Financial Statement Analysis:
Learning Objectives:
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Prepare and interpret financial statements in comparative and common-size form.
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Compute and interpret financial ratios that would be most useful to a common stock holder.
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Compute and interpret financial ratios that would be most useful to a short-term creditor
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Compute and interpret financial ratios that would be most useful to long -term creditors.
Definition and Explanation of Financial Statement Analysis:
Financial statement analysis is defined
as the process of identifying financial strengths and weaknesses of the firm
by properly establishing relationship between the items of the balance sheet
and the profit and loss account.
There are various methods or techniques that are
used in analyzing financial statements, such as comparative statements,
schedule of changes in
working capital, common size percentages, funds analysis, trend
analysis, and ratios analysis.
Financial statements are
prepared to meet external reporting obligations and also for decision
making purposes. They play a dominant role in setting the framework of
managerial decisions. But the information provided in the financial
statements is not an end in itself as no meaningful conclusions can be
drawn from these statements alone. However, the information provided in
the financial statements is of immense use in making decisions through
analysis and interpretation of financial statements.
Tools and Techniques of Financial Statement Analysis:
Following are the most important
tools and techniques of financial statement analysis:
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