BU1002 Lecture Notes - Lecture 8: Financial Statement Analysis, Financial Statement, Trend Analysis
14 Jun 2018
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Week 8: Topic Analysis and Interpretation of Financial Statements
Users and decision making
• The users of finical reports can broadly be categorised as:
• Resource providers e.g. creditors, lenders, shareholders, employees
• Recipients of goods and services i.e customers, debtors
• Parties performing an overview or regulatory function e.g tax office,
corporate regulator, stastical bureaus
• Internal management to assist in their decision-making duties
Nature and purpose of financial statement analysis
• Financial analysis involves expressing the reported numbers in relative terms rather
than relying on the absolute numbers
• This can highlight the strengths and the weaknesses of the firms
• By evaluating an entity’s finanial past users are in a etter position to form an
opinion as to the entity’s future finanial health
• It is essential in financial analysis to compare figures with:
• The equivalent figures from previous years (rather than in one years absolute
terms)
• Other figures in the financial statements
Analytical Methods
• Analytical methods include:
• Horizontal analysis
• Trend analysis
• Benchmarks
• Ratio Analysis and calculations
Horizontal Analysis
• Compares reported numbers in different reporting periods to highlight magnitude
and significance of changes
• Dollar change is calculated by:
• Accounting number in current reporting period less accounting number in
previous reporting period
• Percentage change is calculated by:
• (Accounting number in current reporting period – accounting number in
previous reporting period) x 100 / accounting number previous reporting period
• Accounting number in current reporting period less accounting number in previous
reporting period
• SELF EVALUATION ACTIVITY 8.1
Trend Analysis
• Tries to predict the future direction of various items on the basis of the direction of
the items in the past
• To calculate a trend, it is necessary to have at least three years of data
• Trend analysis of a particular item involves expressing the item in subsequent years,
relative to a selected base year - which is usually given a value of 100.
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