Certified Financial Management Specialist Practice Exam

Vertical analysis is primarily used to analyze what?

1. Cash flows

2. Income over multiple periods

3. Proportions of line items within financial statements

4. Changes in equity over time

The correct answer is: Proportions of line items within financial statements

Vertical analysis is primarily used to analyze proportions of line items within financial statements. This method allows users to express each item in the financial statement as a percentage of a base figure, which provides insight into the relative size of various accounts. For instance, in an income statement, each expense can be shown as a percentage of total revenue, allowing for easy comparison across different periods or among various companies regardless of their size. By employing vertical analysis, financial analysts can quickly identify trends in how resources are allocated and how expenses relate to revenues. This can be particularly useful, for example, in understanding the cost structure of a business or evaluating how efficiently it is operating. Additionally, it simplifies the analysis of financial statements for stakeholders who may need to gauge financial health and operational efficiency at a glance.