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”)

4. 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.

5. 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.

6. 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

7. 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

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

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

10. Example of a Common Size Balance Sheets

12. Example of a Common Size Income Statements

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

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

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

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

17. The End