review26 - CHAPTER 26 Financial Performance Measurement...

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CHAPTER 26 Financial Performance Measurement 0REVIEWING THE CHAPTER Objective 1: Describe the objectives, standards of comparison, sources of information, and compensation issues in measuring financial performance. 10. Financial performance measurement, or financial statement analysis, comprises all the techniques users of financial statements employ to show important relationships in an organization’s financial statements and to relate them to important financial objectives. Internal users of financial statements include top managers, who set and strive to achieve financial performance objectives; middle-level managers of business processes; and lower- level employee stockholders. External users are creditors and investors who want to assess how well management has accomplished its financial objectives, as well as customers who have cooperative agreements with the company. 20. Management is responsible for devising, executing, monitoring, and reporting on a complete financial plan for the business. Such a plan should focus on the financial objectives of liquidity, or the ability to pay bills when due and to meet unexpected needs for cash; profitability, the ability to earn a satisfactory net income; long-term solvency, the ability to survive for many years; cash flow adequacy, the ability to generate sufficient cash through operating, investing, and financing activities; and market strength, the ability to increase the wealth of owners. 30. Investors and creditors use financial performance to judge a company’s past performance, present position, and future potential. They also use it to assess the risk connected with acting on that potential. a0. In judging a company’s past performance and current status, investors and creditors look at trends in past sales, expenses, net income, cash flows, and return on investment. They also look at a company’s assets and liabilities, its debt in relation to equity, and its levels of inventories and receivables. b0. Information about a company’s past and present enables creditors and investors to make more accurate projections about its future—and the more accurate their projections are, the lower their risk of realizing a loss will be. In return for assuming a higher risk, creditors may charge higher interest rates or demand security on their loans; stock investors look for a higher return in the form of dividends or an increase in market price. 40.
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This note was uploaded on 06/10/2009 for the course ACG 2071 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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review26 - CHAPTER 26 Financial Performance Measurement...

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