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When is a trend better than year over year comparisons?

Vertical vs Horizontal analysis. Should someone put more emphasize on one type over the other? These two methods are only two methods in an entire arsenal of ways of analyzing a company. Both have benefits and limitations. Everybody has discussed what they are and some have expressed their purposes. But, how can they be used in practice?

As an auditor, I am required to perform analytical procedures on a company books and records looking for any unusual items that would warrant additional investigation. I tend to use horizontal analysis more frequently than vertical analysis. The reason is because I typically would have audited the books of a company the prior year and should be familiar with the transactions that comprise each amount. With this knowledge, I perform my calculations and look at the results. I will identify any item that fluctuated more than expected. And these amounts would receive higher attention and scrutiny when performing my current year audit. It is a rather straight forward procedure to focus my attention on the areas where the biggest change occurred.

This procedure is a straight year over year comparison. But, the question always comes up, should I use more than one year in making my analytical determination. How would I benefit from using multiple years of data? Would my decision have changed if I were to look 5 years of data instead of two? Would a multiple year analysis provide a different picture than simply using two years?

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Typically, two years isn't enough to sense a trend. Multiple years will highlight if last year was just out of pattern. So, yes, you might come up with a different answer with five years worth of data. Remember the credit crunch in fall of 2008? If you ...

Solution Summary

This discussion weighs in on how multiple years (a trend) might be more powerful than just a prior year comparison.