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Chapter 17 Financial Statement Analysis Notes

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Accounting Chapter 17: Financial Statement Analysis I. Analyzing and Interpreting Financial Statements ➢ The objective of accounting is to provide relevant and timely information to support the decision-making needs of financial statement users The Value of Financial Statement Information: ➢ Short-term creditors (banks and financial institutions) are concerned with whether a company will be able to repay short-term borrowings (loans and notes) ○ Concerned with liquidity of the company ➢ Long-term creditors such as bondholders loan money for long periods of time ○ Interested in evaluating a company’s ability to make its periodic interest payments and repay the face amount of debt at maturity (solvency; ability to pay one’s debt) ➢ Shareholders benefit from increases in the price of a company’s share and are interested in evaluating the potential for the price of the company’s stock to increase ○ The price of a company’s stock depends on a variety of factors, including the company’s current and potential future earnings ○ Focus on profitability (company’s ability to generate earnings) Techniques for Analyzing Financial Statements: 1. Analytical methods: Examine changes in the amount and percentage of financial statement items within and across periods 2. Ratios: Express a financial statement item or set of financial statement items as a percentage of another financial statement item in order to measure an important economic relationship as a single ...
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