Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Vertical Analysis

Financial Accounting

14. Financial Statement Analysis

Vertical Analysis

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Multiple Choice

In vertical analysis of a company's income statement, each item is typically expressed as a percentage of which of the following?

Gross Profit

Net Sales

Total Assets

Total Liabilities

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Verified step by step guidance

Understand the concept of vertical analysis: Vertical analysis is a method of financial statement analysis where each item in the financial statement is expressed as a percentage of a base amount. This helps in comparing the relative size of each item and analyzing trends over time.

Identify the financial statement being analyzed: In this case, the income statement is being analyzed. The base amount for vertical analysis of the income statement is typically Net Sales, as it represents the total revenue generated by the company.

Clarify why Net Sales is used as the base: Net Sales is the most logical choice because it reflects the company's total revenue after deducting returns, allowances, and discounts. It provides a consistent basis for comparing all other items on the income statement, such as cost of goods sold, operating expenses, and net income.

Eliminate other options: Gross Profit, Total Assets, and Total Liabilities are not appropriate bases for vertical analysis of the income statement. Gross Profit is a derived figure (Net Sales minus Cost of Goods Sold), and Total Assets and Total Liabilities are balance sheet items, not income statement items.

Apply the vertical analysis formula: To express each item as a percentage of Net Sales, use the formula: \( \text{Percentage} = \frac{\text{Item Value}}{\text{Net Sales}} \times 100 \). This formula ensures that each item is proportionally represented relative to Net Sales.