Financial Statement Analysis

Financial Statement Analysis

Financial statement analysis is used internally by management and externally by stockholders, financial analysts, stockbrokers, loan officers, and others to evaluate an organization’s financial position and results

of operations. For example, loan officers examine a company’s current ratio, quick ratio, accounts receivable turnover, and inventory turnover to determine the company’s ability to pay its debts as they fall due.

Ratios are developed using relationships between balance sheet and income statement items to provide insights into an organization’s liquidity, solvency, profitability, and market performance.

Financial Accounting Vs. Management Accounting

Financial accounting has an external emphasis and focuses on the preparation of financial statements in accordance with generally accepted accounting principles (GAAP). Managerial accounting has an internal emphasis and focuses on managerial techniques and procedures designed to aid managers in their planning, control, and decision­making roles. For example, managerial accounting techniques can provide managers with valuable input to evaluate special orders, determine if a business segment or product line should be discontinued, determine the level of sales needed to generate a certain operating income, and project costs and revenues for a proposed capital project.

 

Cost classification is an important consideration in the preparation and analysis of the income statement when considering differences among service, merchandising, and manufacturing organizations.

Consider the following examples:

  • A service organization would benefit from distinguishing between direct and indirect costs.
  • A merchandiser would want to distinguish between selling expenses and general and administrative expenses.
  • A manufacturer would find it important to properly classify expenses as period or product costs. In addition, manufacturing organizations must subdivide product costs into direct material, direct labor, and manufacturing overhead. Manufacturing organizations use a cost­of­goods manufactured statement to determine the cost of products manufactured during the accounting period.
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