{"id":4106,"date":"2020-10-25T15:47:26","date_gmt":"2020-10-25T15:47:26","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4106"},"modified":"2020-11-15T19:13:44","modified_gmt":"2020-11-15T19:13:44","slug":"financial-statement-analysis-defined","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/financial-statement-analysis-defined\/","title":{"raw":"Financial Statement Analysis Defined","rendered":"Financial Statement Analysis Defined"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Define financial statement analysis<\/li>\r\n<\/ul>\r\n<\/div>\r\nWe previously introduced the four financial statements. We discussed how these statements provide information about a company\u2019s performance and financial position. Here, we extend this discussion by showing you specific tools you can use to analyze financial statements in order to make a more meaningful evaluation of a company.\r\n<h2>Ratio Analysis<\/h2>\r\n<img class=\"alignright wp-image-5207 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04175410\/presentation-1454403_1280-300x218.png\" alt=\"A cartoon man holding a clipboard with a red line pointing upwards with an arrow on the end. \" width=\"300\" height=\"218\" \/>Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. For analysis of the primary financial statements, we classify ratios as:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\"><strong>Liquidity ratios<\/strong> measure the short-term ability of the company to pay its maturing obligations and to meet unexpected cash needs.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Operating efficiency ratios<\/strong> measure how efficiently a firm is paying its bills, collecting cash from customers, and turning inventory into sales.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Profitability ratios<\/strong> measure the income or operating success of a company for a given period of time.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Solvency ratios<\/strong> measure the ability of the company to survive over a long period of time.<\/li>\r\n<\/ul>\r\n<h2>Comparative Analysis<\/h2>\r\nA single ratio by itself is not very meaningful. Accordingly, we will use various comparisons to shed light on company performance:\r\n<ol>\r\n \t<li>Intracompany comparisons covering two years for the same company.<\/li>\r\n \t<li>Industry-average comparisons based on average ratios for particular industries.<\/li>\r\n \t<li>Intercompany comparisons based on comparisons with a competitor in the same industry.<\/li>\r\n<\/ol>\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTIONS<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23848\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23849\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23850\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23851\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Define financial statement analysis<\/li>\n<\/ul>\n<\/div>\n<p>We previously introduced the four financial statements. We discussed how these statements provide information about a company\u2019s performance and financial position. Here, we extend this discussion by showing you specific tools you can use to analyze financial statements in order to make a more meaningful evaluation of a company.<\/p>\n<h2>Ratio Analysis<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-5207 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04175410\/presentation-1454403_1280-300x218.png\" alt=\"A cartoon man holding a clipboard with a red line pointing upwards with an arrow on the end.\" width=\"300\" height=\"218\" \/>Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. For analysis of the primary financial statements, we classify ratios as:<\/p>\n<ul>\n<li style=\"font-weight: 400;\"><strong>Liquidity ratios<\/strong> measure the short-term ability of the company to pay its maturing obligations and to meet unexpected cash needs.<\/li>\n<li style=\"font-weight: 400;\"><strong>Operating efficiency ratios<\/strong> measure how efficiently a firm is paying its bills, collecting cash from customers, and turning inventory into sales.<\/li>\n<li style=\"font-weight: 400;\"><strong>Profitability ratios<\/strong> measure the income or operating success of a company for a given period of time.<\/li>\n<li style=\"font-weight: 400;\"><strong>Solvency ratios<\/strong> measure the ability of the company to survive over a long period of time.<\/li>\n<\/ul>\n<h2>Comparative Analysis<\/h2>\n<p>A single ratio by itself is not very meaningful. Accordingly, we will use various comparisons to shed light on company performance:<\/p>\n<ol>\n<li>Intracompany comparisons covering two years for the same company.<\/li>\n<li>Industry-average comparisons based on average ratios for particular industries.<\/li>\n<li>Intercompany comparisons based on comparisons with a competitor in the same industry.<\/li>\n<\/ol>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTIONS<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23848\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23848&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23848\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23849\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23849&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23849\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23850\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23850&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23850\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23851\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23851&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23851\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4106\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Financial Statement Analysis Defined. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Financial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\">https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li><strong>Authored by<\/strong>: GraphicMama-team. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/illustrations\/presentation-statistic-boy-1454403\/\">https:\/\/pixabay.com\/illustrations\/presentation-statistic-boy-1454403\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t 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