Penny, Financial statement analysis focus is primarily on information that is useful for deciding (Edmonds, Tsay, & Olds, 2011). The information required can take many forms but usually involves comparisons such as comparing changes in the same item for the same organization over several years, comparing key relationships within the same year, or comparing the operations of several different organizations in the same industry (Edmonds, Tsay, & Olds, 2011). Existing and potential investors, lenders, and other creditors are the primary internal and external users in which financial statements are directed (Drake, Quinn, & Thornock, 2017). Financial statement analysis procedures can be broken into three categories; horizontal, vertical, and ratio …show more content…
Ratio analysis involves studying various relationships between different items reported in a set of financial statements (Edmonds, Tsay, & Olds, 2011). Analysts calculate many different ratios for a wide variety of purposes (Edmonds, Tsay, & Olds, 2011). The objectives of ratio analysis is looked at by creditors as to whether an organization will be able to repay their debts on time (Edmonds, Tsay, & Olds, 2011). Creditors and stockholders are concerned with how the organization is financed, through debt, equity, or earnings (Edmonds, Tsay, & …show more content…
Stockholders and potential investors analyze past earnings performance and dividend policy for clues to the future value of their investments (Edmonds, Tsay, & Olds, 2011). The following are examples of ratio analysis; liquidity ratios, long-term solvency ratios, profitability ratios, and market price and dividend ratios (Edmonds, Tsay, & Olds, 2011). The following is a sample calculation for each of these ratios; liquidity ratio, may be used to find the current ratio, by dividing current assets by current liabilities (Edmonds, Tsay, & Olds, 2011). Long-term solvency ratio could be used to find the debt to asset ratio by dividing total liabilities by total assets (Edmonds, Tsay, & Olds, 2011). Profitability ratio could help find the gross profit rate by dividing gross profit by sales (Edmonds, Tsay, & Olds, 2011). Finally, market price to dividend ratio will help find the price to earnings ratio by dividing the market price of common share by earnings per common share (Edmonds, Tsay, & Olds, 2011). The one thing about ratio analysis is there is no governing body in charge of ratios, users of ratios are free to customize or create the ratios to address their analytical needs (Mankin &