Final answer:
The best way to prepare a vertical analysis is to study the relationship between the components of a financial statement, analyzing how each item contributes as a percentage of the whole.
Step-by-step explanation:
Preparing a vertical analysis is the best way to study the relationship between the components of a financial statement. This method of analysis takes each line item on a statement as a percentage of a base figure, allowing for a comparison of different-sized companies and for analyzing a single company over different periods. It is not primarily used to evaluate series of financial statement data over time, measure profitability directly, or assess a company's ability to meet financial obligations; those are objectives more suitable for horizontal analysis, profitability ratios, and liquidity ratios respectively.
Alternative Measures of Costs such as breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost are useful for analyzing the patterns of costs to determine potential profit and manage production and costs effectively. Understanding these costs provides insights and aids in the calculation of average profit, which is a different aspect of financial analysis compared to vertical analysis.
When creating graphs to illustrate financial data, such as in a vertical analysis, a line graph is effective in showing relationships between two variables, especially in a time series to indicate trends and patterns over time.