What is vertical analysis in accounting?

Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item. For example, on an income statement, every line item is stated in terms of the percentage of gross sales.

Can a vertical analysis compare a line item's percentages?

However, it is important to remember that you can still use vertical analysis to compare a line item's percentages from one quarter or year to another. The main difference is that the percentages in a vertical analysis do not represent the percentage of change.

What is a horizontal financial analysis?

Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you're looking for a specific type of analysis. Be mindful that the gaps between each financial statement are consistent.

What are the disadvantages of using a vertical analysis method?

There are still disadvantages to using a vertical analysis method. Let’s take a look at some of the key ones: It does not provide a quality analysis of the financial statements due to the lack of consistency in the ratio of the elements Let’s say that Company X has gross sales of $500,000 and a cost of goods sold (COGS) of $100,000.