Question

When vertical analysis is performed, what happens?

1) Ratios are used to detect fraud.
2) Changes in significant balance totals are examined.
3) Financial statement balances are converted to percentages.
4) Total revenues are compared to total expenses.

Answer 1

Vertical analysis is performed by converting financial statement balances to percentages in order to compare different components and identify trends over time.

Step-by-step explanation:

When vertical analysis is performed, financial statement balances are converted to percentages. This allows for a comparison of different components of the financial statements and the identification of trends over time.

For example, if a company's total assets increase by 10% from one period to another, vertical analysis can show how each individual asset account contributes to this overall increase.

Vertical analysis is not used to detect fraud or compare revenues and expenses.