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

When calculating vertical analysis on the income statement, which figure is typically used as the base amount for expressing all other items as a percentage?

Total Assets

Net Sales (or Total Revenue)

Net Income

Gross Profit

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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 each item.

Identify the type of financial statement: In this case, the problem refers to the income statement, which reports a company's financial performance over a specific period.

Determine the base amount for the income statement: The base amount for vertical analysis on the income statement is typically 'Net Sales' or 'Total Revenue.' This is because all other items on the income statement are derived from or related to the company's revenue generation.

Express each item as a percentage of the base amount: For example, if you are analyzing 'Cost of Goods Sold,' you would calculate its percentage by dividing 'Cost of Goods Sold' by 'Net Sales' and multiplying by 100. Use the formula:

\frac{Item}{Net Sales} \times 100

Apply this method to all items on the income statement: Repeat the calculation for each line item, such as Gross Profit, Operating Expenses, and Net Income, to express them as percentages of Net Sales or Total Revenue.