Question

Horizontal and vertical analysis are two key techniques used in analyzing financial statements, usually applied in tandem. Briefly stated, vertical analysis requires that significant element be measured as a percentage of a base to which its related. For example, the various components of an income statement might be measured as a percentage of sales. This technique can be applied to the balance sheet as well. True or False

Answer 1

Vertical analysis in financial statements is true and involves representing line items as percentages of a base figure, like sales on an income statement or total assets on a balance sheet. This technique, alongside horizontal analysis, is pivotal in financial analysis.

Step-by-step explanation:

The statement regarding vertical analysis is true. Vertical analysis is indeed a technique used in financial statement analysis where each financial statement line item is listed as a percentage of another item. For example, on an income statement, various components might be presented as a percentage of net sales, which provides insights into the relative size and importance of these items. Similarly, a balance sheet might show assets, liabilities, and equity each as a percentage of total assets, allowing for assessment of the structure of a company's finances. Alongside vertical analysis, horizontal analysis is often used which examines financial data over time, typically comparing line items on a year-to-year basis.

Horizontal and vertical analysis are complementary techniques essential to financial analysis and are widely applied by analysts, accountants, investors, and other stakeholders to evaluate a company's performance, financial health, and trends over time.