Paper Ratio and Financial Statement Analysis

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Benefits and Limitations of Ratio and Financial Statement Analysis July 25, 2013 MGMT640 Executive Summary 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…show more content…
For a firm, such as Microsoft, its revenue would come from products such as the computers, phones, tablets, and software it sells to consumers. On the other hand, for a consulting firm, such as Accenture, revenues would stem from the fees it charges for its consulting services contracts with various government agencies around the world. Both companies are providing a product to a consumer, one simply happens to be a tangible product that people buy, while the other is a service product that agencies need for their functionality. Expenses are the costs a firm incurs while generating its revenues (Parrino, 2011). For Microsoft, expenses would stem from the costs of building its products, marketing them, developing new products, shipping them around the world, etc. For Accenture, expenses would stem from the cost of all of its consultants, which includes their wages, insurance, company laptops it provides to each of them, travel costs for sending consultants around the world on projects, etc. Again both types of firms exhibit expenses; some of them are just different. Net income shows the company’s revenue relative to its expenses. If revenues exceeds expenses then the company has a net profit and is “in the black” for that time period (Parrino, 2011). On the other hand, if expenses exceed revenues then the company has a net loss and is “in the red” for that time period (Parrino, 2011). By looking at financial
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