Stakeholders use financial statements to gather information about an organization and perform financial analysis. Common-size financial statements present all items in percentage terms. Balance sheet items are presented as percentages of assets, while income statement items are presented as percentages of sales.
Comparative financial statements present financial data for several years side by side. Data may be presented in the form of absolute values, percentages or both.
Vertical Common-Size Statements
A vertical financial statement is a type of common-size statement that expresses all values as percentages of the base value in the same year. Vertical analysis is most beneficial with income statements. Total sales figure is usually the base value (100 percent). Various expenses, such as cost of goods sold, advertising and administrative expenses, are expressed as percentages of total sales.
When used with balance sheets, vertical analysis shows how various balance sheet items (assets, liabilities, equity) relate to the total assets figure.
Because the analysis is performed from the top down, these financial statements are called vertical.
Horizontal Common-Size Statements
Horizontal financial statements are common-size statements that express values across different years as percentages of the base value in a given base year. Horizontal statements are used to compare balance sheet data as well as income statement data and evaluate how it changed over the course of several years. Because the analysis is performed across the rows of the statement, these financial statements are called horizontal.
Comparative Financial Statements
Comparative financial statements are also called year-to-year change statements. Comparative financial statements can use both absolute amounts and percentages to provide meaningful analysis. This type of analysis puts absolute changes and percentage changes in perspective. No changes can be computed if there is no base figure available and no meaningful change can be calculated if one figure is positive and the other is negative.
Common-size financial statements are very useful when comparing financial data between different companies and especially across different industries. Because of size, currency and other differences between financial statements, it may be difficult to gauge whether a certain figure is normal, too high or too low. Common-size analysis standardizes financial statements and allows for an effective comparison.