Final answer:
Horizontal analysis is a financial analysis technique that measures the change in financial statement items over time. It helps in spotting trends by comparing figures from different time periods. Graphs such as line and bar graphs can effectively illustrate the findings from a horizontal analysis.
Step-by-step explanation:
Horizontal analysis is a financial analysis technique that gives you the means to specify the change in financial statement items over time. This type of analysis allows for the examination of relative changes in different line items from one period to the next.
To perform a horizontal analysis, you would typically calculate the amount of each item's change from the base year in absolute terms and as a percentage. This method can be particularly insightful for spotting trends such as increases or decreases in revenues or expenses. While horizontal analysis does provide information about financial trends over time, it does not directly involve the comparison to industry averages, calculation of financial ratios, or identification of potential financial risks—those would relate to other types of analyses, such as vertical analysis, ratio analysis, and risk assessment.
Graphical representations such as line graphs, bar graphs, and pie charts can be useful to illustrate the patterns and trends highlighted by a horizontal analysis. They condense the numerical data to provide an intuitive understanding of the changes across periods, enhancing the analysis's clarity and impact.