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Lecture Fundamental accounting principles (19/e) - Chapter 17: Analysis of financial statements

After completing this chapter you should be able to: Explain the purpose and identify the building blocks of analysis, describe standards for comparisons in analysis, summarize and report results of analysis, explain and apply methods of horizontal analysis, describe and apply methods of vertical analysis, define and apply ratio analysis. | ANALYSIS OF FINANCIAL STATEMENTS Chapter 17 Chapter 17: Analysis of Financial Statements Application of analytical tools Involves transforming data Reduces uncertainty BASICS OF ANALYSIS Financial statement analysis helps users make better decisions. Internal Users Managers Officers Internal Auditors External Users Shareholders Lenders Customers C 1 Part I We have many analytical tools we can use to analyze the financial statements of a company. These techniques help us to better understand the company and reduce any uncertainty associated with financial information. Part II Financial statement analysis is used by many people within the organization. Managers find financial analysis helpful in planning and controlling operations. External users of financial statements are also interested in the results of comprehensive financial analysis. Shareholders, creditors, and customers all want to learn as much as possible about the financial health of a company. To help me interpret our financial statements, I use several standards of comparison. Intracompany Competitors Industry Guidelines STANDARDS FOR COMPARISON C 1 When we complete our analysis, it is essential to compare the results we obtained to those of our competitors, other companies in our same industry, and general financial market guidelines. Dun & Bradstreet, Standard & Poor’s, and Moody’s provide a wealth of industry information. Horizontal Analysis Comparing a company’s financial condition and performance across time. TOOLS OF ANALYSIS Vertical Analysis Comparing a company’s financial condition and performance to a base amount. Ratio Analysis Measurement of key relations between financial statement items. C 2 Horizontal analysis can be extremely helpful in learning more about a company. It is the process of properly preparing financial data in dollar and percentage formats. This information is usually shown side-by-side. Vertical analysis is the process of comparing a company’s financial . | ANALYSIS OF FINANCIAL STATEMENTS Chapter 17 Chapter 17: Analysis of Financial Statements Application of analytical tools Involves transforming data Reduces uncertainty BASICS OF ANALYSIS Financial statement analysis helps users make better decisions. Internal Users Managers Officers Internal Auditors External Users Shareholders Lenders Customers C 1 Part I We have many analytical tools we can use to analyze the financial statements of a company. These techniques help us to better understand the company and reduce any uncertainty associated with financial information. Part II Financial statement analysis is used by many people within the organization. Managers find financial analysis helpful in planning and controlling operations. External users of financial statements are also interested in the results of comprehensive financial analysis. Shareholders, creditors, and customers all want to learn as much as possible about the financial health of a company. To help me interpret .