Unit 12Analyzing & InterpretingFinancial Statements
Unit 12 Analyzing & Interpreting Financial Statements
Why?The basic financial statements provide muchinformation the users need, but what thy giveisonlyan overall viewComparison, analysis and study are neededto enable their users to understand thefinancial position and performance of acompany.Analyzing and interpreting financial statementsare critical in disclosing relationships amongfigures in the financial statements andpredicting the future changes of the accountingelements.2
2 Why? ⚫ The basic financial statements provide much information the users need, but what thy give is only an overall view. ⚫ Comparison, analysis and study are needed to enable their users to understand the financial position and performance of a company. ⚫ Analyzing and interpreting financial statements are critical in disclosing relationships among figures in the financial statements and predicting the future changes of the accounting elements
Financialanalysis is a process ofreclassification and summarization ofthe financial information through theestablishment of ratios and trends inorder to interpret the company'sactivities and to understand thecompany's financial situation
3 ⚫Financial analysis is a process of reclassification and summarization of the financial information through the establishment of ratios and trends in order to interpret the company’s activities and to understand the company’s financial situation
RatioHorizontalVerticalAnalysisAnalysisAnalysisBasic approaches ofanalysis
4 Horizontal Analysis Vertical Analysis Ratio Analysis Basic approaches of analysis
I . Horizontal AnalysisHorizontal Analysis, also called trendanalysis, compares a series of financialstatement data over a period of time.Firstly, the base year that carry a weight of 100 foreach item is selected.Then, the amount of same item in prior orsubsequent years is expressed as the percentage ofthe base year amount.ICurrent year amount - Base year amountBase year amount
5 Ⅰ. Horizontal Analysis ⚫ Horizontal Analysis, also called trend analysis, compares a series of financial statement data over a period of time. ⚫ Firstly, the base year that carry a weight of 100 for each item is selected. ⚫ Then, the amount of same item in prior or subsequent years is expressed as the percentage of the base year amount. Current year amount – Base year amount Base year amount