Discuss the need for comparative analysis. There are three bases of comparison: (1) Intracompany, which compares an item or financial relationship with other data within a company. (2) Industry, which compares company data with industry averages. (3) Intercompany, which compares an item or financial relationship of a company with data of one or more competing companies.
Identify the tools of financial statement analysis. Financial statements may be analyzed horizontally, vertically, and with ratios.
Explain and apply horizontal analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage.
Describe and apply vertical analysis. Vertical analysis is a technique that expresses each item within a financial statement in terms of a percentage of a relevant total or a base amount.
Identify and compute ratios and describe their purpose and use in analyzing a firm's liquidity, profitability, and solvency. The formula and purpose of each ratio is presented in Illustration 14-1 in this book.
Understand the concept of earning power, and indicate how material items not typical of regular operations are presented. Earning power refers to a company's ability to sustain its profits from operations. “Irregular items”—discontinued operations, and extraordinary items—are presented net of tax below income from continuing operations ...
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