Cma Notes
CMA DEFINITIONS-PART2:
Why to look at financial statements?
• It helps to analyze trends in data and operating results.
• Trends are important because they may point to basic changes in the nature of the business.
• With the use of ratios they help to evaluate a company’s past performance and are useful in projecting its financial future and also reflects a company’s performance compared to industry averages.
Why ratios advantageous?
• Measurement of economic events and transactions and the communication of the information is one of the responsibilities of a management accountant.
• Financial ratios are a part of this communication process that includes analysis, interpretation and evaluation of the financial statements.
• Ratios display a relationship between various elements of financial data and are used to assist management in interpreting and explaining financial statements and can be effective tools in evaluating company’s liquidity, debt position and profitability.
• Financial ratios are an important part of evaluating a company’s past performance and are useful in projecting its financial future.
• Gives some indication of the company’s short term solvency and helps to assess the level of risk involved.
• Useful in analyzing a company’s performance compared to industry averages, and thus serves as a benchmark for comparison to other companies.
• Ratios reduce absolute dollar amounts to more meaningful data in order to compare ratios to prior periods, other companies and industry.
• They can be used to show how well the company is being managed and to highlight areas for further investigation.
Limitations to ratios?
• Although ratios are useful as starting point in financial analysis, they are not at end in themselves.
• Ratios can be used as indicators of what to pursue in a more detailed analysis.
• Difficulties can arise in making average comparisons;
• Different companies could use different accounting methods (FIFO vs LIFO)
•
Why to look at financial statements?
• It helps to analyze trends in data and operating results.
• Trends are important because they may point to basic changes in the nature of the business.
• With the use of ratios they help to evaluate a company’s past performance and are useful in projecting its financial future and also reflects a company’s performance compared to industry averages.
Why ratios advantageous?
• Measurement of economic events and transactions and the communication of the information is one of the responsibilities of a management accountant.
• Financial ratios are a part of this communication process that includes analysis, interpretation and evaluation of the financial statements.
• Ratios display a relationship between various elements of financial data and are used to assist management in interpreting and explaining financial statements and can be effective tools in evaluating company’s liquidity, debt position and profitability.
• Financial ratios are an important part of evaluating a company’s past performance and are useful in projecting its financial future.
• Gives some indication of the company’s short term solvency and helps to assess the level of risk involved.
• Useful in analyzing a company’s performance compared to industry averages, and thus serves as a benchmark for comparison to other companies.
• Ratios reduce absolute dollar amounts to more meaningful data in order to compare ratios to prior periods, other companies and industry.
• They can be used to show how well the company is being managed and to highlight areas for further investigation.
Limitations to ratios?
• Although ratios are useful as starting point in financial analysis, they are not at end in themselves.
• Ratios can be used as indicators of what to pursue in a more detailed analysis.
• Difficulties can arise in making average comparisons;
• Different companies could use different accounting methods (FIFO vs LIFO)
•