Final answer:
To perform vertical analysis on a balance sheet, each account figure is divided by total assets for assets, or total liabilities and equity for liabilities and equity items, to determine their proportional contributions.
Step-by-step explanation:
In order to perform vertical analysis on the balance sheet, it is necessary to divide the dollar amount of each account by the total assets for asset line items or by total liabilities and stockholders' equity for liability and equity line items. This process allows one to see each line item as a percentage of total assets or liabilities plus equity, providing insights into the structure of the company's financial statements.
For instance, comparing cash held in vaults, securities, and loans offered by the bank to its total assets can give a measure of liquidity and investment preferences. Similarly, analyzing the proportion of a bank's liabilities that are time deposits can reflect on the bank's funding stability and cost structure.