Common size analysis is a financial analysis tool that involves expressing financial statement items as percentages of a base item, which allows for comparison with other companies or periods. This technique is particularly useful for analyzing trends over time and understanding the relative importance of different financial statement components.
In accountancy, common size analysis is referred to as Vertical Analysis. This name is derived from the method's approach of analyzing a single period's financial statements to express each line item as a percentage of a total base figure within the same statement. For instance, in a common size income statement, each expense and revenue line item is presented as a percentage of total sales.
Option
Description
Horizontal Analysis
Examines financial statement data over multiple periods to identify trends.
Vertical Analysis
Expresses each item in a financial statement as a percentage of a base figure within the same period. Also known as common size analysis.
Cash Flow Analysis
Analyzes the cash inflows and outflows over a period.
Ratio Analysis
Uses various financial ratios to assess a company's performance and condition.
Given these options, the correct answer is Vertical Analysis.