Financial Performance Measurement
0REVIEWING THE CHAPTER
Objective 1: Describe the objectives, standards of comparison, sources of information, and
compensation issues in measuring financial performance.
Financial performance measurement,
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.
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
or the ability to pay bills when due and to meet unexpected needs for
the ability to earn a satisfactory net income;
ability to survive for many years;
cash flow adequacy,
the ability to generate sufficient cash
through operating, investing, and financing activities; and
the ability to
increase the wealth of owners.
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.
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.
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.