A technique for analyzing the relationships between the items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages is called:

Question

Options

• AVertical analysis
• BHorizontal analysis
• CFraction analysis
• DRatio analysis

• A
  81% (48)
• B
  10% (6)
• C
  3% (2)
• D
  5% (3)

Explanation

Vertical analysis expresses each line item on a financial statement as a percentage of a base figure - typically total revenue on the income statement or total assets on the balance sheet - allowing meaningful comparisons of component relationships within a single period.

Why the distractors are wrong:

• B (Horizontal analysis) compares figures across time periods (e.g., year-over-year change), not within a single statement as percentages.
• C (Fraction analysis) is not a recognized financial analysis term - it's a fabricated distractor.
• D (Ratio analysis) computes specific mathematical relationships between two figures (e.g., current ratio = current assets ÷ current liabilities), but doesn't express all components of a statement as percentages of a base.

Memory tip: Think "Vertical = View within" - you're reading down a single column of a statement, converting each item into a percentage of the whole. Horizontal = across time (left to right on a timeline).

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