Analysis and Interpretation of Financial Statements

Read this chapter, which discusses how to analyze financial statements and demonstrates the use of ratios and the horizontal and vertical analysis tools that everyone from creditors to investors, vendors, and top management use when they want to identify the strengths and weaknesses in an organization. Analysis tools can help you compare companies of different sizes, companies in different industries, and the same company over time.

Learning objectives

After studying this chapter, you should be able to:

  • Describe and explain the objectives of financial statement analysis.
  • Describe the sources of information for financial statement analysis.
  • Calculate and explain changes in financial statements using horizontal analysis, vertical analysis, and trend analysis.
  • Perform ratio analysis on financial statements using liquidity ratios, long-term solvency ratios, profitability tests, and market tests.
  • Describe the considerations used in financial statement analysis.

Source: James Don Edwards and Roger H. Hermanson,
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