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Vertical Analysis quiz #1

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  • What is vertical analysis in financial accounting?
    Vertical analysis is a method of analyzing financial statements by expressing each line item as a percentage of a base amount within the same period, such as net sales for the income statement or total assets for the balance sheet.
  • What is the base amount used for vertical analysis on the income statement?
    The base amount for vertical analysis on the income statement is net sales (or sales revenue if net sales is not available).
  • What base amount is used for vertical analysis on the balance sheet?
    The base amount for vertical analysis on the balance sheet is total assets, or equivalently, total liabilities and equity.
  • How do you calculate the vertical analysis percentage for a line item on the income statement?
    Divide the line item amount by net sales and multiply by 100 to get the percentage.
  • How do you calculate the vertical analysis percentage for a line item on the balance sheet?
    Divide the line item amount by total assets (or total liabilities and equity) and multiply by 100 to get the percentage.
  • If cost of goods sold is $54,912 and net sales are $65,455, what is the vertical analysis percentage for cost of goods sold?
    The vertical analysis percentage for cost of goods sold is 83.9% ($54,912 ÷ $65,455 × 100).
  • Why is net sales always 100% in vertical analysis of the income statement?
    Net sales is always 100% because it is the base amount against which all other line items are compared.
  • What does a vertical analysis reveal about a company’s expenses and income?
    Vertical analysis shows how much of each dollar of sales is allocated to various expenses and how much remains as net income.
  • How would you interpret a net income percentage of 4.8% in vertical analysis?
    A net income percentage of 4.8% means that for every dollar of sales, the company keeps 4.8 cents as profit after all expenses.
  • What is the main difference between vertical analysis and horizontal analysis?
    Vertical analysis compares each line item to a base amount within the same period, while horizontal analysis compares changes in amounts over multiple periods.
  • Can vertical analysis be applied to subtotals like gross profit or total operating expenses? Explain.
    Yes, vertical analysis can be applied to subtotals by dividing the subtotal amount by the base amount (e.g., net sales) and expressing it as a percentage.