Financial Accounting: Tools for Business Decision Making, 7th Edition

CHAPTER 13

FINANCIAL ANALYSIS: THE BIG PICTURE

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Understand the concept of sustainable income.
2. Indicate how irregular items are presented.
3. Explain the concept of comprehensive income.
4. Describe and apply horizontal analysis.
5. Describe and apply vertical analysis.
6. Identify and compute ratios used in analyzing a company's liquidity, solvency, and profitability.
7. Understand the concept of quality of earnings.

Feature Story

IT PAYS TO BE PATIENT

A recent issue of Forbes magazine listed Warren Buffett as the richest person in the world. His estimated wealth was $62 billion, give or take a few million. How much is $62 billion? If you invested $62 billion in an investment earning just 4%, you could spend $6.8 million per day—every day—forever.

So, how does Buffett spend his money? Basically, he doesn't! He still lives in the same house that he purchased in Omaha, Nebraska, in 1958 for $31,500. He still drives his own car (a Cadillac DTS). And, in case you were thinking that his kids are riding the road to Easy Street, ...