Question

Vertical analysis is a more direct method than horizontal analysis in focusing on changes in financial statements from one period to another.

1) True
2) False

Answer 1

False. Vertical analysis is a method that focuses on within-period changes in financial statements, while horizontal analysis focuses on between-period changes.

Step-by-step explanation:

The statement is False. Vertical analysis focuses on comparing each item on a financial statement to a common base amount within the same reporting period. It helps identify the proportion of each item to the total of that period. On the other hand, horizontal analysis compares the same items on a financial statement across different reporting periods. It helps identify the change in values over time.

For example, in vertical analysis, we may compare each expense item on an income statement to the total revenue for the period to determine the percentage of each expense relative to the revenue. In horizontal analysis, we may compare the revenue of a company in 2020 to the revenue in 2019 to determine the increase or decrease in revenue over time.

Therefore, vertical analysis is focused on the within-period changes, whereas horizontal analysis is focused on the between-period changes.