Outline Financial Statement Analysis

1850 Words May 31st, 2013 8 Pages
Chapter 13 … Analyzing Financial Statements

Chapter Outline

I. Basics of Analysis -- Transforming data into useful information for decision making.

A. Purpose of Analysis
To help users (both internal and external) make better business decisions.
1. Internal users (managers, officers, internal auditors, consultants, budget officers, and market researchers) make the strategic and operating decisions of a company.
2. External users (shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press) rely on financial statement analysis to make decisions in pursuing their own goals. 3. The common goal of all users is to evaluate:
a. Past and current performance.
b. Current
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III. Vertical Analysis -- Comparing financial condition and performance to a base amount. The analysis tools include:

A. Common-Size Statements -- reveal changes in the relative importance of each financial statement item. All amounts are redefined in terms of common-size percents.
1. Common-size percentage equals analysis amount divided by base amounts multiplied by 100.
2. Common-size balance sheets—base amount is usually total assets.
3. Common-size income statements—base amount is usually revenues.
B. Common-Size Graphics
Graphical analysis (e.g., pie charts and bar charts) of common-size statements that visually highlight comparison information.

IV. Ratio Analysis -- Using key relationships among financial statement items. Ratios organized into the four (items A through D below) building blocks of analysis:

A. Liquidity and Efficiency
1. Liquidity refers to the availability of resources to meet short-term cash requirement.
2. Efficiency refers to how productive a company is in using its assets. Efficiency is usually measured relative to how much revenue is generated for a certain level of assets.
3. Ratios in this block:
a. Working capital—the excess of current assets over current liabilities. b. Current ratio—current assets divided by current liabilities; describes a company 's ability to pay its short-term obligations. c. Acid-test ratio—similar to current ratio but focuses on
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