Financial Statement Analysis

Financial Statement Analysis - Financial Statement Analysis...

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Financial Statement Analysis How to “Interpret” & “Analyze” Financial Statements
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2 Evaluating Financial Performance This section provides a clear and concise overview of specific financial ratios used to measure financial performance. Performance areas covered include liquidity, asset management, profitability, leverage, market value ratios, and comparative analysis. The objective of this section is to provide the user with methodologies that can be useful in measuring and monitoring financial performance.
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3 Why Ratio Analysis ? You must measure what you expect to manage and accomplish. Without measurement, you have no reference to work with, and thus, you tend to operate in the dark. One way of establishing references and managing the financial affairs of an organization is to use financial ratios. Ratios are simply relationships between two financial balances or financial calculations. These relationships establish our references so we can understand how well we are performing financially. Ratios also extend our traditional way of measuring financial performance; i.e. relying on financial statements. By applying ratios to a set of financial statements, we can better understand financial performance.
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4 The Use of Financial Ratios Ratio analysis is used to compare a company's performance and status with that of another company or itself over time. The basic inputs to ratio analysis is items from Income statement and Balance Sheet Balance Sheet What’s important in ratio analysis is the interpretation interpretation , rather than the calculation itself.
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5 We should Consider the following A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. A group of ratios should be used The financial statements being compared should be dated at the same point in time during the year. To avoid the effect of seasonality. Use audited financial statements. Compare financial statements with similar accounting treatments.
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6 Types of Ratio Comparison Cross Sectional The comparison of different Companies’ financial ratios at the same point in time; involves comparing the company’s ratios to those of an industry leader or to the industry average. Times series Evaluation of the company’s financial performance over time utilizing financial ratio analysis Combined analysis
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Dollar Change: Analysis Period Amount Base Period Amount Dollar Change = Percentage Change : Dollar Change Base Period Amount Percent Change = ÷ % Dollar and Percentage Changes
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Let’s look at the asset section of Clover,
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