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Vertical - Common Size Statements

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23 views11 pages

Vertical - Common Size Statements

Uploaded by

rexlapislolol
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Vertical Analysis

of Financial Statements
Dr. Ashish Siddiqui
BK School, GU.
Introduction
• Vertical analysis, also known as common-size analysis, is a technique
used to evaluate the relative proportion of individual line items to a
specific base item within a financial statement.
• The purpose of vertical analysis is to analyze the internal structure of
financial statements by expressing each line item as a percentage of a
base item.
• The base item is typically the total revenue or total assets, depending
on whether you are analysing an income statement or a balance
sheet.
Here's how you can perform vertical analysis for both the income
statement and the balance sheet:

• Vertical Analysis of Income Statement:


1.Select the Base Item:
1. Total Revenue (Sales) is commonly used as the base item for the income
statement.
2.Calculate Percentages:
1. Express each line item as a percentage of Total Revenue.
2. Formula: (Individual line item / Total Revenue) * 100.
Example
• Sales: $500,000 Cost of Goods Sold: $300,000 Gross Profit: $200,000 Vertical Analysis: Sales: 100% Cost of Goods Sold: (300,000 / 500,000) * 100 = 60% Gross Profit: (200,000 / 50Sales: $500,000

•
Sales: INR 500,000
Cost of Goods Sold: $300,000

Gross Gross Profit: $200,000

•
Cost of Goods Sold: INR 300,000
Vertical Analysis:

Sales: 100%

•
Gross Profit: INR 200,000
Cost of Goods Sold: (300,000 / 500,000) * 100 = 60%

Gross Profit: (200,000 / 500,000) * 100 = 40%

• 0) * 100 = 40%$500,000

• Cost of Goods Sold: $300,000

• Gross Profit: $200,000

•
Vertical Analysis:
Vertical Analysis:

•
Sales: 100%
Sales: 100%

Cost of Goods Sold: (300,000 / 500,000) * 100 = 60%

Cost of Goods Sold: (300,000 / 500,000) * 100 = 60%


Gross Profit: (200,000 / 500,000) * 100 = 40%: $200,000

• Sales: $500,000 Cost of Goods Sold: $300,000 Gross Profit: $200,000 Vertical Analysis: Sales: 100% Cost of Goods Sold: (300,000 / 500,000) * 100 = 60% Gross Profit: (200,000 / 500,000) * 100 = 40%

• Vertical Analysis:

•
Gross Profit: (200,000 / 500,000) * 100 = 40%
Sales: 100%

Cost of Goods Sold: (300,000 / 500,000) * 100 = 60%

• Gross Profit: (200,000 / 500,000) * 100 = 40%0,000) * 100 = 40%


Vertical Analysis of Balance Sheet:

• Vertical Analysis of Balance Sheet:


1.Select the Base Item:
1. Total Assets is commonly used as the base item for the balance sheet.
2.Calculate Percentages:
1. Express each line item as a percentage of Total Assets.
2. Formula: (Individual line item / Total Assets) * 100.
Vertical Analysis of Balance Sheet:

• Total Assets: INR 1,000,000


• Liabilities:
• - Accounts Payable: INR 200,000
• - Long-term Debt: INR 300,000
• Equity:
• - Common Stock: INR 400,000
• - Retained Earnings: INR 100,000

• Vertical Analysis:
• Accounts Payable: (200,000 / 1,000,000) * 100 = 20%
• Long-term Debt: (300,000 / 1,000,000) * 100 = 30%
• Common Stock: (400,000 / 1,000,000) * 100 = 40%
• Retained Earnings: (100,000 / 1,000,000) * 100 = 10%
Interpretation:

• Vertical analysis helps to identify the proportion of each line item


relative to the base item.
• It's useful for comparing the composition of financial statements over
time or against industry benchmarks.
• For example, if the percentage of cost of goods sold increases over
time, it may indicate a decrease in gross profit margin.
Interpretation:

• Keep in mind that while vertical analysis provides insights into the
internal structure of financial statements,
• it does not provide information about the overall financial health of
the company or its performance in absolute terms.
• For a comprehensive analysis, vertical analysis is often combined
with horizontal analysis and other financial metrics.
• For practical example PTO….
Learning
• Common-size analysis is, however, also an effective way of
comparing two companies with different levels of revenues
and assets. For example, suppose one company has an
operating income of $100,000, and a competing company has
an operating income of $2,000,000.
• If both companies have similar levels of net sales and total
assets, it is reasonable to assume that the more profitable
company is the better performer.
• However, most companies are not the same size. How do we
compare companies of different sizes?
• This is where common-size analysis can help

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