What is the primary purpose of horizontal analysis?

• A. Identify Trends Over Time To Inform Changes
• B. Evaluate Capital Structure Over Several Years
• C. Assess Liquidity Using The Current Ratio
• D. Forecast Next Year Market Demand

Answer: (B)

Horizontal analysis looks at financial statements across multiple periods to see how each item changes over time. By comparing the same line items year after year, you can spot trends, such as steady revenue growth, rising costs, or improving margins, and quantify those changes. Those trend patterns are what guide management in deciding what to adjust or investigate further, making this approach especially useful for informing strategic decisions and planned changes.

While tracking changes in financing mix or liquidity can be part of broader analysis, the central aim of horizontal analysis is to identify trends over time, not to evaluate capital structure in isolation, assess liquidity with a single ratio, or forecast market demand.