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, which of the following is typically used as the base amount for income statement items?

Total liabilities

Total assets

Retained earnings

Net sales

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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 on a financial statement is expressed as a percentage of a base amount. This helps in comparing the relative size of financial statement items.

Identify the financial statement being analyzed: In this case, the income statement is being analyzed. The income statement reports a company's revenues, expenses, and profits over a specific period.

Determine the base amount for income statement items: In vertical analysis of the income statement, the base amount is typically 'Net Sales' (or 'Revenue'). This is because net sales represent the total revenue generated by the company, and all other items (such as cost of goods sold, operating expenses, and net income) are expressed as a percentage of net sales.

Understand why other options are incorrect: Total liabilities, total assets, and retained earnings are balance sheet items and are not used as the base amount for income statement vertical analysis. These items are relevant for vertical analysis of the balance sheet, where total assets are often used as the base amount.

Apply the vertical analysis formula: To calculate the percentage for each income statement item, use the formula: \( \text{Percentage} = \frac{\text{Income Statement Item}}{\text{Net Sales}} \times 100 \). This formula ensures that each item is expressed as a proportion of net sales.