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Income Statement Analysis: How to Read an Income Statement

Vertical Analysis Of Income Statement

Vertical analysis makes it much easier to compare the financial statements of one company with another, and across industries. This is because one can see the relative proportions of account balances. One disadvantage of vertical analysis is that it does not give any indication of absolute values. For example, if two companies have very different sized businesses, then their financial statements will look very different when expressed as percentages.

  • Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time.
  • 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.
  • The information provided by this income statement format is useful not only for spotting spikes in expenses, but also for determining which expenses are so small that they may not be worthy of much management attention.
  • For each account on the income statement, we divide the given number by the company’s sales for that year.
  • Using Layer, you can also automate data flows and user management, gathering and updating the data automatically, carrying out the analysis, and sending out customized reports.

A vertical analysis is one way to make sense of your company’s finances, and you can use it to make decisions about the direction you take your business in. Identifying your base figure gives you a bottom line for comparison, and comparing each line item to this figure can help you identify any potential areas of weakness or strength. This can be paired with horizontal analysis to help you recognise trends and maximise profits through efficient, data-based strategies. Vertical analysis is a handy tool and a popular method for comparing financial statements. When using this alongside horizontal analysis, you can get a full picture of a company’s financial position. While vertical analysis is a great tool for analyzing your current financial position, horizontal analysis is better for spotting trends between two accounting periods.

Vertical (common-size) analysis of financial statements – explanation, example | Accounting For Management

The base figure can be either the total of all items in the financial statement or some other reference point, such as total assets. Vertical analysis is useful for single accounting period analysis, while horizontal analysis is used to compare company performance between two specific accounting periods, whether it’s quarterly or annually. In the above example, we’re comparing company performance for 2021 and the previous year, which was 2020. The vertical method is used on a single financial statement, such as an income statement.

Vertical Analysis Of Income Statement

Vertical analysis is a financial statement analysis technique that shows how each line item on a company’s income statement or balance sheet compares to a base figure. The most common form of vertical analysis is called common-size analysis. In this example of vertical analysis, you can see that Vertical Analysis Of Income Statement you only need to use balance sheet items from a single accounting period. While we’re only showing account balances for assets on this vertical analysis, the same process would be completed for your liability accounts, with your total liabilities and equity serving as your baseline number.

Other uses and benefits of a vertical analysis

It is a management tool used by companies in analyzing the changes in the relative size of different accounts over several years. It is also helpful in comparing the financial statements of two companies with the industry average. Vertical analysis refers to the comparative analysis of the financial statement in which each line item is represented as a percentage of the base item. The items on the income statement are presented as a percentage of total revenue, and the items on the balance sheet are presented as a percentage of total assets or total liabilities. The vertical analysis of the cash flow statement is made by showing each cash outflow and inflow as a percentage of the total cash inflows. The items on the income statement are presented as a percentage of total revenue, and the items of the balance sheet are presented as a percentage of total assets or total liabilities.

The vertical analysis of cash flow statement is made by showing each cash outflow and inflow as a percentage of the total cash inflows. It’s frequently used in absolute comparisons, but can be used as percentages, too. Vertical analysis can be used with both income statements and balance sheets, with every line item on the financial statement entered as a corresponding percentage of the base item. Vertical analysis is typically used for a single accounting period, whether that’s monthly, quarterly, or annually, and can be particularly helpful when used to compare data for several accounting periods. Cash in the current year is $110,000 and total assets equal $250,000, giving a common-size percentage of 44%. If the company had an expected cash balance of 40% of total assets, they would be exceeding expectations.


As it indicates the relative proportion of accounts, it is useful in identifying the cost centers that witness a sudden spike to negatively impact the profitability of a company. For example, the amount of cash reported on the balance sheet on Dec. 31 of 2018, 2017, 2016, 2015, and 2014 will be expressed as a percentage of the Dec. 31, 2014, amount. Cost Of Goods SoldThe Cost of Goods Sold is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.

  • To complete a vertical analysis for your balance sheet, you’ll need to perform this calculation for each line item that is currently listed on your balance sheet.
  • This would mean that the ratio of years 1, 2, and 3 to year one would be 100%, 97%, and 94%, respectively.
  • This could be useful in identifying areas where a company may be able to cut costs without affecting its overall bottom line too much.
  • The first column of each statement should present Klein’s common-size statement, and the second column, the industry averages.
  • Horizontal and vertical analysis are two types of analysis you can do that use simple mathematical formulas.

ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities. Let us see the example of vertical analysis of Colgate’s Income Statement.

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