Vertical common-size analysis of financial statements explanation, example

income statement vertical analysis

Converting amounts into percentage gives a particularly good idea for comparison, as you will see in the video above. Although Pepsi’s total revenue is more than double Coca Cola’s revenue, you can still compare the two income statements and analyze them to make informed decisions. A closer look into vertical analysis in fig shows the distribution pattern of liabilities among current liabilities, long – terms liabilities and equity capital. Similarly, it shows the distribution pattern of total asserts among current asserts, fixed assets and other asserts. If a company’s inventory is $100,000 and its total assets are $400,000 the inventory will be expressed as 25% ($100,000 divided by $400,000). If cash is $8,000 then it will be presented as 2%($8,000 divided by $400,000). If the accounts payable are $88,000 they will be restated as 22% ($88,000 divided by $400,000).

income statement vertical analysis

There are several reasons why using vertical analysis can be advantageous for your business. Datarails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before. The same process applied to ABC Company’s balance sheet would likely reveal further insights into how the company is structured and how that structure is changing over time. With the previous year’s statement and analyzing the period’s profit or loss. Always looks at the amount from the financial statement over the horizon of many years. By converting each number by the sales number for the year, comparing the line items over the years is easy. Note that rounding issues sometimes cause subtotals in the percent column to be off by a small amount.

Vertical Analysis of Balance Sheet

This would mean that the ratio of years 1, 2, and 3 to year one would be 100%, 97%, and 94%, respectively. In this example, the business’s variable expenses have trended downward over the three-year period.

  • As you can see in Figure 13.5 “Common-Size Income Statement Analysis for “, Coca-Cola’s gross margin as a percent of net sales decreased from 2009 to 2010 (64.2 percent versus 63.9 percent).
  • We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to 2nd year.
  • Again, keep in mind that these examples only become an issue if they occur consistently over several accounting periods, which is why it’s so important to perform vertical analysis regularly.
  • 27.9%On the comparative balance sheet, the amount of each line item is divided by total assets.
  • They can use them internally to examine issues such as employee performance, the efficiency of operations and credit policies.
  • On the other hand, horizontal analysis looks at changes in specific dollar amounts for each period, highlighting the changes line-by-line over two specific accounting periods.

For a business owner, information about trends helps identify areas of wide divergence. Vertical Analysis – compares the relationship between a single item on the Financial Statements to the total transactions within one given period.


You can see how much debt your company holds in proportion to its assets and how short-term debt directly compares to short-term assets. The higher the proportion of short-term assets, the stronger vertical analysis formula your company’s working capital position and its ability to meet its near-term obligations. Balance sheets show all the assets, liabilities, and equity of a company at a particular time.

How do you calculate horizontal analysis of an income statement?

  1. The overall growth has been relatively higher in the year 2018 compared to that of the year 2017.
  2. Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

For example, if the cost of goods sold has a history of being 40% of sales in each of the past four years, then a new percentage of 48% would be a cause for alarm. It is also useful in comparing a company’s financial statement to the average trends in the industry. It would be ineffective to use actual dollar amounts while analyzing entire industries. Common-size percentages solve such a problem and facilitate industry comparison. Similarly, in a balance sheet, every entry is made not in terms of absolute currency but as a percentage of the total assets.

Tools for Financial Measurement

But on this page you have not given the vertical analysis of current assets section and the statement of retained earnings. Vertical analysis is the comparison of various line items within a single period. It compares each line item to the total and calculates what the percentage the line item is of the total. It can be done with the company’s Financial Statements or with the use of the Common Size Statements.

However, as you will learn in this chapter, there are many other measures to consider before concluding that Coca-Cola is winning the financial performance battle. As you can see from Figure 13.6 “Common-Size Balance Sheet Analysis for “, the composition of assets, liabilities, and shareholders’ equity accounts changed from 2009 to 2010. Vertical analysis, horizontal analysis and financial ratios are part of financial statement analysis. The vertical analysis of a balance sheet results in every balance sheet amount being restated as a percent of total assets. Vertical analysis provides the percentage size of each item of the financial statement, which makes a comparison between different companies very easy. Vertical analysis includes the presentation of each item of a financial statement as a percentage of the base item.

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