Chapter14StudyObjectives - 5 Identify and compute ratios...

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1   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. 2   Identify the tools of financial statement analysis. Financial statements can be analyzed horizontally, vertically, and with ratios. 3   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. 4   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.
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Unformatted text preview: 5 Identify and compute ratios used in analyzing a firm's liquidity, profitability, and solvency. The formula and purpose of each ratio was presented in Illustration 14-27 . 6 Understand the concept of earning power, and how irregular items 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 to highlight their unusual nature. 7 Understand the concept of quality of earnings. A high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition....
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