Question

State whether the following is True or False:

Common size statements and financial ratios are the two tools employed in vertical analysis.

Answer 1

This statement is true.

Explanation:

Vertical analysis evaluates financial data within a single accounting period from top to bottom, using a common base figure of 100%. Common-size statements use this by expressing each item as a percentage of a common base, such as Total Assets or Revenue from Operations. Similarly, financial ratios establish a direct mathematical relationship between different items from the same year’s statements. Since both tools analyse financial data vertically within a single year, they are the two primary methods used in vertical analysis.