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Accounting information, market information, and basic aggregated
economic data are the basic inputs needed for ﬁnancial analysis and
planning; statistical methods, regression analysis, operation research
programming techniques, and computer programming knowledge are
important tools for achieving ﬁnancial planning and forecasting. In performing ﬁnancial analysis and planning, it is important to know how to use
the appropriate tools in analyzing the relevant data.
The main purposes of this chapter are (i) to show how algebraic and statistical methods are used in cost–volume–proﬁt (CVP) analysis and (ii) to
demonstrate how modern econometric methods can be used to analyze the
dynamic adjustment process of ﬁnancial ratios and obtain new insights
into the use of ﬁnancial ratios in the ﬁnancial analysis, planning, and forecasting. Recall that for ﬁnancial management, the three major policies of
the ﬁrm are investment, ﬁnancing, and dividend policy. The basic concept
of CVP analysis can be used in the areas of investment and ﬁnancing, specifically for capital budget decision-making and leverage analysis. Similarly,
ratio analysis can be used to determine a ﬁrm’s liquidity position, leverage
position, the eﬀectiveness of asset utilization, and proﬁtability performance.
This chapter is organized as follows. Section 2.2 reviews four important
ﬁnancial statements: the balance sheet, the income statement, the retained
earnings statement, and the statement of changes in ﬁnancial position.
Section 2.3 discusses possible weaknesses of accounting information, and
proposes possible methods to minimize these weaknesses. In Section 2.4,
static ratio analysis is reviewed and dynamic ﬁnancial ratio analysis is
presented. Both single-equation and simultaneous-equation approaches to
13FINANCIAL ANALYSIS, PLANNING AND FORECASTING - Theory and Application (Second Edition)
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