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financial statement
Analysis of Financial Statements

After reading this chapter, students should be able to:

Explain why ratio analysis is usually the first step in the analysis of a company’s financial statements.

List the five groups of ratios, specify which ratios belong in each group, and explain what information each group gives us about the firm’s financial position.

State what trend analysis is, and why it is important.

Describe how the Du Pont chart is used, and how it may be modified to include the effect of financial leverage.

Explain “benchmarking” and its purpose.

List several limitations of ratio analysis.

Identify some of the problems with ROE that can arise when firms use it as a sole measure of performance.

Identify some of the qualitative factors that must be considered when evaluating a company’s financial performance.

Financial Statements and Reports

Annual Report: Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.
Income Statement (Statement of Operations, Profit and Loss Statement): A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.
Balance Sheet: Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity at a specific point in time.
Statement of Retained Earnings: A statement of all transactions affecting the balance of a company's retained earnings account.

Accounting Income versus Cash Flow

Cash Flow From Operations: A firm's net cash inflow resulting directly from its regular operations calculated as the sum of net income plus noncash expenses (mainly depreciation) that are deducted in calculating net

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