The Comparison Of A Company's Financial Condition And Performance To A Base Amount Is Known As:

The correct answer of this mcq is (e), as in Vertical Analysis each item / account in Income Statement or Balance Sheet is measured as percentage of base amount or figure. For example, in income statement, let’s say, the value of total revenues is the base amount and the each item in income statement is measured as a percentage of total revenues i.e., Cost of Sales / Total Revenues X 100. Similarly, on balance sheet, let’ s say, the value of total assets is the base amount, then each item on balance sheet is measured as a percentage of total assets i.e., Cash in Hand / Total Assets X 100.

Financial condition shows the position of total assets, total liabilities and total shareholders’ equity (Balance Sheet) on specified date of time while financial performance is measured by matching total revenues and total expenses during the current accounting period and such matching of total revenues and total expenses is showed by income statement.

The vertical analysis is very importance for Users of Accounting Information such as investors, shareholders, management, etc., to compare the Profitability between two companies within the fiscal period. For example, during the fiscal year 2024, if cost of sales of a company A is 30% of total revenue i.e., ($300,000 / $1,000,000 X 100) and gross profit is 70% of total revenue i.e., ($700,000 / $1,000,000 X 100) while the cost of sales of company B is 20% i.e., ($400,000 / 2,000,000 X 100) while gross profit is 80% i.e., ($1,600,000 / 2,000,000 X 100) then the investors should invest in company B as it has better vertical analysis related to the percentage of cost of sales and gross profit. Company B has the percentage of cost of sales (20%) which is lower than 30% of company A resulted in a better gross profit than company A. Similarly, company B has the percentage of gross profit (80%), which is higher than company by 10% in the fiscal year 2024.