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 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. Intracompany Competitors Industry Guidelines STANDARDS FOR COMPARISON C 1 When we interpret our analysis, it is essential to compare the results we obtained to other standards or benchmarks. These include ■ Intracompany—The company under analysis can provide standards for comparisons based on its own prior performance. ■ Competitors—One or more direct competitors of the company being analyzed can provide standards for comparisons. ■ Industry—Industry statistics can provide standards of comparisons. Such statistics are available from services such as Dun & Bradstreet, Standard & Poor’s, and Moody’s. ■ Guidelines (rules of thumb)—General standards of comparisons can develop from experience. All of these comparison standards are useful when properly applied, yet measures taken from a selected competitor or group of competitors are often best. 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 Three of the most common tools of financial statement analysis are: 1. Horizontal analysis, which can be extremely helpful in . | ANALYSIS OF FINANCIAL STATEMENTS Chapter 17 Chapter 17: Analysis of Financial Statements 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. Intracompany Competitors Industry Guidelines STANDARDS FOR COMPARISON C 1 When we interpret our analysis, it is essential to compare the results we obtained to other standards or benchmarks. These include ■ Intracompany—The company under analysis can provide .
