CFA Level I · CFA Level I Exam · Analyzing Balance Sheets
An analyst prepares a vertical common-size balance sheet for a manufacturer. Each line item is most likely expressed as a percentage of:
Each line item on a vertical common-size balance sheet is expressed as a percentage of total assets. This lets analysts compare the composition of the balance sheet across companies and periods. Using the prior-year balance would be a horizontal analysis, and revenue is the base for income statements.
- Atotal assetsCorrect
- Bprior-year balance of the same item
- Ctotal revenue for the period
Explanation
A vertical common-size balance sheet divides every item by total assets (equivalently total liabilities plus equity). Dividing by the prior-year balance of the same item gives a horizontal (growth) analysis. Revenue is the base for a common-size income statement.
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