Financial Statement Analysis (PowerPoint PPT)

This document explains the financial statement analysis process. Most slides are instructional and covered topics include the financial statement analysis process, financial ratios analysis, accounting information (assumptions, principles, policies, procedures), and others.

Financial statement analysis involves analyzing the firm's financial statements to extract information that can facilitate decision-making. For example, an analysis of the financial statement can reveal:
•  whether the firm will be able to meet its long-term debt commitment,
•  whether the firm is financially distressed,
•  whether the company is using its physical assets efficiently,
•  whether the firm has an optimal financing mix,
•  whether the firm is generating adequate return for its shareholders,
•  whether the firm can sustain its competitive advantage, and so forth.

Performance of a firm can be assessed by computing key ratios and analyzing:
•  How is the firm performing relative to the industry?
•  How is the firm performing relative to the leading firms in their industry?
•  How does the current year performance compare to the previous year(s)?
•  What are the variables driving the key ratios?
•  What are the linkages among the ratios?
•  What do the ratios reveal about the future prospects of the firm for various stakeholders such as shareholders, bondholders, employees, customers, etc.?

Financial analysis is performed by both internal management and external groups. Firms would perform such an analysis in order to evaluate their overall current performance, identify problem/opportunity areas, develop budgets and implement strategies for the future.

External groups (e.g. investors, regulators, lenders, suppliers, customers) also perform financial analysis in deciding whether to invest in a particular firm, whether to extend credit, etc. There are several rating agencies (such as Moody's, Standard & Poors) that routinely perform financial analysis of firms in order to arrive at a composite rating.

The document also covers the hierarchy of accounting qualities, emphasizing the importance of relevance and reliability in decision-making. Key accounting principles such as the cost principle and the materiality principle are explained in detail to enhance understanding.