Chapter
2
Financial
Statements
and Analysis
LEARNING GOALS
LG1
LG2
Understand who uses financial
ratios, and how.
LG3
Use ratios to analyze a firm’s
liquidity and activity.
LG4
LG5
LG6
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Review the contents of the
stockholders’ report and the
procedures for consolidating
international financial statements.
Discuss the relationship between
debt and financial leverage and the
ratios used to analyze a firm’s debt.
Use ratios to analyze a firm’s
profitability and its market value.
Use a summary of financial ratios
and the DuPont system of analysis
to perform a complete ratio analysis.
Across the Disciplines
Why This Chapter Matters To You
Accounting: You need to understand the
stockholders’ report and preparation of
the four key financial statements; how
firms consolidate international financial
statements; and how to calculate and
interpret financial ratios for decision
making.
Information systems: You need to understand what data are included in the firm’s
financial statements in order to design
systems that will supply such data to
those who prepare the statements and to
those in the firm who use the data for ratio
calculations.
Management: You need to understand
what parties are interested in the annual
report and why; how the financial statements will be analyzed by those both
inside and outside the firm to assess various aspects of performance; the caution
that should be exercised in using financial
ratio analysis; and how the financial statements affect the value of the firm.
Marketing: You need to understand the
effects your decisions will have on the
financial statements, particularly the
income statement and the statement of
cash flows, and how analysis of ratios,
especially those involving sales figures,
will affect the firm’s decisions about levels
of inventory, credit policies, and pricing
decisions.
Operations: You need to understand how
the costs of operations are...