Question

In vertical analysis, the same base is used across all financial statements analyzed. a base amount is optional. a base amount is required. the results of the horizontal analysis are necessary inputs for performing the analysis.

Answer 1

Vertical analysis is a method of financial statement anaylsis wherein a base amount is required based on which each line item is listed as a percentage of that base amount within the financial statement.

The correct answer is option C

So in the question asked,

> The first option 'the same base is used across all financial statements analyzed" is not correct as the financial statement comprises of the Income Statement, Balance Sheet and Cash Flow. So for each of this statement, the base amount cannot be same. For example, in income statement the base amount may be considered as sales.while assets may be considered as base amount in balance sheet.

> The second option "a base amount is optional" is incorrect as selecting the base amount is the most important thing to start with vertical analysis. To compare the financial statements over a period of time, ratio analysis is required. For comparing this, we need a percentage on the basis of something. So, the base amount is required

> The third option "a base amount is required" is correct. As in the earlier points mentioned, setting the base amount is the first step based on which the analysis can be done.

> The fourth option "the results of the horizontal analysis are necessary inputs for performing the analysis" is incorrect as it is a different analysis of financial statements over time. Vertical analysis is independent analysis for which the inputs are not required.