Vertical Analysis

Vertical Analysis

Introduction

The vertical analysis is a method that is used to analyze the financial statements in which each item are included in the financial statements and it is represented as a percentage of a single item that is large in number. It is a method that is related to the analysis of the financial statement in which each single entry has three main accounts' categories such as assets, liabilities and equities in the balance sheets and it is represented as the total account's proportion. There is an advantage that is associated with the vertical analysis that the balance sheet of enterprises of all sizes can able to compare easily. It also makes it easy for finding the relative changes based on yearly within one particular business (McGuire & Staelin 1983, p.161-191).

The vertical analysis method may be used with both the financial statements; income statements and balance sheets by comparing the large amounts based on monetary and making the actual sense related to the data. There are certain advantages of the vertical analysis that it is used for the purpose of comparison between the different sizes of companies within the same industry and it is far easier to prepare (McGuire & Staelin 1983, p.161-191). The vertical analysis also enable a company for weighing its present reports against particular reports as compared from past as well as revealing past and possible areas and trends that are needed for the improvement.

The raw data that are highlighted in the financial statement may be indicated as meaningless without having certain benchmarks in which the comparison is possible with certain numbers. The vertical analysis solves this issue by enabling and relating all the balance sheet's items into a single item and it forms the common-size balance sheet. As compared to other statements, the common-size balance sheets are easily comparable as well as to older financial statements within in the single company.

Any business is able to identify its strengths, weaknesses as well as trends by using the vertical analysis. For example, there is an XYZ company that might spot a trend in which the accounts receivable level may go to rise while the cash level may go towards decline. This type of situation indicates the inefficiency regarding the methods of collection.

It allows the decision makers at a company to pinpoint exactly by analyzing an income statement regarding how each currency or amount is distributed among expenses and costs as well as yielding a complete financial picture (Caballero & Krishnamurthy 2001, p.23-42).

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Vertical Analysis of Emeritus Corp. (NYS: ESC)

This vertical method is adapted that involves the amount from financial statements and reporting for many long time. The previous year that is designated to be known as the base year and the following years are indicated in terms of percentage of the amounts of base year. This make it easy for the analyst for monitoring the trends in which all amounts are highlighted in terms of percentage of the amounts regarding the base year that are used in ...