Final answer:
Vertical analysis in financial statement analysis expresses each line item in a balance sheet and income statement as a percentage of a total figure within the same statement. it is used for comparing financials across different sizes of companies and for better understanding of financial structures.
Step-by-step explanation:
Vertical analysis is a method used in financial statement analysis where each entry in a particular category (such as revenues, expenses, assets, or liabilities) is represented as a proportion of a total within the same statement. For a balance sheet (B.S.), vertical analysis would express each component as a percentage of total assets, making it easier to compare financial statements of companies of different sizes and to observe the structure of assets, liabilities, and equity. In the case of an income statement (I.S.), each expense or revenue is shown as a percentage of total sales, which is useful for understanding cost structure and profitability.Through vertical analysis, stakeholders can quickly grasp the content loaded with financial insights in terms of relative size and importance of various categories. This approach is integral for performing financial comparisons across multiple periods or different companies within the same industry. It simplifies the complex data found in financial statements and highlights trends and ratios that may warrant further investigation or could indicate financial health or issues.