Chapter 3, Problem 2ADM

A.

To determine

Vertical analysis:

Vertical analysis is the method of financial statement analysis, and it is useful in evaluating a company’s performance and financial condition. Vertical analysis is helpful for analyzing the changes in the financial statements over the time, and comparing the each item on a financial statement with a total amount from the same statement. In the vertical analysis, the financial statements are analyzed in the following manner:

• In vertical analysis of a balance sheet, each asset item is stated as a percent of the total asset, and each liability and owner’s equity item is stated as a percent of total liabilities and owner’s equity.
• In vertical analysis of an income statement, each item of revenue and expense is stated as a percent of total revenues of the business.

To prepare: The vertical analysis of CM Incorporation’s balance sheet.

B.

To determine

To interpret:  The vertical analysis with respect to the changes in the percent assets, liability, and stockholders’ equity.