Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know

By William G. Droms | Go to book overview

6
Financial Statement Analysis

OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is the art of analyzing and interpreting financial statements. One major objective of financial statement analysis is to "understand the numbers" or "get behind the figures" - that is, to employ the tools of financial analysis as an aid to understanding reported financial data and then use that understanding to better manage a business. Thus, one may develop various analytical measures to portray meaningful relationships and extract information from raw financial data.

In the final analysis, informed decision making is the overriding goal of financial statement analysis. Whether one is a potential equity investor, a potential credit grantor, or a staff analyst of the corporation under analysis, the final objective is the same-to provide a basis for rational decision making. Decisions such as whether to purchase or sell stock, to grant or deny a loan, or to choose between continuing with past practices or to change to a new procedure are strongly dependent on the results of competent financial analysis. The type of decision under consideration will be the major determinant of the focus of the analysis, but the decision-making objective is a constant. Both stockholders and bank loan officers analyze financial statements as an aid to decision making, for example, but the major focus of their separate analyses will differ. The bank loan officer may be more concerned with short-term liquidity and the collateral value of liquid assets, while the potential (or current) stockholder will be more concerned with long-term profitability and

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