What is vertical analysis?

Vertical analysis is the method of analysis of the financial statements in which each item in the command is represented as a percentage of one larger item. This method of analysis can be used both with balance sheets and income statements as a way of cohesion of comparing large money and understanding of data. One of the advantages of vertical analysis is that it makes it easier to compare between companies of different sizes in the same industry. It also allows companies to consider its current reports against messages from its past and detect possible trends or areas that require improvement. Vertical analysis will solve this problem by joining all items in the balance sheet to one item and creating what is called the balance sheet of common size. The balance sheets of common size are easily compared to the Other commands for older sheets from one society.

When using vertical analysis in the balance sheet, all items on the sheet are measured in terms ofthe total asset. Imagine, for example, that the company has total assets of $ 1,000 (USD) and an inventory of $ 100. Since $ 100 includes $ 10 percent of a total assets of $ 1,000, supplies 10 would be in the balance sheet. All different assets, whether cash, supplies, capital or receivables, add up to 100 in the standard size.

In terms of vertical analysis of income statements, all different items are represented as part of the total sales. This means that the total amount of sales is automatically represented as 100. If the interest expenditure of a company was $ 200 and its total sale amted to $ 4,000, then the interest would be represented as 5, because a total of 5 percent of total sales.

Using vertical analysis, the company can quickly identify strengths and weaknesses and trends. For example, a company could find a trend that shows the percentage of receivables on the rise while the percentage of cashI is for loss. This can mean inefficiency of collection methods. The analysis of the profit and loss statement in the same way allows the creators of the decision to determine exactly how each dollar is divided between costs and expenditures, which brings a complete financial image.