Which statement best describes Horizontal Analysis in financial evaluation?

• A. Comparing a single year's financial statements to industry averages
• B. Comparing financial statements across multiple years to identify trends and inform changes
• C. Analyzing cash flows in depth for a single period
• D. Forecasting future revenue using past data

Answer: (B)

Horizontal analysis, also called trend analysis, compares financial statements across multiple periods to identify patterns in how items change over time. By looking at growth or decline in revenues, expenses, and other line items year by year, you can see whether things are improving, deteriorating, or staying stable, and how different components move relative to each other. This helps management spot trends, assess the impact of past decisions, and guide planning and corrective actions. For example, if sales rise steadily but costs rise even more quickly, margins shrink, signaling a need to investigate pricing, efficiency, or cost control. This approach focuses on changes over time, not how a single year's numbers stack up against industry peers, nor on deep single-period cash-flow analysis, nor on forecasting future results—though the trends it reveals can inform future projections.