Certified Financial Management Specialist Practice Exam

What type of analysis would you use to assess the proportion of each item in a financial statement relative to a total amount?

1. Vertical analysis

2. Horizontal analysis

3. Trend analysis

4. Comparative analysis

The correct answer is: Vertical analysis

Vertical analysis is utilized to evaluate the relative size of each item in a financial statement compared to a total amount, which provides insights into the structure of the financial statements. This method expresses each item as a percentage of a base amount — for instance, each line item on the income statement may be presented as a percentage of total sales or revenues, while items on the balance sheet are typically shown as a percentage of total assets. This analysis is particularly useful for understanding the significance of each item within the financial record, allowing stakeholders to see how various components contribute to overall financial health. For example, if a company has a total revenue of $1 million and its cost of goods sold is $700,000, the vertical analysis would show the cost of goods sold as 70% of the total revenue, helping to clarify the direct relationship between these figures. Other types of analysis serve different purposes: horizontal analysis focuses on trends over time by comparing financial data from different reporting periods, trend analysis seeks to identify patterns in financial data over time based on historical performance, and comparative analysis involves comparing financial metrics between different entities or sectors. Each of these methods provides valuable insights, but for assessing the proportion of financial statement items relative to totals, vertical analysis is the most appropriate