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CHAPTER 3 Risk Analysis

CHAPTER 3 Risk Analysis - The Balance Sheet and Financial...

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The Balance Sheet and Financial Disclosures RISK ANALYSIS The purpose of financial reporting is to provide investors and creditors with information that can be used in making investment and/or credit decisions. The financial statements report on past events and the current position of the business entity. Third party users are more interested in using the information available to predict the future. Financial statement analysis involves ratios to interpret the information contained in published financial statements. USING FINANCIAL INFORMATION The financial ratios that apply to the balance sheet are liquidity ratios and financing ratios. Liquidity Ratios , measure the ability of a business entity to convert assets into cash. There are two ratios discussed below: 9 Current Ratio Working capital is calculated as total current assets less total current liabilities. The ratio that measures working capital is the current ratio. The formula for the current ratio is as follows: Current assets
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