Lesson details
- Estimated study time
- 2 hr
Learning objectives (4)
Once the source packet is controlled, transform it in two directions. Horizontal analysis follows a line through time. Common-size analysis locates a line within its statement.
Horizontal view
For every selected line, retain the current and comparison amounts, then compute:
dollar change = current − comparison
percentage change = dollar change ÷ comparison
Use the immediately preceding period for period-over-period changes. Use a fixed first-period base for a trend index:
trend index = current ÷ first-period amount × 100
Do not confuse an index with growth. An index of 126.67 means 26.67% above the base. If the base amount is zero, retain the dollar transition and omit the ordinary percentage or index. That is an information boundary, not a spreadsheet error to hide.
Common-size view
Use same-period net sales as the bounded income-statement base. Use same-date total assets as the balance-sheet base. Aster Year 3 illustrates both:
COGS share = $235,000 ÷ $380,000 = 61.84%
Inventory share = $80,000 ÷ $285,000 = 28.07%
Keep the currency amounts. Percentages improve composition and scale comparison but remove material size information.
Combine the views
Build Aster's two views. The result supports a bounded observation: sales rise, their rate of growth slows, net-income share falls, and receivable and Inventory shares rise. It does not prove a cause.
Construct a next-evidence table:
| Observation | Competing explanations | Evidence request |
|---|---|---|
| Receivables grow faster than sales | terms, sales timing, collection, mix | aging, terms, subsequent receipts |
| Inventory share rises | growth support, demand change, input cost, aging | units, aging, stockouts, write-downs |
| COGS share rises | price, product mix, input cost, markdown | price-volume-mix and gross-margin bridge |
Practice and exit check
Complete the change calculation, zero-base control, and common-size base check.
Exit sentence: “Common-size removes ___, but it does not remove ___.” A complete answer names absolute scale first and at least one policy, scope, classification, period, or business-model difference second.