Final Answer:
Vertical analysis is a financial analysis technique that expresses each item on a financial statement as a percentage of a base item. The base item for cost of goods sold is net sales. This means that each item on the income statement is expressed as a percentage of net sales. so, the correct answer is B) net sales.
Step-by-step explanation:
Certainly! Vertical analysis is a method used to analyze financial statements by expressing each line item as a percentage of a base figure. In the context of cost of goods sold (COGS), the base for the vertical analysis is typically the net sales.
Here's a breakdown of the explanation:
Vertical Analysis Concept: The goal of vertical analysis is to understand the proportional relationship of each component of a financial statement to a base figure. This helps in assessing the relative significance of different line items.
Base for COGS: In the case of COGS, the base is the net sales. This choice is logical because it allows us to evaluate how much of the sales revenue is utilized to cover the costs associated with producing the goods sold.
Calculation: The vertical analysis percentage for COGS is calculated by taking the COGS amount and dividing it by the net sales amount, then multiplying by 100 to express it as a percentage.
Interpretation: The resulting percentage indicates the proportion of net sales that is attributed to the cost of producing goods. This insight is valuable for understanding the cost structure and efficiency of the production process.
In summary, when performing vertical analysis, the base for cost of goods sold is the net sales figure. This choice aligns with the objective of vertical analysis to assess the relative importance of different financial statement components in relation to a common base.
Therefore, the correct answer is B) net sales.