Explanation

Vertical common-size analysis expresses each balance sheet item as a percentage of total assets (or total liabilities and equity). For Year 2:

• Total assets = $90 million
• Total liabilities = $36 million

To calculate the vertical common-size percentage for total liabilities:

$\text{Percentage} = \frac{\text{Total liabilities}}{\text{Total assets}} \times 100$

$\text{Percentage} = \frac{36}{90} \times 100 = 40\%$

Verification:

• Option A: 40% ✓ Correct
• Option B: 67% (This would be 36/54 × 100, which is incorrect - that's liabilities/net assets)
• Option C: 90% (This is simply the total assets value, not a percentage)

Key Concept: In vertical common-size balance sheet analysis, all items are expressed as a percentage of total assets (or total liabilities and equity). This allows for comparison of the relative composition of the balance sheet across different companies or time periods.