Chapter 6
Analysis of Financial
Statements
1
,Learning Objectives
After studying this chapter you should understand:
• The usefulness and importance of ratio analysis
• The advantages and disadvantages of ratio analysis
• Able to calculate some basic accounting ratios
• Apply those ratios in interpreting a set of accounts
• How liquidity measures can be influenced by the inventory cost flow
assumption used.
• How the number of days’ sales in both accounts receivable and
inventory are used to evaluate the effectiveness of the management
of receivables and inventory.
,Financial Ratios and Trend Analysis
A ratio is simply the
relationship between The large dollar amounts
two numbers. reported on the financial
statements of many
companies, and the varying
size of companies, make
ratio analysis the only
sensible method of
evaluating various financial
characteristics.
Learning Objective 3-1: Discuss why financial statement ratios are important.
, Trend Analysis
Trend analysis compares a single observation over
several years.
Trend analysis example: Suppose a
student’s grade point average for last
semester was 3.5 on a 4.0 scale. That GPA
may be interesting, but it says little about
the student’s work. However, suppose you
learn that this student’s GPA was 1.9 four
semesters ago, 2.7 three semesters ago,
and 3.0 two semesters ago. The upward
trend of grades suggests that the student
is working “smarter and harder.”
Learning Objective 3-1: Discuss why financial statement ratios are important.
Analysis of Financial
Statements
1
,Learning Objectives
After studying this chapter you should understand:
• The usefulness and importance of ratio analysis
• The advantages and disadvantages of ratio analysis
• Able to calculate some basic accounting ratios
• Apply those ratios in interpreting a set of accounts
• How liquidity measures can be influenced by the inventory cost flow
assumption used.
• How the number of days’ sales in both accounts receivable and
inventory are used to evaluate the effectiveness of the management
of receivables and inventory.
,Financial Ratios and Trend Analysis
A ratio is simply the
relationship between The large dollar amounts
two numbers. reported on the financial
statements of many
companies, and the varying
size of companies, make
ratio analysis the only
sensible method of
evaluating various financial
characteristics.
Learning Objective 3-1: Discuss why financial statement ratios are important.
, Trend Analysis
Trend analysis compares a single observation over
several years.
Trend analysis example: Suppose a
student’s grade point average for last
semester was 3.5 on a 4.0 scale. That GPA
may be interesting, but it says little about
the student’s work. However, suppose you
learn that this student’s GPA was 1.9 four
semesters ago, 2.7 three semesters ago,
and 3.0 two semesters ago. The upward
trend of grades suggests that the student
is working “smarter and harder.”
Learning Objective 3-1: Discuss why financial statement ratios are important.
