Which statement correctly distinguishes vertical analysis from horizontal analysis?

• A. Vertical analysis is a means of measuring the relationship between any two different financial statement amounts, whereas horizontal analysis examines the relationship between specific financial statement ratios.
• B. Vertical analysis expresses the percentage of component items to a base item, while horizontal analysis analyzes the percentage change in individual financial statement line items from one accounting period to the next.
• C. Vertical analysis compares items on one financial statement to items on a different financial statement, while horizontal analysis compares items on the same financial statement.
• D. Vertical analysis compares the performance of a parent company to its subsidiary, while horizontal analysis compares different companies across an industry.

Answer: (B)

Vertical analysis expresses each line item as a percentage of a base figure in the same period, helping you see the relative size of components. For example, on the income statement you express every item as a percent of net sales, and on the balance sheet you express items as a percent of total assets. Horizontal analysis, by contrast, looks at how those line items change over time, typically as a percentage change from one period to the next, to reveal trends and growth patterns.

This combination is what the correct statement captures: vertical analysis uses a base item to derive percentages within a single period, while horizontal analysis focuses on percentage changes across periods. The other options mix up these ideas or bring in unrelated comparisons, such as comparing items across different statements, ratios, or between a parent and subsidiary, which are not the definitions of vertical or horizontal analysis.