Ch14 - ACCT 1710 Introduction To Financial Accounting Chapter 14 Financial Statement Analysis Dr HU Bingbing 1 Learning Objectives 1 The basics of

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1 ACCT 1710 Introduction To ACCT 1710 Introduction To Financial Accounting Financial Accounting Dr. HU Bingbing Dr. HU Bingbing Chapter 14 Financial Statement Analysis
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2 Learning Objectives 1. The basics of financial statement analysis 2. Tools of financial statement analysis -Horizontal analysis -Vertical analysis - Ratio analysis 6% 8% 10% 6% 8% 10%
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3 Make investment; Purchase materials; Rent office; Pay salary; ……. . Financial Statement: Statement of Financial Position  ( Balance sheet); Income statement; Retained earnings statement: Cash flow statement Accounting Information System Users: Financial Statement Analysis Accounting Standards A Framework
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4 USES OF FINANCIAL INFORMATION   Who are the users?  Investors   Creditors   What are they interested in? Is the company earning satisfactory income? Will the company be able to pay its debts as they come due? How does the company compare in size and profitability with competitors? How to assess? Analyzing the financial data provided by the company
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5 Financial statement analysis Use financial statement data to assess a company. Help the financial statement users make informed decisions. Three characteristics evaluated: Liquidity : the ability to pay maturing liabilities and to meet unexpected needs  for cash. Profitability : the ability to earn a satisfactory net income. Solvency : the ability of a company to survive over a long period of time. Comparison bases Intracompany basis : same item, same company, different years.   Industry averages   Intercompany basis:  same item, same year, across companies BASICS OF FINANCIAL STATEMENT ANALYSIS
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6 Three commonly used tools: 1. Horizontal analysis (trend analysis) 2. Vertical analysis (common size analysis) 3. Ratio analysis TOOLS OF FINANCIAL STATEMENT ANALYSIS
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7 Horizontal Analysis Horizontal analysis ( trend analysis ) — Evaluate a series of financial statement data over a period of time. To determine the increase or decrease in a particular financial item. Expressed as an amount or a percentage. For intracompany comparison. Change since base year = Current year amount – Base year amount Base year amount Current results in relation to base year = Current year amount Base year amount
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In the asset section, plant assets (net) increased $167,500 or 26.5% . In the liabilities section, current liabilities increased $41,500 or 13.7% . In the equity section, retained earnings increased $202,600 or 38.6% . These changes suggest that the company expanded its asset base during 2011 and financed this expansion primarily by retaining income rather than assuming additional long-term debt. HORIZONTAL ANALYSIS OF A
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This note was uploaded on 01/19/2012 for the course ECON 201 taught by Professor Wong during the Spring '11 term at CUHK.

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Ch14 - ACCT 1710 Introduction To Financial Accounting Chapter 14 Financial Statement Analysis Dr HU Bingbing 1 Learning Objectives 1 The basics of

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