ACCT CH17

Financial Statement Analysis

Conducted to evaluate a company’s performance and financial condition.

Purpose of Financial Statement Analysis

To assess past/current performance, financial position, and future performance risk.

Internal Users

Individuals within a company who use financial statements for decision-making, such as managers.

External Users

Individuals outside a company, such as shareholders and lenders, who evaluate the company for financial decisions.

Income Statement

Shows revenue, expenses, and profit.

Balance Sheet

Displays a company’s assets, liabilities, and equity at a specific point in time.

Statement of Stockholders’ Equity

Tracks changes in owners' equity over time.

Statement of Cash Flows

Reports cash inflows and outflows for a specific period.

Horizontal Analysis

Evaluates financial condition and performance over time by comparing financial statements from multiple periods.

Vertical Analysis

Compares financial items relative to a base amount, often expressed as a percentage.

Liquidity Ratios

Indicate a company’s ability to meet short-term obligations.

Working Capital

Calculated as Current Assets minus Current Liabilities.

Current Ratio

Calculated as Current Assets divided by Current Liabilities, indicating short-term debt coverage ability.

Debt Ratio

Calculated as Total Liabilities divided by Total Assets, indicating reliance on debt.

Equity Ratio

Calculated as Total Equity divided by Total Assets, measuring shareholder financing.

Price-Earnings (P/E) Ratio

Calculated as Market Price per Share divided by Earnings per Share, indicating growth expectations.

Gross Margin Ratio

Calculated as Gross Margin divided by Net Sales, reflecting percentage of sales revenue remaining after costs.

Return on Equity (ROE)

Calculated as Net Income divided by Average Stockholders’ Equity, indicating profitability for shareholders.

Dividend Yield

Calculated as Dividends per Share divided by Market Price per Share, indicating dividend returns relative to price.