Vertical Analysis of Financial Statements

Vertical analysis of financial statements is also known as common size financial statement analysis. This analysis technique is used to evaluate the financial performance of a company by comparing the different items of its financial statements. It is a tool that helps in identifying trends and patterns in the company's financial statements.

Preparation of Common Size Financial Statement

The preparation of a common size financial statement involves converting the financial statements into percentages. The percentage calculation is done by dividing the individual item of the financial statement by a base figure.

For example, in the income statement, the base figure is the total revenue generated by the company. Similarly, in the balance sheet, the base figure is the total assets or liabilities of the company. By doing this, we can compare the different items of the financial statements with each other and with the industry standards.

Benefits of Common Size Financial Statement Analysis

- Provides a better understanding of the company's financial performance
- Helps in identifying trends and patterns in the financial statements
- Enables comparison of financial statements of companies of different sizes and industries
- Helps in identifying areas of strength and weakness in the financial performance of the company

Conclusion

Common size financial statement analysis is an essential tool for evaluating the financial performance of a company. It converts the financial statements into percentages, making it easier to compare different items of the financial statements with each other and with the industry standards. It helps in identifying trends and patterns, and enables comparison of financial statements of companies of different sizes and industries.