Chapter 6: Financial Statement Analysis

May 12th, 2015
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Financial analysis involves analyzing financial statements prepared in accordance with generally accepted accounting principles to ascertain information concerning the magnitude, timing, and riskness of future cash flows

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Chapter 6: Financial Statement AnalysisStudy objectivesReview financial statementsA possible framework for analysisBalance sheet ratiosIncome statement and income statement/balance sheet ratiosTrend analysisCommon size and index analysis1.What is financial analysisAnalysis is to interpret certain information for decision purposeFinancial analysis involves analyzing financial statements prepared in accordance with generally accepted accounting principles to ascertain information concerning the magnitude, timing, and riskness of future cash flowsDifferent purpose of financial analysisThe firm itself and outside providers of capital---creditors and investors---all undertake financial analysis. The type of analysis varies according to the specific interests of the party involvedTrade creditors (suppliers) are interested in the liquidity of a firmThe claims of bondholders (bankers or other creditors) are more interested in the cash-flow ability of the firm to service debt over a long period of timeInvestors in a companys common stock are principally concerned with present and expected future earnings as well as with the stability of these earnings about a trend lineManagement also employ financial analysis for the purpose of internal control and to better provide what capital suppliers seek in financial condition 2. Financial statementsSee page 128-129 balance sheet and income statementThe probable defect of

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