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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER THIRTY

Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS examines a company’s historical financial performance and its future prospects. It appraises the health and operating performance of the business. This chapter covers analytical techniques in appraising the balance sheet, analyzing the income statement, and evaluating the financial structure. CFOs analyze the financial statements to see how the company looks to the financial community and what corrective actions can be taken to minimize and solve financial problems. Areas of risk are identified. Means to efficiently utilize assets and earn greater returns are emphasized. Financial statement analysis aids in determining the appropriateness of mergers and acquisitions.

A company’s financial condition influences its price/earnings (P/E) ratio, bond rating, cost of financing, and availability of financing.

FINANCIAL ANALYSIS ESSENTIALS

To see how the company fares in the industry or how it is doing over time, a comparison with the benchmark is essential. Tools such as horizontal and vertical analyses can unveil areas needing attention.

What kind of financial comparisons should CFOs make?

To obtain worthwhile conclusions from financial ratios, the CFO has to make two comparisons.

1. Industry comparison. The CFO should compare the company’s ratios to those of competing companies in the industry or with industry standards. Industry norms can be obtained from such services as Standard & Poor’s and Moody’s.

  • In analyzing ...

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