Page 141 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 6.4 Summary

Financial statement analysis can be explained as a method used by interested parties such
as investors, creditors, and management to evaluate the past, current, and projected
conditions and performance of the firm.
Under the financial statement analysis, the information available are grouped together in
order to cull out the meaningful relationship which is already available among them; for
interpretation and analysis.

To reveal qualitative information about the firm in terms of solvency, liquidity,
profitability, etc., are extracted from the analysis of financial statements.
Ratio analysis is one of the important tools of financial statement analysis to study the
financial structure of the business fleeces.
Financial ratio analysis is the calculation and comparison of ratios which are derived from
the information in a company’s financial statements.

The level and historical trends of these ratios can be used to make inferences about a
company’s financial condition, its operations and attractiveness as an investment.
Financial ratios are calculated from one or more pieces of information from a company’s
financial statements.
A ratio gains utility by comparison to other data and standards.
Ratios are classified as liquidity, leverage, profitability, activity, integrated and growth
ratio.

6.5 Keywords

Assets: Assets are economic resources owned by business or company.
Balance Sheet or Positional Statement Ratios: These type of ratios are calculated from the
balance sheet of the enterprise which normally reveals the financial status of the position i.e.
short-term, long-term financial position, Share of the owners on the total assets of the enterprise
and so on.
Balance Sheet: A balance sheet or statement of financial position is a summary of a person’s or
organization’s balances.
Capital Structure Ratios: The capital structure position are analysed through leverage ratios as
well as coverage ratios.

Current Assets: Current assets are in the form of cash, equivalent to cash or easily convertible
into cash.
Current Liabilities: Current liabilities are short-term financial resources or payable in short
span of time within a year.
Financial Statement: A written report which quantitatively describes the financial health of a
company.
Firm: A business organization or the members of a business organization that owns or operates
one or more establishments.
Income Statement Ratios: These ratios are computed from the statements of Trading, Profit &
Loss account of the enterprise

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