What is the difference between horizontal and vertical analysis in financial statements?

The distinction between horizontal and vertical analysis is crucial for understanding financial statements and their interpretation. The correct choice highlights that horizontal analysis compares financial data over different periods, which involves evaluating the trend of an item or set of items within the financial statements across time. This approach allows analysts and stakeholders to identify growth patterns, variances, or trends in revenue, expenses, and profits, providing insight into the company's performance over time.

In contrast, vertical analysis involves looking at each line item as a percentage of a base figure within a single period, which is not the definition of horizontal analysis. Thus, the other options do not align with the fundamental characteristics of horizontal analysis. By focusing on periods rather than percentages or cross-company comparisons, this choice accurately reflects how horizontal analysis assesses financial data trends over time, aiding in performance evaluation and projections.