311-Ch14RevNotes(7th) - Chapter 14 - Analyzing Financial...

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Chapter 14 - Analyzing Financial Statements Note: You should read the following pages for his topic: Chapter 14, pages 707 - 718 and Chapter 5, pages 252 - 255. Overview Interpretation of amounts reported on financial statements may be enhanced by expressing certain relationships as ratios or percentages. Although many ratios can be calculated, only a few will be useful for a given decision. Having selected the relevant ratios, the analyst has the problem of evaluating the results. This evaluation involves the task of selecting one or more realistic standards with which to compare the results. Four types of standards are used: historical standards external standards experience planned standards The interpretation of ratios may suggest strengths and weaknesses in the operations and/or the financial position of the company that should be accorded in-depth investigation and evaluation. Business Background In the U.S., billions of dollars are spent each year preparing, auditing, and publishing financial statements. These expenditures are incurred because financial statements provide information that helps people make better economic decisions. Investors and investment advisors (analysts) consider two types of returns on stock investments - dividends and stock appreciation. Investors should evaluate the company's future income and growth potential. Factors for investors to consider are: Economy wide factors include interest rate changes, unemployment rates, and general inflation. All of these items can impact the performance of a company. Industry factors include events of major impact on a given industry. Examples are easing lumber prices and declining mortgage rates. Individual company factors
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311-Ch14RevNotes(7th) - Chapter 14 - Analyzing Financial...

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