Financial Ratios
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- Category: English
- Date Submitted: 09/30/2015 10:40 AM
- Pages: 7
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Introduction to Financial Ratios
When computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This means assets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.
These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.
Our explanation of financial ratios and financial statement analysis is organized as follows:
• Balance Sheet
o General discussion
o Common-size balance sheet
o Financial ratios based on the balance sheet
• Income Statement
o General discussion
o Common-size income statement
o Financial ratios based on the income statement
• Statement of Cash Flows
Note: To assist you in understanding financial ratios, we developed business forms for computing 24 popular financial ratios. They are included in AccountingCoach PRO.
General Discussion of Balance Sheet
The balance sheet reports a company's assets, liabilities, and stockholders' equity as of a specific date, such as December 31, 2014, March 31, 2014, etc.
The accountants' cost principle and the monetary unit assumption will limit the assets reported on the balance sheet. Assets will be reported
(1) only if they were acquired in a transaction, and
(2) generally at an amount that is not greater than the asset's cost at the time of the transaction.
This means that a company's creative and effective management team will not be listed as an asset. Similarly, a company's outstanding reputation, its unique product...
When computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This means assets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.
These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.
Our explanation of financial ratios and financial statement analysis is organized as follows:
• Balance Sheet
o General discussion
o Common-size balance sheet
o Financial ratios based on the balance sheet
• Income Statement
o General discussion
o Common-size income statement
o Financial ratios based on the income statement
• Statement of Cash Flows
Note: To assist you in understanding financial ratios, we developed business forms for computing 24 popular financial ratios. They are included in AccountingCoach PRO.
General Discussion of Balance Sheet
The balance sheet reports a company's assets, liabilities, and stockholders' equity as of a specific date, such as December 31, 2014, March 31, 2014, etc.
The accountants' cost principle and the monetary unit assumption will limit the assets reported on the balance sheet. Assets will be reported
(1) only if they were acquired in a transaction, and
(2) generally at an amount that is not greater than the asset's cost at the time of the transaction.
This means that a company's creative and effective management team will not be listed as an asset. Similarly, a company's outstanding reputation, its unique product...