Summary

Date: 2015-10-07; view: 418.

The analysis of accounting reports is undertaken to achieve an under­standing of a company and its activities. It is an involved process and the detailed study of this topic falls in the area of advanced accounting where statistical and mathematical methods and external, as well as in­ternal, data are used. But this introduction to the subject provides a basic understanding of the process. It is based on the assumption that masses of data are often best understood when reduced to one significant figure. Consequently, a number of financial ratios may be used to reveal information in accounting reports. However, effective •analysis of ac­counting reports can seldom be reduced to a process of computing 8 or 10 ratios. The more informative analyses depend upon the use that is to be made of the information. Broadly, accounting report analysis may develop information for either management or investors.

Effective analysis requires that the data available be unambiguously defined. Non-comparable data should be adjusted. If broad interpreta­tions are to be made, data may be rounded off and reclassified to disclose only the significant information needed.

Selected ratios, comparisons, trends, and relationships which may be developed to reveal information to investors are:

1. Balance-sheet ratios:

Current ratio

Acid-test ratio

Shareholders'-equity ratio

Book value per share of stock

2. Income-statement ratios:

Operating ratio

Number of times fixed charges earned

Net income to sales ratio

3. Cross-statement ratios: