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Lecture Principles of financial accounting - Chapter 17: Analysis of financial statements

After completing chapter 17 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 Financial statement analysis applies analytical tools to general-purpose financial statements and related data for making business decisions. It provides us an effective and systematic basis for making business decisions. These techniques help us to better understand the company and reduce uncertainty associated with financial information. 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 . | 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 Financial statement analysis applies analytical tools to general-purpose financial statements and related data for making business decisions. It provides us an effective and systematic basis for making business decisions. These techniques help us to better understand the company and reduce uncertainty associated with financial information. 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. The goals include evaluating (1) past and current performance, (2) current financial position, and (3) future performance and risk. BUILDING BLOCKS OF ANALYSIS C 1 Liquidity and efficiency Solvency Market prospects Profitability Financial statement analysis focuses on one or more elements of a company’s financial condition or performance. These four areas are considered the building blocks of financial statement analysis: ■ Liquidity and efficiency—ability to meet short-term obligations and to efficiently generate revenues. ■ Solvency—ability to generate future revenues and meet long-term obligations. ■ Profitability—ability to provide financial rewards sufficient to attract and retain financing. ■ Market prospects—ability to generate positive market expectations. INFORMATION FOR ANALYSIS C 1 Income Statement (Statement of Comprehensive Income) Balance Sheet (Statement of Financial Position) Statement of