financial statement item that is used as a base value. All other accounts on the financial statement are compared to it. In the balance sheet, for example, total assets equals 100%. Each asset is stated as a percentage of total assets.Similarly, total liabilities and stockholders' equity are assigned 100% with a given liability or equity account stated as a percentage of the total liabilities and stockholders' equity. For the income statement, 100% is assigned to net sales with all revenue and expense accounts related to it. Under vertical analysis, the statements showing the percentages are referred to as COMMON SIZE FINANCIAL STATEMENTS. Common size percentages can be compared from one period to another to identify areas needing attention. An illustration follows:

Net Sales                                   $300,000                           100%
Less: Cost of Sales                        60,000                             20%
Gross Profit                                $240,000                             80%
Less: Operating Expenses            150,000                             50%
Net Income                                 $ 90,000                             30%