Chapter 6: Financial Statement Analysis•Study objectives

May 19th, 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 Analysis-Study objectives-Review financial statements-A possible framework for analysis-Balance sheet ratios-Income statement and income statement/balance sheet ratios-Trend analysis-Common size and index analysis1.What is financial analysis-Analysis is to interpret certain information for decision purpose-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 flowsDifferent purpose of financial analysis-The 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 involved-Trade creditors (suppliers) are interested in the liquidity of a firm-The 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 time-Investors in a company's common stock are principally concerned with present and expected future earnings as well as with the stability of these earnings about a trend line-Management also employ financial analysis for the purpose of internal control and to better provide what capital suppliers seek in financial condition 2. Financial statements-See page 128-129 balance sheet and income statement-The probable defect of financial statements analysis: window

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