MHC 6305 Financial Statement Analysis
MHC 6305 Financial Statement Analysis
Provided an accurate analysis of Best Care’s net working capital for 2011.
Provided an accurate debt ratio for Best Care.
Correctly analyzed the comparison of Best Care’s debt ratio to Sunnyvale’s debt ratio.
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and APA style attribution of sources; displayed accurate spelling, grammar, and punctuation.
Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.
Analyzing Financial Statements
The financial statements of a company record important financial data on every aspect of a business’s activities. As such they can be evaluated on the basis of past, current, and projected performance.
In general, financial statements are centered around generally accepted accounting principles (GAAP) in the U.S. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP standards which requires accrual accounting.1 Private companies have greater flexibility in their financial statement preparation and also have the option to use either accrual or cash accounting.2
Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques include horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical affects line items have on other parts of the business and also the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.