Analysts also use vertical analysis of a single financial statement, such as an income statement. Vertical analysis consists of the study of a single financial statement in which each item is expressed as a percentage of a significant total. Vertical analysis is especially helpful in analyzing income statement data such as the percentage of cost of goods sold to sales. Where horizontal analysis looked at one account at a time, vertical analysis will look at one YEAR at a time.
Financial statements that show only percentages and no absolute dollar amounts are common-size statements. All percentage figures in a common-size balance sheet are percentages of total assets while all the items in a common-size income statement are percentages of net sales. The use of common-size statements facilitates vertical analysis of a company’s financial statements.
The calculation for common-size percentages is: (Amount / Base amount) and multiply by 100 to get a percentage. Remember, on the balance sheet the base is total assets and on the income statement the base is net sales. The video showed an example using the balance sheet so we will look at Synotech, Inc.'s income statement with common-size percentages (calculations provided in last column).
|For year ended December 31|
|Net Sales||$10,498.8||100.0%||( 10,498.8|
|Cost of goods sold||5,341.3||50.9%||( 5,341.3|
|Gross profit||5,157.5||49.1%||( 5,157.5|
|Selling, general and admin expenses||3,662.5||34.9%||( 3,662.5|
|Other expense, net||112.6||1.1%||( 112.6|
|Interest expense||236.9||2.3%||( 236.9|
|Income before taxes||1145.5||10.9%||( 1,145.5|
|Income tax expense||383.5||3.7%||( 383.5|
|Net Income||762||7.3%||( 762|
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