Chapter 14

Analyzing Financial Statements: A Managerial Perspective

Learning Objectives

  1. Explain why managers analyze financial statements.
  2. Perform horizontal and vertical analyses of the balance sheet and the income statement.
  3. Discuss earnings management and the importance of comparing net income to cash flow from operations.
  4. Understand how MD&A, credit reports, and news articles can be used to gain insight into a company's current and future financial performance.
  5. Calculate and interpret profitability ratios.
  6. Calculate and interpret turnover ratios.
  7. Calculate and interpret debt-related ratios.


Home and Garden Warehouse (HGW) is a large home improvement retailer, much like Home Depot or Lowe's.

A number of managers are interested in its financial situation. For example, Barbara Wilson, president of HGW, wants to know whether the company has been able to obtain planned discounts from suppliers and reduce selling and operating expenses.

Bob Watson, a manager at John Deere, which is one of HGW's suppliers, is also interested in HGW's financial situation. Deere is considering linking its information system to the electronic checkout systems at the more than 200 HGW locations so it can track sales and efficiently schedule production of products it markets exclusively to HGW. ...

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