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.
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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).
Synotech,
Inc. |
|
Income
Statement |
|
For year ended
December 31 |
|
Net Sales |
$10,498.8 |
100.0% |
(
10,498.8 |
10,498.8 ) |
Cost of goods sold |
5,341.3 |
50.9% |
(
5,341.3 |
10,498.8 ) |
Gross profit |
5,157.5 |
49.1% |
( 5,157.5 |
10,498.8 ) |
Selling, general and admin expenses |
3,662.5 |
34.9% |
( 3,662.5 |
10,498.8 ) |
Other expense, net |
112.6 |
1.1% |
( 112.6 |
10,498.8 ) |
Interest expense |
236.9 |
2.3% |
( 236.9 |
10,498.8 ) |
Income before taxes |
1145.5 |
10.9% |
( 1,145.5 |
10,498.8 ) |
Income tax expense |
383.5 |
3.7% |
( 383.5 |
10,498.8 ) |
Net Income |
762 |
7.3% |
( 762 |
10,498.8 ) |
What does this common-size percentage tell you
about the company? Since we use net sales as the base on the income
statement, it tells us how every dollar of net sales is spent by
the company. For Synotech, Inc., approximately 51 cents of every
sales dollar is used by cost of goods sold and 49 cents of every
sales dollar is left in gross profit to cover remaining expenses.
Of the 49 cents remaining, almost 35 cents is used by operating
expenses (selling, general and administrative), 1 cent by other and
2 cents in interest. We earn almost 11 cents of net income before
taxes and over 7 cents in net income after taxes on every sales
dollar. This is a little easier to understand than the larger
numbers showing Synotech earned $762 million dollars.
The same process would apply on the balance sheet
but the base is total assets. The common-size percentages on the
balance sheet explain how our assets are allocated OR how much of
every dollar in assets we owe to others (liabilities) and to owners
(equity). Many computerized accounting systems automatically
calculate common-size percentages on financial statements.
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- Accounting Principles: A Business Perspective. Authored
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H. Hermanson, Georgia State University. Provided
by: Endeavour International Corporation.
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- Financial Statement Analysis: Vertical Analysis - Financial
Accounting video . Authored by: Brian Routh
TheAccountingDr. Located at: youtu.be/OT1BVZPNfks.
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