Financial Accounting: A User Perspective 6th Canadian Edition

chapter 12

FINANCIAL STATEMENT ANALYSIS

USER RELEVANCE

OVERVIEW OF FINANCIAL STATEMENT ANALYSIS

Understanding the Business

Reading the Financial Statements

Retrospective versus Prospective Analysis

Time-Series versus Cross-Sectional Analysis

Data to Be Used

RATIOS

Profitability Ratios

Short-Term Liquidity Ratios

Activity Ratios

Solvency Ratios

Equity Analysis Ratios

NON-MANUFACTURING OR NON-RETAIL COMPANY ANALYSIS

INTERPRETING THE RATIOS

SUMMARY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Explain why knowledge of the business is important when drawing conclusions about a company's future financial health.
2. Describe the various ways of analyzing a company's financial statements.
3. Identify the types of ratios that are best at providing insights for specific decisions.
4. Calculate specific ratios that are used to assess a company's profitability, short-term liquidity, activity, and solvency, and explain how the ratios can be interpreted.
5. Calculate and explain the uses of the earnings per share ratio and the price/earnings ratio.
6. Understand the differences that might affect the ratio analysis of non-manufacturing or non-retail companies.
7. Understand the need to exercise caution when interpreting ratios.
8. Use ratios to assess a company's financial health through an analysis of its performance and financial position.

A Real-Life Exercise in Financial Management

Proper analysis of financial statements requires a good understanding of the statements' various ...