basic of financial statement analysis
- characteristics : liquidity, profitability, solvency
2.comparison bases : intracompany, industry averages , intercompany 3. tools of analysis : Horizontal vertical ratio
Horizontal analysis
trend analysis
is a technique for evaluating a series of financial statment data over a period of time.
Purpose is to determine the increase or decrease that has taken place
vertical analysis
common-size analysis
is a technique that expresses each financial statement item as a percent of a base amount
ratio analysis
expresses the relationship among selected items of financial statement data
liquidity ratios
measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
profitability ratios
measure the income or operating success of a company for a given period of time
solvency ratios
measure the ability of a company to survive over a long period of time
earning power
the normal level of income to be obtained in the future
discontinued operations
- separately identified on the income statement
2. reported net of income taxes
discontinued operations
1, disposal of a significant component of a business
2.report the income from discountinued operation in two parts
income from operationis and gain on disposal
change in accounting principle
- occurs when the principle used in the current year is different from the one used in the preceding year
- accounting rules permit a change if justified
- most changes are reported retroactively
why are gains and losses on non-trading securities excluded from net income
because disclosing them separately reduces the volatility of net income due to fluctuations in fair value
informs the financial statement user of the gain or loss that would be incurred if the securities were sold at fair vaule
pro forma income
usually excludes items that the company thinks are unusual or nonrecurring
some companies have abused the flexibility that pro forma numbers allow
improper recognition
some managers have felt pressure to continually increase earnings and have manipulated the earnings numbers to meet these expectations
