Finance benchmarks question

Business & Finance
Tutor: None Selected Time limit: 1 Day

Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis

Jun 12th, 2015

Benchmark can be created by using the followings

1.Trend analysis :This benchmark is based on a firm’s historical performance. It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.

2. Industry average analysis :  Industry analysis is another way of developing a benchmark. Firms in the same industry are grouped by size, sales, and product lines to establish benchmark ratios. One way of identifying industry groups is the Standard Industrial Classification (SIC) System.

3. Peer group analysis : Instead of selecting an entire industry, management may choose to identify a set of firms that are similar in size or sales, or who compete in the same market. The average ratios of this peer group would then be used as the benchmark. Depending on the industry, peer groups can be as small as three or four firms.

Jun 12th, 2015

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