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Vertical Analysis & Common Size Statements

Vertical Analysis & Common Size Statements. Dr Clive Vlieland-Boddy. Vertical Analysis. Analysing Financial statements by examining the information top down or bottom up. One year is looked at separately. It expresses items in %’s and not amounts.

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Vertical Analysis & Common Size Statements

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  1. Vertical Analysis &Common Size Statements Dr Clive Vlieland-Boddy

  2. Vertical Analysis • Analysing Financial statements by examining the information top down or bottom up. • One year is looked at separately. • It expresses items in %’s and not amounts. • It is NOT comparing year by year, although this can be done. • The main tool used is called “Common Sized Financial Statements”)

  3. Vertical Analysis • Analysing the financial data from both the Income Statement and Balance Sheet a year at a time. • Looking at the relationship of activity is to other items in the financial statement.

  4. Common-Size Statements Vertical analysis focuses on the relationships among financial statement items at a given point in time. A common-size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage.

  5. Common-size financial statements • Standardizing financial statements by introducing a common denominator • In a common-size balance sheet each component of the balance sheet is expressed as a percentage of total assets • In a common-size income statement each item is expressed as a percentage of sales

  6. Common-size financial statements (cont.) • Allow comparison of companies of different size (in terms of total assets and sales) • Allow (internal) structural analysis of the financial statements of a company • Relative magnitude of asset, liability, equity and income statement components • Combination of horizontal and vertical analysis

  7. Common-Size Statements In Balance Sheet, all items usually are expressed as a percentage of total assets.

  8. Common-Size Statements In the Income Statement, all items usually are expressed as a percentage of sales.

  9. Example of a Common Size Balance Sheets

  10. Example of a Common Size Balance Sheets

  11. Example of a Common Size Income Statements

  12. Common-Size Statements Sales is usually the base and is expressed as 100%.

  13. Common-Size Statements 2010 Cost ÷ 2010 Sales × 100% ( $360,000 ÷ $520,000 ) × 100% = 69.2% 2009 Cost ÷ 2009 Sales × 100% ( $315,000 ÷ $480,000 ) × 100% = 65.6%

  14. Common-Size Statements What conclusions can we draw?

  15. Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.

  16. The End

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