Vertical (common-size) analysis of financial statements

Vertical analysis (also known as common-size analysis) is a popular method of financial statement analysis that shows each item on a statement as a percentage of a base figure within the statement.

To conduct a vertical analysis of balance sheet, the total of assets and the total of liabilities and stockholders’ equity are generally used as base figures. All individual assets (or groups of assets if condensed form balance sheet is used) are shown as a percentage of total assets. The current liabilities, long term debts and equities are shown as a percentage of the total liabilities and stockholders’ equity.

To conduct a vertical analysis of income statement, sales figure is generally used as the base and all other components of income statement like cost of sales, gross profit, operating expenses, income tax, and net income etc. are shown as a percentage of sales.

In a vertical analysis the percentage is computed by using the following formula:

vertical-analysis-formula

A basic vertical analysis needs an individual statement for a reporting period but comparative statements may be prepared to increase the usefulness of the analysis.

Example:

An example of the vertical analysis of balance sheet and income statement is given below:

Comparative balance sheet with vertical analysis:

Current assets:

2008: (550,000 / 1,139,500) × 100 = 48.3%
2007: (530,000 / 1,230,500) × 100 = 43.3%

Comparative income statement with vertical analysis:

Cost of goods sold:

2008: (1,043,000/1,498,000) × 100 = 69.6%
2007: (820,000/1200,000) × 100 = 68.3%

Vertical analysis states financial statements in a comparable common-size format (percentage form). One of the advantages of common-size analysis is that it can be used for inter-company comparison of enterprises with different sizes because all items are expressed as a percentage of some common number. For example, suppose company A and company B belong to same industry. A is a small company and B is a large company. Company A’s sales and gross profit are $100,000 and $30,000 respectively whereas company B’s sales and gross profit are $1,000,000 and $300,000 respectively. If vertical analysis is conducted and sales figure is used as base, it would show a gross profit percentage of 30% for both the companies as shown below:

Company A and B
Comparative Income Statement
For the year ended…….
Company A Company B
Sales 100,000 100% 1,000,000 100%
Cost of goods sold 70,000 70% 700,000 70%
——— ———–
30,000 30% 300,000 30%
——— ———–
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28 Comments on Vertical (common-size) analysis of financial statements

  1. Rana

    Thank you for the very useful services you are providing, it is really appreciable.

  2. Accounting for Management

    Your are welcome.

  3. Masters in Commerce

    You have presented the horizontal analysis of current assets section and statement of retained earnings on horizontal analysis page. But on this page you have not given the vertical analysis of current assets section and the statement of retained earnings.

    Also I cannot find any exercise or problem about vertical analysis in exercises and problems section of your website. Are you still preparing it?

  4. Accounting for Management

    We are working, will be available soon. Please check back again in a month.

  5. shan burton

    This was tremendously helpful. Looking forward to more. Thank you.

  6. Bob

    Very helpful. What do you do for cashflow statements vertical analysis?

  7. Zeest

    What are some advantages and disadvantages of this analysis technique? Thanks in advance.

  8. Meze

    Thanks. Very useful

  9. rachel

    My exam is in 2 days and i was looking for a formula to solve vertical analysis and this information is so useful and helped me to understand more. Thank you so much!!

  10. Mackline

    Totally helpful. looking forward for more insights.

  11. Amudha

    WAS TOO GOOD ..APPRECIATION

  12. leona

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  13. Robbie

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  14. Amgd hamdy

    Thank you for this useful info. It is my first participation in this website but will not be the last one 🙂

  15. H.farhan

    How can I calculate the vertical analysis for ratios?! What would be my base

  16. Mahendra

    It was very informative, thanks

  17. mj

    it is useful information with horizontal format but please update this article along with vertical format because it’s new corporate trend of presenting accounting statement ..

  18. sadil

    thnx a lot 4 sharing useful infos and rendering apreciable sevices keep it up…… stay bless

  19. khushdeep arora

    It was very informative, thanks

  20. allyza

    Was the Sales are always a 100%? In Statement of Income. What formula will be used as the based year? The Total assets or the Sales? In horizontal analysis if the given problem was from Year 1-5 (multiple year)??

  21. allyza

    What if the problem are comparing more than 2 years? If it was a multiple years comparison using the horizontal analysis in Statement of Income? How come? What formula will I’ll be using to this?

  22. pogi

    it is very heplful , thank you so much 🙂

  23. Wahid Safi

    It is very helpful,and really help me,the way utilized for BBA lecture course.

  24. ayush

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  25. chai

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    helpful. Godbless.

  26. Loretta

    Thank you so much for this information. Its very helpful

  27. zara shahid

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