Question

What is the typical base used in vertical analysis of a balance sheet?

Answer 1

Answer

The typical base vertical analysis of a balance sheet is also called the " Common-size" Balance Sheet.

Common-size Balance Sheet is a statement in which each asset is expressed as a percentage of total assets and each liability is expressed as a percentage to total equity and liabilities.

Total Assets or Total Equity and Liabilities are taken as 100 and all figures are expressed as a percentage of the total.

This Statement shows:

1) Asset, Equity, and Liabilities in absolute value.

2) Assets and LIabilities as a percentage of total assets or total equity and liabilities.

Objectives:

1) To analyze the change in an individual item of the Balance Sheet.

2) To observe the trend of different items of assets, equity, and liabilities.

3) To asses the relative financial position on the basis of common size Balance Sheet for different firms belonging to the same industries.

Note:

Above has been taken from the accounts book of higher secondary issued by ISC Council and written by "T.S. Grewal"