Question

In vertical analysis, each item in a financial statement is expressed

A. in dollars and terms of a percent of a base amount.
B. starting with the highest value down to the lowest value .
C. in terms of a percentage of the item in the previous year.

Answer 1

In vertical analysis, each item on a financial statement is represented as a A. percentage of a base amount, simplifying comparison and understanding of financial relationships.

Step-by-step explanation:

In vertical analysis, each item in a financial statement is expressed A. in dollars and terms of a percent of a base amount. This method of analysis allows each line item on the financial statement to be represented as a percentage of a base figure, facilitating comparability and understanding of financial proportions. For example, if we select time period 3 as the base year with spending of $107, this amount becomes the reference point (with an index of 100). To derive the index for other years, their dollar amounts are divided by the base year amount (in this case, $1.07). This makes it easier to interpret complex financial data by focusing on relative change over time, rather than raw numbers that can be unwieldy and difficult to compare, such as messy-looking numbers like $17,147.51 or $27,654.92.

For example, if the total assets for a year are $100,000 and the accounts receivable is $20,000, the vertical analysis would show that accounts receivable is 20% of the total assets.

Vertical analysis is useful for comparing the proportions of different items on a financial statement and identifying any significant changes over time.