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 using vertical analysis to compare profitability on an income statement, which of the following is typically expressed as a percentage of net sales?

Total assets

Gross profit

Accounts payable

Retained earnings

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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 line item is expressed as a percentage of a base figure. For the income statement, net sales is typically used as the base figure.

Identify the purpose of vertical analysis in profitability comparison: The goal is to analyze how different components of the income statement, such as gross profit, operating expenses, and net income, contribute to net sales.

Focus on gross profit: Gross profit is calculated as net sales minus the cost of goods sold (COGS). It represents the profitability of a company before accounting for operating expenses and other costs.

Express gross profit as a percentage of net sales: To perform vertical analysis, divide gross profit by net sales and multiply by 100 to convert it into a percentage. The formula is:

\frac{Gross Profit}{Net Sales} \times 100

Understand why gross profit is used: Gross profit is a key indicator of profitability because it shows how efficiently a company is producing and selling its goods relative to its net sales. Other options like total assets, accounts payable, and retained earnings are not directly related to net sales in the context of vertical analysis.