Financial Accounting Chapter 3

Charles_T._Horngren (2005) stated that “people perform financial analysis for different reasons, Supplier want to see if a customer can afford a price hike, Customers want to know if a company will still be around in a year to honor a warranty, Managers, creditors, investors, and the CEO’s all have their reasons for reading the statements, regardless of your interest in the company. Financial statement analysis involves using financial data to assess some aspect of a company’s performance” Horngren added ”Although many analysis methods exist, the cornerstone of financial statement analysis is the use of ratios”

The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.

Financial ratios are great indicators to find a firm’s performance and financial situation. Most of the ratios are able to be calculated through the use of financial statements provided by the firm itself. They show the relationship between two or more financial variables that can be used to analyze trends and to compare the firm’s financials with other companies to further come up with market values or discount rates, etc.

Ratio analysis: Perform trend and ratio analysis on current and fixed assets, current and long term liabilities, owner’s equity, sales revenues, EBIT, net income, and earnings per share. Project these trends

Ratio analysis with information from financial statements, cash flow statement and income statements provide investors and managers insight for company performance, issues, and efficiency. In other words, the intent of ratio analysis is to determine the financial position and financial trends of an organization (Andrijasevic, & Pasic, 2014). By analyzing the ratios, a manager can determine liquidity and solvency of the organization. Liquidity is the available resources that are cash or rapidly converted to cash. When something is “liquid,” the asset can be easily used for buying or selling, thus the utmost liquid asset is cash. Solvency refers to the organizations assets versus liabilities. Organizations that have solvency accrue profits that exceed their liabilities, thus a higher probability of covering the liabilities. However, a company that is high in

First, ratio analysis which is a method used to analyze financial statements in order to determine a business overall

Financial and non- financial ratios forms a key consideration when making investment decisions. Financial ratios reveal the financial viability of investing in the firm. The ratios specify the financial position of the company. The ratios can either explain the liquidity, profitability, or efficiency levels of the firm. They assist in comparing the economic performance of enterprises in the same industry. Therefore, investors rely on the ratios in making feasible investment decisions.

In corporate finance, both ratio and financial statement analysis are important tools that can be used in order to assess a company’s strength financially. They can be used in order to forecast a business’ prospective cash flow and ability to grow in the future, as well as a company’s strengths and weaknesses. Income statements, balance sheets, the statement of retained earnings, and the statement of cash flows are the four primary types of financial statements used in corporate finance. All of these financial statements serve to analyze a firm’s

Financial statement and ratio analysis is also used to drill down within the larger financial performance of the company as a whole to evaluate various divisions and product or service lines. These analyses are critically important as they are often used to enhance the firm’s credibility in the larger marketplace; assist in determining its own creditworthiness; and comparing its performance to that of potential competitors.

Ratios are used to interpret the financial situation and performance of the company differently depending upon who is assessing the information, what problem they are trying to solve, and/or what decision they trying to make.

The relationship between two variables is defined by ratios. When dividing the dollar amount of one item on a financial statement by the amount of another item on the financial statement a financial ratio is computed. Expressing the relationship of two variables for ease of comparison and interpretation of other information is the purpose of ratio analysis. A ratio analysis computation allows a look at a particular time period in a financial statement. Ratios present a true picture of a company’s financial health, which serves as a control. In analyzing a business one would want to know if enough funds are being generated, if there is a

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.

Ratio analysis is one of the methods used to construe financial information, they help to whittle down the vast amounts of information given in financial statements, to summarise the main points with a small number of ratios. There are a number of different ratios available which allows firms to select only the ratios which are most applicable to them. Ratios allow comparisons to be made within the company – for example from previous years or a ratio produced based on predictions or the budget that was set – to judge how well the company is performing at present, highlighting their strengths and weaknesses. However it is not only the present performance that a ratio can assess, they can also be used for identifying

Ratio is used as a yardstick for assessing the financial position and business performance of the organization. It is a helpful tool to analyze and produce a meaningful interpretation of financial statements. This technique helps in decision making process and finding out the relationship between different trends and ratios (Accounting- Managment , n.d).

Ratio Analysis is a powerful tool of financial analysis. The absolute figures that are reported in the financial statements do not provide an understanding of the financial well-being of the firm. Ratios help in creating a qualitative judgement about the financial position of the company by making use of quantitative relationships. The standards of comparison of the ratios involve comparing them with: