Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 69

VERTICAL ANALYSIS

The basic financial statements illustrated in this and the preceding chapter are primary

sources of information that financial analysts and other stakeholders use in evaluating

a company’s performance. In Chapter 1, we illustrated horizontal analysis as one

method of analyzing financial performance. Another method of analyzing comparative

financial statements is to compute percentages of each item within a statement to a

total within the statement. These percentages can then be compared

across years. This type of analysis is called vertical analysis.

In vertical analysis of the balance sheet, each asset item is stated as

a percent of the total assets. Each liability and stockholders’ equity item

is stated as a percent of total liabilities and stockholders’ equity. To il-

lustrate, Exhibit 9 shows comparative balance sheets for Wm. Wrigley

Jr. Company, using vertical analysis.^3

Exhibit 8

Family Health Care Integrated Financial Statements for October

Family Health Care

Balance Sheet

October 31, 2007

Assets  Liabilities  Stockholders’ Equity

Notes Capital Retained

Cash  Land  Payable  Stock  Earnings

••••

••••

••••

$7,320 12,000 $10,000 $6,000 $3,320

$19,320 $19,320

Total Assets  Total Liabilities Stockholders’ Equity

Family Health Care

Statement of Cash Flows

For the Month Ended Oct. 31, 2007

Operating act. $ 3,220

Investing act. 0

Financing act. (1,000)

Increase in cash $ 2,220

Cash, Oct. 1 5,100

Cash, Oct. 31 $ 7,320

Family Health Care

Retained Earnings Statement

For the Month Ended Oct. 31, 2007

RE, Oct. 1 $ 1,100

Net income 3,220

Dividends (1,000)

RE, Oct. 31 $ 3,320

Family Health Care

Income Statement

For the Month Ended Oct. 31, 2007

Revenues $6,400

Expenses 3,1 80

Net income $3,220

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6

3 These financial statements have been adapted, based upon Securities and Exchange Commission filings.

Describe and illustrate how
vertical analysis can be
used to analyze and
evaluate a company’s
performance.

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