The________________ is useful for both, intra-firm comparisons over different years and inter-firm comparisons for the same year or for several years.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Vertical analysis
In vertical analysis (common size statements) every item is shown as a percentage of a common base, such as revenue from operations or total assets. Once the figures are on a common base, a firm can be compared with its own past years and with firms of a different size.
Why the other options are incorrect
Option (1) Horizontal analysis — Incorrect. It compares the same item over a number of years, so it works over time but not between firms of different size.
Option (2) Ratio Analysis — Incorrect. It relates one item of the statements to another, such as current assets to current liabilities. The sentence in the question describes common size statements; see the Note below.
Option (4) Cash Flow Analysis — Incorrect. It studies the movement of cash and cash equivalents, not comparison between years or firms.
Note: Ratios also help in both kinds of comparison, over a number of years for the same firm and between firms, so Option (2) can also look correct. But the question uses the sentence the textbook gives for common size statements, which it calls ‘Vertical analysis’, so the answer given by NTA is Option (3).
NCERT (2026-27 edition): |