Final answer:
Vertical analysis is the method of financial analysis that compares balance sheet items as a percentage of total assets or liabilities and equity, allowing for comparability regardless of company size.
Step-by-step explanation:
The method of financial analysis that looks at balance sheet data and compares it as a proportion of the totals on that page is known as vertical analysis (also called common size analysis). This approach involves standardizing the balance sheet by representing each line item as a percentage of total assets (in the case of assets) or total liabilities and equity (in the case of liabilities and shareholders' equity). This enables comparability between companies of different sizes by examining the composition of their assets, liabilities, and equity.
Example of Vertical Analysis:
For instance, if a bank has $1,000 in total assets, of which $200 is cash, the cash would represent 20% of the total assets on a vertical balance sheet analysis. Similarly, if total liabilities and equity equal $1,000 and the mortgage liabilities account for $300, they would be represented as 30% of the liabilities and equity.
Using the T-account format within a bank's balance sheet provides a clear presentation of the assets on one side and the liabilities and capital on the other side. This structure simplifies the process of conducting vertical analysis.