Borderless World Business

Chapter 4 Analysis of Financial Statements

Learning Objectives

After reading this chapter, students should be able to:

 Explain what ratio analysis is.  List the 5 groups of ratios and identify, calculate, and interpret the key ratios in each group.  Discuss each ratio’s relationship to the balance sheet and income statement.  Discuss why ROE is the key ratio under management’s control, how the other ratios impact ROE, and

explain how to use the DuPont equation for improving ROE. over time (trend analysis).

 Compare a firm’s ratios with those of other firms (benchmarking) and analyze a given firm’s ratios  Discuss the tendency of ratios to fluctuate over time (which may or may not be problematic), explain

how they can be influenced by accounting practices as well as other factors, and why they must be used with care.

Chapter 4: Analysis of Financial Statements

Learning Objectives

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Lecture Suggestions

Chapter 4 shows how financial statements are analyzed to determine the firm’ strengths and weaknesses. On the basis of this information, management can take actions to exploit the firm’s strengths and correct its weaknesses. At Florida, we find a significant difference in preparation between our accounting and nonaccounting students. The accountants are relatively familiar with financial statements, and they have covered in depth in their financial accounting course many of the ratios discussed in Chapter 4. We pitch our lectures to the non-accountants, which means concentrating on the use of statements and ratios, and the ―big picture,‖ rather than on details such as seasonal adjustments and the effects of different accounting procedures. Details are important, but so are...