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Multiple Choice
Vertical analysis is also called:
A
Ratio analysis
B
Common-size analysis
C
Horizontal analysis
D
Trend analysis
Verified step by step guidance
1
Understand the concept of vertical analysis: Vertical analysis is a method of financial statement analysis where each item in a financial statement is expressed as a percentage of a base amount. For example, in an income statement, each line item is expressed as a percentage of total sales.
Recognize the alternative name for vertical analysis: Vertical analysis is commonly referred to as 'common-size analysis' because it standardizes financial data, making it easier to compare across companies or time periods.
Differentiate vertical analysis from other types of analysis: Horizontal analysis involves comparing financial data over multiple periods to identify trends, while ratio analysis uses specific financial ratios to evaluate a company's performance. Trend analysis focuses on identifying patterns over time.
Match the correct term to the definition: Based on the explanation above, the correct answer to the question is 'Common-size analysis,' as it aligns with the definition of vertical analysis.
Review the importance of vertical analysis: Vertical analysis is useful for comparing companies of different sizes or analyzing changes in a company's financial structure over time, as it provides a standardized view of financial data.