What is the purpose of horizontal analysis in financial statement review?

The purpose of horizontal analysis in financial statement review is to assess the percentage change in items from one period to the next. This technique allows analysts to identify trends over time by comparing financial data across different periods, typically in the form of percentage increases or decreases. By focusing on the change in specific line items from one reporting period to another, horizontal analysis highlights growth patterns or potential red flags, such as declining revenues or increasing expenses, thus facilitating a more dynamic understanding of the company's financial health.

This method is particularly useful for detecting irregularities and trends that might not be obvious when looking at a single period's figures. It helps in evaluating how well the business is performing over time and provides critical insights for decision-making and forecasting.