Vertical Analysis – Balance Sheet Analysis

Analysts usually begin with a review of the firm’s assets, as well as its liabilities and owners’ equity. This review begins with the preparation of a common-size balance sheet, which shows the percentage component of each major section to the grand totals on each side of the balance sheet. This analysis is called vertical analysis, or vertical percentage analysis, because it is based on the percentage relationship of each line in the balance sheet to the total. Figure 2.1 in the section “Elements of the Balance Sheet” has been revised as Figure 2.4 showing the vertical percentages for each account on the balance sheet. These percentages are calculated by dividing each line by the total assets ($2,057,000). Note that either total assets or total liabilities plus owners’ equity can be used as the denominator for this calculation because the number is the same ($2,057,000).

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