Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 16. ANALYZING FINANCIAL STATEMENTS

Gerald I. White, CFA

Grace & White, Inc.

Ashwinpaul C. Sondhi, PhD

A. C. Sondhi and Associates, LLC

SCOPE OF FINANCIAL STATEMENT ANALYSIS

(a) EXTERNAL USERS OF PUBLISHED FINANCIAL STATEMENTS.

This section is concerned with the techniques of financial analysis employed by users of financial statements who are external to the company. As such, the techniques described are generally limited to analysis of published financial statements or similar statements privately circulated. Principal emphasis is on the financial statements of companies whose shares are publicly traded. Chapter 44 of this Handbook is concerned with the valuation of companies whose shares are not publicly traded.

Management has available far more extensive internal financial data for control of the business and deployment of resources. In many respects it may employ the same analytical approaches as the external user, but in greater detail.

The common characteristic of external users is their general lack of authority to prescribe the information they want from an enterprise. They depend on general-purpose external financial reports provided by management. The objectives of these external users are aptly described by the Financial Accounting Standards Board (FASB) in SFAC No. 1, "Objectives of Financial Reporting by Business Enterprises" (par. 34):

INFORMATION USEFUL IN INVESTMENT AND CREDIT DECISIONS

Financial reporting should provide information that is useful to present and potential ...