Fixed Assets in Vertical Analysis
Fixed assets form a major part of the assets that any company necessarily needs to carry its long term survival by generating profit through increased sales. Unless the company takes adequate steps for managing its resources, it won’t be able to reach planned goals and is quite likely to end up spending more than allotted funds on non-essential and non-productive goods and activities. Financial mangers employ different techniques, which also include vertical analysis, for reviewing how the business is performing and how effectively fixed assets are being put to use.
These are the assets and resources that a business uses for generating money and thus keeps itself financially viable for long time. Accounting terminology frequently refers to fixed assets as ‘long term resources’ and ‘tangible assets.’ Some of the very common examples of fixed assets would be land and building, machines required for manufacturing, computers and other office equipment etc. These resources, when put together, help the company to produce goods efficiently and economically, bring in sophisticated manufacturing techniques thus generating more money for business. Economy of manufacturing is achieved when a company saves money on manufacturing expenses by producing goods on a mass scale.
A system of financial study, wherein one item is chosen as the yardstick for comparing the rest of financial accounts with respect to that, is called vertical analysis. Usually, the numerical yardstick is one component of some financial statement. It could be a revenue item or an expense. Choosing one specific account doesn’t essentially imply any logical bias towards other accounts. Accounting mangers just select a yardstick as per operational convenience, keeping in mind the rationale of evaluation. For instance, the manger may choose total sales for carrying of vertical analysis of heads like cost of materials, wages and net income. The purpose is to examine how other connected items change with respect to sales.
Though vertical analysis and fixed assets point out different things, these could interconnect the operational aspects of a company. For instance, the chief executive may ask financial manager to weigh the movements of items in balance sheet, keeping resources as a benchmark. So, the manager would calculate the amount of money spent by the company towards fixed assets, the funds used for assets like stocks and goods and the ratio of intangibles and present assets to the fixed resources. Trademarks and patents form intangibles or intangible assts.
Other Operating Assets
Apart from fixed assets, companies use other resources for their operations for making additional money as well for successfully dealing with competitors. These comprise of short term assets as also intangible assets. Current resources range from cash plus operating expenses to goods and marketable securities like bonds and stocks.
Apart from vertical analysis, horizontal analysis is also significant for financial analysis. For conducting horizontal analysis, historical data gets more prominence. For instance, financial manger may conduct horizontal analysis of records of five years by choosing figures of Year 1 as the yardstick for comparing performance from Year 2-Year 5 on the basis of performance of Year 1.