ACCOUNTING PRINCIPLES: Problem Solving Survival Guide, Volume 2: Chapters 13-26, 10th Edition

CHAPTER 18

FINANCIAL STATEMENT ANALYSIS

OVERVIEW

The significance of a single absolute dollar amount reported in the general purpose financial statements for an entity is difficult to assess. To determine the meaningfulness of one amount, we must consider the relative significance of the amount when compared with other relevant information. Various techniques can be used to perform this analysis of the financial statement data. Ratios developed for a particular company may be compared to industry averages to judge the solvency, strength, earning power, and growth potential of the company. Basic ratio analysis is discussed in this chapter. Also discussed is the use of horizontal analysis and vertical analysis.

SUMMARY OF STUDY OBJECTIVES

1. Discuss the need for comparative analysis. There are three bases of comparison: (1) Intracompany, which compares an item or financial relationship with other data within a company. (2) Industry, which compares company data with industry averages. (3) Intercompany, which compares an item or financial relationship of a company with data of one or more competing companies.
2. Identify the tools of financial statement analysis. Financial statements can be analyzed horizontally, vertically, and with ratios.
3. Explain and apply horizontal analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage.
4. Describe and apply ...