Page 119 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers Manpreet Kaur, Lovely Professional University

Notes Unit 6: Financial Statements: Analysis and Interpretation

CONTENTS
Objectives
Introduction
6.1 Types of Financial Statements Analysis
6.2 Ratio Analysis
6.3 Classification of Ratios
6.3.1 Short-term Solvency Ratios
6.3.2 Capital Structure Ratios
6.3.3 Profitability Ratios
6.3.4 Turnover Ratios
6.4 Summary
6.5 Keywords
6.6 Self Assessment
6.7 Review Questions
6.8 Further Readings

Objectives

After studying this unit, you will be able to:

Discuss analysis and interpretation of financial statements
Explain types of financial statement analysis
Illustrate ratio analysis
Make the classification of ratios.

Introduction

Financial statement analysis is the process of examining relationships among financial statement
elements and making comparisons with relevant information. It is a valuable tool used by investors
and creditors, financial analysts, and others in their decision-making processes related to stocks,
bonds, and other financial instruments. The goal in analyzing financial statements is to assess past
performance and current financial position and to make predictions about the future performance
of a company. Investors who buy stock are primarily interested in a company’s profitability and
their prospects for earning a return on their investment by receiving dividends and/or increasing
the market value of their stock holdings. Creditors and investors who buy debt securities, such as
bonds, are more interested in liquidity and solvency: the company’s short-and long-run ability to
pay its debts. Financial analysts, who frequently specialize in following certain industries, routinely
assess the profitability, liquidity, and solvency of companies in order to make recommendations
about the purchase or sale of securities, such as stocks and bonds.

6.1 Types of Financial Statements Analysis

Analysts can obtain useful information by comparing a company’s most recent financial
statements with its results in previous years and with the results of other companies in the same

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