Accounting Information, Regression Analysis, and Financial Management

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2.1. Introduction

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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