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ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT
The paper contains analysis and interpretation of financial statement.
The purpose of financial statement analysis is to assist statement users in predicting the future by means of comparison, evaluation and trend analysis.
|3828 (cca 10 pages)
Table of contents
Objectives of financial statement analysis 2
The specific objectives of financial statement analysis 3
Usefulness of Analysis 3
Techniques of analysis 3
Problems of Trend analysis 5
Cross sectional analysis 5
Problems of Cross sectional analysis 5
Ratio analysis 6
Working capital=Current assets – Current liabilities 7
Current liabilities 7
Average trade payables x 365 days 9
Credit purchases 9
Accounts payable turnover ratio 9
(viii) Average sales period ( Age of inventory) ratio 9
(ii) Total assets turnover 11
Net sales 11
(iii) Return on total assets 11
Net income – preference dividend x 100 11
Dividends per share X 100 12
Dividends per share x 100 12
Market price per share 12
Preview of the essay: ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT
Financial statements are essentially historical and static documents. They tell us what
has happened during a particular period or series of periods of time. The most valuable information to most users of financial statements or reports, however, concerns what probably will happen in the future. The purpose of financial statement analysis is to assist statement users in predicting the future by means of comparison, evaluation and trend analysis.
The first procedure in financial statement analysis is to obtain useful information. The main sources of financial information include, but are not limited to, the following:
(i) Published reports
Quoted companies normally issue both interim and annual reports, which contain comparative financial statements and notes thereto. Supplementary financial information and management discussion as well as analysis of the comparative ...
... for growth generally have high price-earnings ratios, with the opposite being true for companies with limited growth.
1. Ratios are insufficient in themselves as a basis of judgment about the future. They are simply indicators of what to investigate. Therefore, they should not be viewed as an end, but as a starting point from which to identify further questions.
2. They are useless when used in isolation. They have to be compared over time for the same firm or across firms or with the industry's average.
3. Ratios are based on financial statements. Any weakness of the financial statements is also captured within the ratios. 25 4 Comparing ratios across firms may be difficult because the firms may not be comparable. Data among companies may not provide meaningful comparisons because of factors such as use of different accounting policies and the size of the company. The most common variations due to accounting policies lie in the computation of depreciation and amortization and inventory valuation.
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