Managerial: Accounting

12

FINANCIAL STATEMENT ANALYSIS

After studying this chapter, you should be able to meet the following learning objectives (LO).

1. Prepare a horizontal analysis of a balance sheet and income statement and use it to analyze a company's performance. (Unit 12.1)
2. Prepare a common-size balance sheet and income statement and use them to analyze a company's performance. (Unit 12.2)
3. Calculate and interpret basic financial statement ratios. (Unit 12.3)
4. Explain how to use sources of industry information to draw conclusions about a company's performance. (Unit 12.4)

The Pitch

George Douglas, CEO of C&C Sports, has been wondering about how well his company is doing. He has looked at the financial statements, but the account balances alone don't tell him much. He sees that the company's cash balance decreased dramatically over the past year, but sales revenue, accounts receivable, and inventory increased. What does all this mean? How can George assess the company's financial strengths and weaknesses so that he can predict how well the company will do in the future?

George is particularly concerned about the increase in C&C's accounts receivable balance over the past year. As the company seeks to attract new customers, many of whom will want to purchase merchandise on account, he worries about ...