Finanical Ratios

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5

ANALYSIS OF FINANCIAL STATEMENTS

Reviewing and Assessing Financial Information

Starting Point

Go to www.wiley.com/college/Melicher to assess your knowledge of the basics of financial statement analysis. Determine where you need to concentrate your effort.

What You’ll Learn in This Chapter

▲ ▲ ▲ ▲ ▲ ▲ ▲ The five basic types of financial ratios How to use financial ratios properly in order to achieve financial growth When to use specific ratios in different situations How internally generated financing occurs The effect of ratio analysis on long-term financial planning How to read a financial statement The application of the cost-volume-profit analysis concept

After Studying This Chapter, You’ll Be Able To

▲ ▲ ▲ ▲ ▲ ▲ Distinguish the three categories of ratio analysis Compare and contrast financial statements from different companies Examine the link between asset investment and sales growth Apply the major components of Du Pont analysis Analyze the quality of financial reports Use analysis methods to evaluate profit levels

Goals and Outcomes

▲ ▲ ▲ ▲ ▲ ▲ Analyze and interpret financial statements Explain the categories of ratio analysis Perform the basic types of financial ratios Manage the application of ratios to evaluate business performance Prepare the requirements for external financing Evaluate the financial viability of particular business alternatives

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5.1 FINANCIAL STATEMENT ANALYSIS

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INTRODUCTION

Now that you have studied the structure of business organizations and learned about financial data and how it is presented, it is time to move on to the next step in financial management. Analyzing financial statements is a skill shared by bankers, investors, bondholders, and stockholders as well as the firm’s managers. Reviewing and assessing financial information helps us to recognize a company’s...