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Financial Statement Analysis & Financial Ratio Types

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1) What is the purpose of financial statement analysis? What are some of the tools that are used to analyze financial performance? What can you use to benchmark your performance? Why?

2) What are the different types of financial ratios used to analyze financial performance? Are some ratios more important than others?

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1) What is the purpose of financial statement analysis? What are some of the tools that are used to analyze financial performance? What can you use to benchmark your performance? Why?

Purpose of Financial statement analysis
Financial Statement analysis is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. It is also used to help management to know the performance of organization.
Financial statements are useful tools for evaluating both profitability and liquidity. Used separately, or in combination, the income statement and balance sheet help interested parties to measure a company's current financial performance, and to forecast its profit and cash flow potential. Some of the tools are:
1) Ratio analysis
2) Common size statement
3) Trend percentage

We can use the above for making inter firm and intra firm comparison. Thus these can be used for benchmarking with the industry or with other organizations.

2) What are the different types of financial ratios used to analyze financial performance? Are some ratios more important than others?
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.
We can use ratio analysis to try to tell us whether the business

1. Is profitable
2. Has enough money to pay its bills
3. Could be paying its employees ...

Solution Summary

Almost 1000 words explains the purpose of financial analysis and tools used for it, as well as weighing the usefulness of different financial ratios.

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