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Tools of Financial analysis & limitations

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BYP13-7 R.J. Falk is the chief executive officer of Ventura Electronics. Falk is an expert
engineer but a novice in accounting. Falk asks you, as an accounting major, to explain
(a) the bases for comparison in analyzing Ventura financial statements and (b) the
limitations, if any, in financial statement analysis.
Broadening Your Perspective 703
Write a memo to R.J. Falk that explains the basis for comparison and the factors affecting
quality of earnings.

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Solution Summary

The answer contains meaning of financial statement and financial analysis,tools of financial analysis and the limitations of financial analysis

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Analyzing Financial statements and its benefits:

Financial statements consist of profit and loss account, Balance sheet and the cash flow statement. Profit and loss account depicts the operating efficiency of the company and it shows whether the company has earned profit or loss during the particular financial year. Balance sheet shows the financial position of the company on the particular date i.e., usually at the end of the financial year. Cash flow statement shows the cash flow from operation and the inflow and outflow of cash and shows the solvent position of the company.

Financial analysis is a process which involves reclassification and summarization of information through the establishment of ratios and trends.

Analysis of the financial statement refers to the examination of the statements for the purpose of acquiring additional information regarding the activities of ...

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