ACCT1046 Lecture Notes - Lecture 5: Inventory Turnover, Profit Margin, Historical Cost
Module 5
Financial statement analysis - soe iitial scee
settig issues
• Who ould or should perfor fiaial stateet aalysis?
– Requires some reasonable knowledge of financial accounting in terms of the
current rules and conventions (and remember, accounting standards are
frequently changing). People with limited financial accounting knowledge
would be unwise to rely upon their own analysis of financial statements.
• Why would somebody do financial statement analysis?
– There could be various reasons. People analysing the reports might be
thinking of investing in an organisation, advising others about whether to
invest, working for an organisation, loaning money to the organisation,
selling goods on credit to the organisation, and so forth. For these various
purposes they might want to know how efficiently the organisation is using
its resources, how profitable the organisation is relative to other
organisations, and the ability of the organisation to pay its debts as and when
they fall due. FSA can provide such insights.
• Financial accounting numbers are everywhere and they are part of common
communication.
– The media often focuses on corporate profitability and changes therein, and
uses this as some form of comprehensive performance assessment –
something we know it is not.
• Financial accounting numbers are used in many agreements between an
organisation and different stakeholders.
How do we do financial statement analysis
• A simple comparison of this year’s figure (perhaps particular expenses or
revenues) with the previous year figure (sometimes referred to as horizontal
analysis) – but we need to ensure there is nothing fundamentally different about the
organisation from one year to the next (or that the accounting rules being used
haven’t changed since last year in a way that might hamper our comparison).
• Ratio analysis
– Within ratio analysis, particular line items in financial statements are
compared to other line items. It is used to evaluate various aspects of a
company, for example its profitability, efficiency, liquidity, or solvency.
– We will consider a number of accounting ratios.
• Trend analysis
– Look at various financial indicators – perhaps ratios – over time to see if there
is a pattern of improvement or deterioration.
• Comparison to benchmarks
– Different performance measures – which might be encapsulated in ratios -
might be compared to other organisations to determine how the organisation
is performing relative to others.
– But be careful when comparing financial accounting numbers with similar
organisations. Different organisations in different industries are subject to
different risks and therefore simply comparing their profitability might not be
appropriate. Also, we must consider size (for example, is it sensible to
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Document Summary
Requires some reasonable knowledge of financial accounting in terms of the current rules and conventions (and remember, accounting standards are frequently changing). People analysing the reports might be thinking of investing in an organisation, advising others about whether to invest, working for an organisation, loaning money to the organisation, selling goods on credit to the organisation, and so forth. Fsa can provide such insights: financial accounting numbers are everywhere and they are part of common communication. Within ratio analysis, particular line items in financial statements are compared to other line items. It is used to evaluate various aspects of a company, for example its profitability, efficiency, liquidity, or solvency. We will consider a number of accounting ratios: trend analysis. Look at various financial indicators perhaps ratios over time to see if there is a pattern of improvement or deterioration: comparison to benchmarks.
