Vertical Analysis - Definition
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What is Vertical Analysis?
Line items are the assets or liabilities reflected in a balance sheet. Assets (cash, accounts receivable, inventory, fixed assets) and liabilities (accrued liabilities, taxes payable, short-term debt, and long-term debt) can be analyzed using the vertical analysis method.
Vertical analysis is an evaluation of the percentage or size of a base figure (line item) in a financial statement. This analysis captures all the line items to show their relative sizes and proportions. A single line item is shown as a percentage of total line items in that category.
A Little More on What is Vertical Analysis
Many industries use vertical analysis to measure whether there is an improvement or setback in the performance. It also reflects how different companies in an industry contribute significantly to the growth and profit margin of the industry.
Example of Vertical Analysis
If a company has a gross sale amounting to $5 million in which $1 million represents the cost of goods sold, $2 million used for general expenses and a tax rate of 25%.
Below is how the income statement of that company will look like using vertical analysis method;
Gross sales= 100%
Cost of Goods Sold = 20% giving us a gross profit of 80%.
That is, ($5 million (100%) - ($1 million (20%) = $4 million (80%).
Further in the calculation; General and administrative expenses is $2 million (40%).
Operating income is $2 million (40%) Tax rate of 25% = 500,000 (10%) Hence, the Net income is $1.5 million (30%)
Academic Research on Vertical Analysis
- Analysis of small-business financial statements using neural nets, Kryzanowski, L., & Galler, M. (1995). Journal of Accounting, Auditing & Finance, 10(1), 147-170.
- Using XBRL to analyze financial statements, Tribunella, T., & Tribunella, H. (2010). The CPA Journal, 80(3), 69.
- Introducing XBRL through a financial statement analysis project, Gomaa, M. I., Markelevich, A., & Shaw, L. (2011). Journal of Accounting Education, 29(2-3), 153-173.
- Diversification, vertical integration, and industry analysis: New perspectives and measurement, Davis, R., & Duhaime, I. M. (1992). Strategic Management Journal, 13(7), 511-524.
- A multivariate study of the economy of the European Union via financial statements analysis, Serrano Cinca, C., Mar Molinero, C., & Gallizo Larraz, J. L. (2002). Journal of the Royal Statistical Society: Series D (The Statistician), 51(3), 335-354.
- Vertical trade relationships: the role of dependence and symmetry in attaining organizational goals, Buchanan, L. (1992). Journal of Marketing Research, 65-75.The Appearance And Development Of The Vertical Income Statement And Its Affect On Managerial Accounting, Gvemli, O. (2006, October). In International Conference on Accounting and Management Information Systems.
- Accounting data for value chain analysis, Hergert, M., & Morris, D. (1989). Strategic Management Journal, 10(2), 175-188.
- Earnings management and the financial statement analyst, Hall, S. C., Agrawal, V., & Agrawal, P. (2013). Accounting and Finance Research, 2(2), 105.
- A" vertical" analysis of crises and intervention: fear of floating and ex-ante problems, Caballero, R., & Krishnamurthy, A. (2001). National Bureau of Economic Research.
- A'Vertical'Analysis of Monetary Policy in Emerging Markets, Caballero, R., & Krishnamurthy, A. (2002).
- A vertical analysis of crises and central bank intervention, Caballero, R. J., & Krishnamurthy, A. (2001). Manuscrito, MIT, octubre.