Certified Financial Management Specialist Practice Exam

What type of analysis would you conduct to assess growth trends over three years?

1. Horizontal Analysis

2. Vertical Analysis

3. Ratio Analysis

4. Benchmark Analysis

The correct answer is: Horizontal Analysis

Conducting a horizontal analysis is particularly effective for assessing growth trends over a specific period, such as three years. This method involves comparing financial data across multiple periods to identify growth patterns, changes in revenues, expenses, and other relevant metrics. By examining the same financial elements side by side across the years, you can ascertain whether a company is experiencing growth, stability, or decline. This analysis focuses on the changes in figures from one period to the next, providing a clear view of performance trends over time. For example, if you analyze the revenue figures from three consecutive years, horizontal analysis will highlight the percentage increase or decrease year over year, making it easy to chart growth trajectories. The other types of analysis serve different purposes: vertical analysis is typically used to show line items as a percentage of a base figure within a single period, ratio analysis focuses on relationships between different financial statement line items to assess financial health, and benchmark analysis compares a company's performance against industry standards or competitors. While all these analyses offer valuable insights, horizontal analysis directly aligns with the objective of tracking growth trends across multiple years.