BUSINESS FACULTY

ACCOUNTING SCHOOL

ACADEMIC REPORT

Vertical Analysis Method

COURSE:
FINANCIAL ANALYSIS FOR DECISION-MAKING

AUTHOR:
SLVA CORI KRISTHIAN ANDRES

TEACHER:
JAVIER GARCIA MENDOZA

Tarapoto - Peru
(2023)
 INDEX

table of Contents
FINANCIAL ANALYSIS FOR DECISION-MAKING ....................................................................1
I. INTRODUCTION: ...................................................................................................................1
II. DEVELOPMENT: ...................................................................................................................2
Application in the income statement ............................................................................................2
Application in the balance sheet ......................................................................................2
Advantages and disadvantages .......................................................................................2
How to do vertical analysis of financial statements. .......................................................3
EXAMPLE: ..................................................................................................................................4
Current assets and liabilities: ........................................................................................................5
III. CONCLUSION: ...................................................................................................................5
IV. BIBLIOGRAPHICAL REFERENCES: ..............................................................................5
 I. INTRODUCTION:

In the business world, the analysis of financial statements is a fundamental tool to

evaluate the economic and financial situation of a company. Among the most used
analysis techniques, vertical and horizontal analysis stand out.
Vertical analysis is a crucial tool in the financial field that allows us to unravel the
financial structure of an entity and evaluate the proportion of each component with
respect to the total. This approach, also known as vertical percentage analysis, is
notable for its ability to reveal the relative distribution of financial elements in a
specific financial statement.
When diving into the essence of vertical analysis, it is essential to understand its
methodology. Instead of simply examining isolated numbers, vertical analysis
focuses on expressing each item as a percentage of the total. In this way, a more
holistic and detailed vision of the financial structure is achieved, allowing trends,
strengths and weaknesses to be identified.
This analysis is commonly applied to financial statements, such as the balance
sheet and income statement. By breaking down each item in percentage terms, it
facilitates comparison between different financial periods or between different
entities, regardless of their size.
On the balance sheet, vertical analysis reveals the proportion of assets, liabilities,
and equity in relation to the balance sheet total. This provides valuable information
about the financial strength, capital management and debt structure of the entity.
On the income statement, vertical analysis highlights the percentages of revenues,
costs and expenses in relation to total revenues. This approach is instrumental in
evaluating operational efficiency, profitability, and resource allocation.
As we immerse ourselves in the world of vertical analysis, it is revealed to be an
essential tool for financial analysts, managers, etc. It provides a clearer and more
detailed view of the financial composition of an entity, allowing informed and
strategic decisions to be made. In a single sheet, vertical analysis distills financial
complexities into significant percentages, revealing the true essence of an entity's
financial health.

1
 II. DEVELOPMENT :

Vertical analysis is a technique that allows evaluating the structure of a financial

statement, expressing each account as a percentage with respect to a base
account. This makes it easier to compare the composition of different companies,
regardless of their size.
This analysis is used to evaluate the investment structure of a company (Assets),
as well as to qualify the chosen financing sources (Liabilities).
Revealing the relative importance of shareholders and different types of creditors in
the financing of total assets. It is also used to analyze the internal structure of costs
and expenses.

In the Vertical Analysis, the total asset is taken as a percentage base (100%) and
the other accounts are taken as a percentage of said base. In the case of the Profit
and Loss Statement, net sales are considered as the reference base (100%) and
the other cost and expense accounts are expressed as a percentage of that base.
Application in the income statement

In the income statement, the vertical analysis is carried out taking net sales as the
base account. Thus, each item in the income statement is expressed as a
percentage of net sales, which allows evaluating the efficiency in generating profits
and analyzing the cost and expense structure.

Application in the balance sheet

In the balance sheet, vertical analysis is applied taking total assets and total
liabilities and equity as base accounts. By expressing each account as a
percentage, the proportions of the different assets, liabilities and equity can be
identified in relation to the total, facilitating comparison with other companies and
the identification of possible financial imbalances.

Advantages and disadvantages

Among the advantages of vertical analysis are its ability to compare companies of
different sizes and the ease of identifying key areas in the financial structure.
However, vertical analysis does not allow evaluating the company's evolution over
time, which could make it difficult to identify trends and changes in financial
performance.

2
How to do vertical analysis of financial statements.

As the objective of the vertical analysis is to determine how much each asset
account represents within the total asset, the account that you want to determine
must be divided by the total asset and then proceed to multiply by 100.
If the total asset is 500 and the available is 74, then we have (70/500) *100 = 14%;
That is to say, the available assets represent 10% of the total assets.
The formula is the following:

 Asset item/Total assets x 100.

Consequently, what is done is to determine what percentage of the total asset

each asset item represents, dividing the value of each item by the total asset.
One more example:
The company has assets of $80,000,000, and a portfolio of $20,000,000. What
percentage of the assets is represented in the portfolio?

 Total assets: $80,000,000.

 Portfolio: $20,000,000.

Applying the formula we have:

20,000,000/80,000,000 = 0.25, that is, 25%.
That is, the portfolio represents 25% of the company's total assets.

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EXAMPLE:

4
INTERPRETATION OF THE VERTICAL ANALYSIS OF THE BALANCE SHEET
Calculation and meaning
This analysis is done exclusively based on the percentage or vertical balances that
arise from dividing each of the active or passive accounts by their corresponding
totals. As an illustration, we divide the total Gs Cash account for the year 2010.
5,349 million for the Total Assets Gs. 30,631 million which gives us a percentage of
17.5%, which means that Cash has a 17.5% participation in the Total Assets and
this same calculation procedure is applied to each of the Asset or Liability
accounts.
Interpretation

Current assets and liabilities:

For 2009, Current Assets, which represent 59% of Assets, exceed Current
Liabilities, which represent 23% of Liabilities.
For 2010, Current Assets, which represent 61.5% of Assets, exceed Current
Liabilities, which represent 23% of Liabilities.
In both years, current assets exceed current liabilities by around 2.6 times, much
higher than the ideal coverage which should be around 1.5 to 2 times.

Permanent Resources:
On the other hand, in relation to permanent resources (long-term debts plus equity
capital), which in both years is around 77%, it greatly exceeds non-current or fixed
assets, which had a small decrease in their share in 2010 . leaving around 38.5%.

III. CONCLUSION:

Vertical and horizontal analysis of financial statements are essential tools in

evaluating the economic and financial situation of a company. Both analyzes are
complementary and allow us to identify areas of improvement, trends and risks in
financial management . The application of these methods in decision making can
contribute to the success and growth of a company in the long term.

IV. BIBLIOGRAPHIC REFERENCES:

http://repositorio.utmachala.edu.ec/bitstream/48000/14356/1/Cap.4%20Análisis
%20de%20estados%20financieros.pdf
http://ri.uaemex.mx/bitstream/handle/20.500.11799/107905/secme-4798_1.pdf?
sequence=1&isAllowed=y