Financial Analysis



Executive Summary

The use of ratio analysis to evaluate the performance of company has been widely used. The ratio analysis of financial statements helps to create relationship between the different items of various financial statements. This helps to simplify the complex figures that are present in the financial statements.

There are many users of the ratio analysis of financial statement. The most important user is the management that evaluates the performance of the company based on these ratios and then takes corrective action to correct their mistakes. The ratios also help to determine what future actions the company should take in order to increase its profitability.

The financial statements that are formed should take into consideration the various factors that affect the meaningfulness of the application of ratio analysis. These factors include the seasonal changes in production and weather. The companies should change their accounting periods so that their active periods are taken into consideration in the financial statements.

The companies should use ratio as an indicator of the performance but they are not the only factors that should be considered while making decisions. There many qualitative factors that are important in terms of making decisions. These factors should also be taken into consideration while making decision. It is also very important to make the financial statements correct because the ratios are based and formed from these financial statements. If the source is not correct then the indicators will also be misleading and the decision making will not be correct. Therefore, it is very important to make correct financial statements because the ratios are based on them and the analysis will be incorrect if correct financial information is not used.

Executive Summaryii

Introduction1

Discussion1

Ratio and Financial Statement Analysis1

Benefits and Limitations of Ratio Analysis2

Factors Affecting the Meaningfulness of Ratio Analysis4

New Practices or Theories Regarding the Application of Ratio and Financial Statement Analysis5

Practical Application of Ratios6

Liquidity Ratio6

Leverage Ratio6

Profitability Ratios7

Conclusion7

References8

Appendices9

Financial Analysis

Introduction

Companies prepare financial statements to present their financial information in a more understandable manner. These financial statements are then used by various stakeholders of the companies to make decisions regarding the company. The data that is available in the financial statements is complex and complicated for various individuals. Therefore, in order to understand and evaluate the performance of the company, various ratios are calculated which creates relationship between various items of financial statements. These ratios are then used by individuals to make decision regarding the company. Therefore, this assignment is focused on analyzing the various limitations and benefits of ratio and financial statement analysis. It also provides a practical application of real-world's use of ratios.

Discussion

Ratio and Financial Statement Analysis

The accountants prepare financial statements which are documents that contain valuable and important information regarding the company. There are three main types of financial statements which are income statement, balance sheet and statement of cash flows. These statements are prepared according to the standards set by the generally accepted accounting principles (www.hh-pub.com).

The main purpose of ratio and financial statement analysis is to measure the company's ...