years, laying prior-year and current-year figures side by side.
AHorizontal Analysis
- Is the comparison of changes in percentages from year to year
- Reads DOWN the years — how did this one line item change over time?
- Needs a Base Year: one common year to which all other years are compared
- % change = (Current year − Base year) ÷ Base year × 100
BVertical Analysis
- Is a comparison within a given year's financial statement
- Reads DOWN one column — each item as a percentage of a major total
- On the income statement, every line is shown as a % of Net Sales
- On the balance sheet, every line is shown as a % of Total Assets
Common-Size Statements show key items as percentages, without dollar values — the end product of vertical analysis. Because every number is converted to a percentage of the same base (Net Sales, or Total Assets), a common-size statement lets you compare a small corner store against a national chain on equal footing, even though their actual dollar figures are wildly different sizes.
Picking a good base year
A Base Year should usually be a normal, representative year — not one distorted by a one-time event (a fire, a pandemic shutdown, an unusually huge one-time sale). Comparing every other year back to a distorted base year makes every trend afterward look artificially dramatic.