Vertical Analysis basically relies on the relationships among financial statement

within a time in which each financial statement items are expressed as a percentage. In

case of balance sheet, each item is expressed in a percentage of total assets whereas, in

income statement, each item is expressed as a percentage of sales. The percentages can be

compared with the past years percentages.

The vertical analysis is important as it helps to remove the element of inflation

and also enables the comparison of the efficiency of large companies. . A vertical

analysis is excellent at showing what is happening within the financial statements of a

company.

Percentage of base= Amount of individual item/Amount of base*100

Balance Sheet of XYZ Company

Assets 2012 2011 2012% 2011%

Current assets 550,000 533,000 48.3% 43.3%

Long-term investment 95,000 177500 8.3% 14.4%

Plant assets 444,500 470000 39% 38.2%

Intangible assets 50,000 50000 4.4% 4.1%

Total assets 11,39,500 12,40,600 100% 100%

Income Statement of XYZ Company

2011 2012 2011% 2012%

Sales $500000 $535000 100% 100%

Cost of Goods Sold $130000 $133,250 26% 24.9%

Gross Profit $370,000 $401,750 74% 75.1%

 Salaries $85,000 $87,000 17% 16.26%

Rent $30,000 $30,000 6% 5.6%

Marketing $20,000 $20,000 4% 3.74%

Others expenses $87,00 $10,000 1.7% 1.8%

Total expenses $143,700 $147,000 28.7% 27.4%

Net Income 226,300 $254,750 45.3% 47.7%

Cost of goods sold:

2012: (133,250/535,000) 100 = 24.9%

2011: (13,0000/500,000) 100 = 26%

Hence, the vertical analysis shows that in 2011, the XYZ company's product cost

74%. However, in 2012, the cost of sales gradually increased by 75.1% of sales.

Reference:

Wester field, R. W. (2012). Corporate finance (10th ed.). New York: McGraw-Hill.

Bodie, Z., Kane, A. & Marcus, A.J., Investments, 9th edn, McGraw-Hill, New York,

2011.