CHAPTER 4

Financial Statement Analysis

This chapter is devoted to how external investors and creditors analyze financial statements when making resource allocation decisions, specifically, how they use percentages, ratios, and other financial metrics to assess a company’s profitability, solvency, and liquidity. Financial statement analysis is complex, and most professional analysts are well versed in accounting, finance, economics, and mathematical modeling. The purpose of this chapter is to provide a hands-on introduction of the terminology and concepts unique to this fascinating topic.

The financial statements of a hypothetical retail clothing business—Fashions By Soges—will be used to illustrate the analysis process. The discussion will focus ...

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