Vertical Analysis of Financial Statements

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 4 (843 words) Published: June 5, 2012
There are various methods for examining the income statement and balance sheet. There are certain ratios that can be used to measure profitability and asset utilization. Financial statements allow the business to stop in time so that entrepreneurs and investors alike can measure the fiscal performance of the company. This article looks at vertical analysis as one method of analyzing financial statements. Vertical Analysis of the Financial Statements

Vertical analysis compares different categories of the financial statements. The comparison is usually within the same accounting period. Vertical analysis doesn’t normally integrate different financial statements. In other words, comparison is made between different accounts of the same financial report. Thus the analysis is done vertically, or up and down on the same financial statement. The comparisons that are made generally have a financial affect on each other. Vertical Analysis of the Income Statement

When it comes to the income statement, vertical analysis can be used to compare revenue account categories, expense categories or expense accounts against revenue categories. Below is an example of vertical analysis in the revenue section of the income statement for separate sales categories compared to total sales. In this example, let’s use a company in the business of selling fruit. Total Fruit Sales $50,000

* Apples $15,000 – 30% of sales
* Oranges $14,000 – 28% of sales
* Bananas $11,000 – 22% of sales
* Pears $10,000 – 20% of sales
Expenses are also compared to either total revenue or to gross profits. There are usually two basic expense categories, fixed and operating expense. Since operating expenses tend to fluctuate more with sales activities, vertically analyzing operating expenses against revenue is more important to profitability. Below is an example of vertical analysis of operating expense compared to total sales. Expenses are also compared to either total revenue or to gross...
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