Financial Statements and Ratios Paper
Introduction
Financial ratio analysis is important to a business’s success. A financial ratio analysis is an indicator of a company’s financial performance. It helps a business compare company financials with previous periods and also allows a business to contrast its financials to similar companies. A financial ratio can provide a clear image of a company 's state and identify trends that are emerging.
Use of ratios in analyzing financial statements
Ratio analysis is a form of financial analysis that utilizes one or more pieces of information obtained from a company 's financial statements to help determine a business’s strengths and problem areas (ITS Tutorial School , 2005). Investors, creditors, and administration of a company can use financial ratio analysis to assess a company. Furthermore, financial ratio analysis assists in industry comparisons and analyzing trends of a company. Industry comparisons ratios contrast a company against comparable businesses or with industry averages to evaluate the company’s performance to competitors (ITS Tutorial School , 2005). Trend analysis is a method of evaluating an organization’s past, current, and anticipated financial position (ITS Tutorial School , 2005). This helps determine whether a business’s financial state is improving or declining over a period of time.
Financial analysis of a balance sheet
A company’s balance sheet shows how a business is financed and the value their assets. The financial analysis of a balance sheet focuses on a business’s internal structure and distribution of company resources (Droms & Wright, 2010). It also reveals ways a business invests assets, allocates resources of working capital investments such as, cash, accounts receivable, and inventory, and indicates the liabilities and equity side of a business (Droms & Wright, 2010). Therefore, a company is able to understand and modify its financial situation. For example, a company that is using a lot of debt to finance
Financial ratio analysis is important to a business’s success. A financial ratio analysis is an indicator of a company’s financial performance. It helps a business compare company financials with previous periods and also allows a business to contrast its financials to similar companies. A financial ratio can provide a clear image of a company 's state and identify trends that are emerging.
Use of ratios in analyzing financial statements
Ratio analysis is a form of financial analysis that utilizes one or more pieces of information obtained from a company 's financial statements to help determine a business’s strengths and problem areas (ITS Tutorial School , 2005). Investors, creditors, and administration of a company can use financial ratio analysis to assess a company. Furthermore, financial ratio analysis assists in industry comparisons and analyzing trends of a company. Industry comparisons ratios contrast a company against comparable businesses or with industry averages to evaluate the company’s performance to competitors (ITS Tutorial School , 2005). Trend analysis is a method of evaluating an organization’s past, current, and anticipated financial position (ITS Tutorial School , 2005). This helps determine whether a business’s financial state is improving or declining over a period of time.
Financial analysis of a balance sheet
A company’s balance sheet shows how a business is financed and the value their assets. The financial analysis of a balance sheet focuses on a business’s internal structure and distribution of company resources (Droms & Wright, 2010). It also reveals ways a business invests assets, allocates resources of working capital investments such as, cash, accounts receivable, and inventory, and indicates the liabilities and equity side of a business (Droms & Wright, 2010). Therefore, a company is able to understand and modify its financial situation. For example, a company that is using a lot of debt to finance
References: Accounting For Management. (2012). Limitations of Financial Statement Analysis. Retrieved September 25, 2012, from http://www.accounting4management.com: http://www.accounting4management.com/limitations_of_financial_statement_analysis.htm#G8ihQeifDBs7KxcY.99 Droms, W., & Wright, J. (2010). Finance and Accounting for Nonfinancial Managers (6th edition). Cambridge, Massachusetts: Perseus Books Group. ITS Tutorial School . (2005). Accounting, Business Studies and Economics Dictionary . Retrieved September 22, 2012, from http://www.tuition.com.hk/: http://www.tuition.com.hk/dictionary/f.htm#Financial_ratio Shadunsky, A. (2012). What Kind of Analysis Can I Do for My Financial Statements? . Retrieved September 23, 2012, from http://www.ehow.com/: http://www.ehow.com/info_12016805_kind-analysis-can-financial-statements.html#ixzz26rK8GBS0