Vertical analysis shows all items of an income statement as a percentage of gross sales and all items on a balance sheet as a percentage of total assets.
When a business increases or decreases in size, a common size statement can help you make rational comparisons. For example, in 2016 ABC Company had $40,000 in sales expense which was 15% of total sales. In 2017 they had $60,000 in sales expense, but it was still 15% of sales. At first glance someone might think the company was spending too much in sales expense 2017, but when they do the percentages it is easy to see the increase in dollars is in proportion to the sales growth.
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