Accountants use vertical analysis to review financial results of individual companies. Vertical analysis restates all numbers as percentages. By restating the financial statement numbers as percentages, the accountant can compare companies of different sizes. These companies use vertical analysis to benchmark their results and to compare the company's performance throughout periods of growth. Vertical analysis requires the accountant to identify which number to use as the base amount and to know how to calculate the percentage.
1. Identify the base amount to use on the financial statement. The base amount represents the total amount, or 100 percent. On the income statement, the base amount refers to a company's total sales, and on the balance sheet the base amount refers to the total assets.
2. Determine which account you need to calculate the percentage of. Some accountants review specific accounts, while others review all accounts on the financial statement.
3. Divide the dollar amount of the specific account by the base amount. This provides the percentage of the base amount.
4. Compare the percentage of the same account over several years. This allows you to see how the account changes over time in relation to the base amount. For example, to calculate the percentage of labor from the base amount, divide the total labor dollars by the total sales. If this percentage decreases over several years, the revenue is increasing faster than the labor expense.
- Use a spreadsheet program to calculate the percentage of the base amount for several accounts at one time. Enter a formula to calculate the percentage of the first account listed. Copy this formula to the remaining accounts.
- If you use the percentages to benchmark, choose companies operating in similar industries. These companies use similar automation techniques and experience similar working conditions.
- Financial analysis involves using a variety of tools to review financial statements, and percentage calculation represents one tool. When you review financial results, include a variety of analytical tools, such as vertical analysis, horizontal analysis and financial ratio calculation.
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