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In this video, I explain vertical analysis of income statement (in Excel) by comparing the real income statements of Coca Cola and Pepsi.
What is vertical income statement analysis?
Vertical analysis is a top to bottom analysis of income statement where amounts for all line items in the income statement are converted to a percentage of a base amount (usually total revenue or Net Sales). This analysis is done to see the relative size of each type of income or expense with respect to the revenue (base).
When is Vertical Analysis used?
Vertical analysis of income statement can be used when trying to understand the size and significance of the components of income statement (hence reflected in percentage), and also to compare financial statements of difference companies either in the same or different industries, which may or may not be of similar size or revenue base. Converting amounts into percentage gives a particularly good idea for comparison, as you will see in the video above. Although Pepsi’s total revenue is more than double Coca Cola’s revenue, you can still compare the two income statements and analyze them to make informed decisions.
Vertical Analysis vs Horizontal Analysis
While vertical analysis looks at the components of income statements and their relative size, horizontal analysis looks at changes in the financial statements over a period of time. It is usually reflected in terms of year over year growth or decline.
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