The significance of a single absolute dollar amount reported in the general purpose financial statements for an entity is difficult to assess. To determine the meaningfulness of one amount, we must consider the relative significance of the amount when compared with other relevant information. Various techniques can be used to perform this analysis of the financial statement data. Ratios developed for a particular company may be compared to industry averages to judge the solvency, strength, earning power, and growth potential of the company. Basic ratio analysis is discussed in this chapter. Also discussed is the use of horizontal analysis and vertical analysis.
When irregular items are included in an income statement, they must be properly reported or “earning power” may be misrepresented. The reporting guidelines for irregular items are included in this chapter.