{"id":365,"date":"2024-09-06T16:49:07","date_gmt":"2024-09-06T16:49:07","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/financial-statement-analysis-defined\/"},"modified":"2024-09-11T20:03:45","modified_gmt":"2024-09-11T20:03:45","slug":"financial-statement-analysis-defined","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/financial-statement-analysis-defined\/","title":{"raw":"Financial Statement Analysis Defined","rendered":"Financial Statement Analysis Defined"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Define financial statement analysis<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nWe previously introduced the four financial statements. We discussed how these statements provide information about a company\u2019s performance and financial position. Here, we extend this discussion by showing you specific tools you can use to analyze financial statements in order to make a more meaningful evaluation of a company.\r\n<h2>Ratio Analysis<\/h2>\r\n<img class=\"alignright wp-image-5207 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04175410\/presentation-1454403_1280-300x218.png\" alt=\"A cartoon man holding a clipboard with a red line pointing upwards with an arrow on the end. \" width=\"300\" height=\"218\" \/>Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. For analysis of the primary financial statements, we classify ratios as:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\"><strong>Liquidity ratios<\/strong> measure the short-term ability of the company to pay its maturing obligations and to meet unexpected cash needs.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Operating efficiency ratios<\/strong> measure how efficiently a firm is paying its bills, collecting cash from customers, and turning inventory into sales.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Profitability ratios<\/strong> measure the income or operating success of a company for a given period of time.<\/li>\r\n \t<li style=\"font-weight: 400;\"><strong>Solvency ratios<\/strong> measure the ability of the company to survive over a long period of time.<\/li>\r\n<\/ul>\r\n<h2>Comparative Analysis<\/h2>\r\nA single ratio by itself is not very meaningful. Accordingly, we will use various comparisons to shed light on company performance:\r\n<ol>\r\n \t<li>Intracompany comparisons covering two years for the same company.<\/li>\r\n \t<li>Industry-average comparisons based on average ratios for particular industries.<\/li>\r\n \t<li>Intercompany comparisons based on comparisons with a competitor in the same industry.<\/li>\r\n<\/ol>\r\n&nbsp;\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25237[\/ohm2_question][ohm2_question hide_question_numbers=1]25238[\/ohm2_question][ohm2_question hide_question_numbers=1]25239[\/ohm2_question][ohm2_question hide_question_numbers=1]25240[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Define financial statement analysis<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>We previously introduced the four financial statements. We discussed how these statements provide information about a company\u2019s performance and financial position. Here, we extend this discussion by showing you specific tools you can use to analyze financial statements in order to make a more meaningful evaluation of a company.<\/p>\n<h2>Ratio Analysis<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-5207 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/04175410\/presentation-1454403_1280-300x218.png\" alt=\"A cartoon man holding a clipboard with a red line pointing upwards with an arrow on the end.\" width=\"300\" height=\"218\" \/>Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. For analysis of the primary financial statements, we classify ratios as:<\/p>\n<ul>\n<li style=\"font-weight: 400;\"><strong>Liquidity ratios<\/strong> measure the short-term ability of the company to pay its maturing obligations and to meet unexpected cash needs.<\/li>\n<li style=\"font-weight: 400;\"><strong>Operating efficiency ratios<\/strong> measure how efficiently a firm is paying its bills, collecting cash from customers, and turning inventory into sales.<\/li>\n<li style=\"font-weight: 400;\"><strong>Profitability ratios<\/strong> measure the income or operating success of a company for a given period of time.<\/li>\n<li style=\"font-weight: 400;\"><strong>Solvency ratios<\/strong> measure the ability of the company to survive over a long period of time.<\/li>\n<\/ul>\n<h2>Comparative Analysis<\/h2>\n<p>A single ratio by itself is not very meaningful. Accordingly, we will use various comparisons to shed light on company performance:<\/p>\n<ol>\n<li>Intracompany comparisons covering two years for the same company.<\/li>\n<li>Industry-average comparisons based on average ratios for particular industries.<\/li>\n<li>Intercompany comparisons based on comparisons with a competitor in the same industry.<\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25237\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25237&theme=lumen&iframe_resize_id=ohm25237&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><iframe loading=\"lazy\" id=\"ohm25238\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25238&theme=lumen&iframe_resize_id=ohm25238&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><iframe loading=\"lazy\" id=\"ohm25239\" class=\"resizable\" 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