Financial Statement and Ratio Analysis

Financial Statement and Ratio Analysis
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Financial Statement and Ratio Analysis
Financial statement scrutiny is the process of evaluating and reviewing the financial statement of a company with an objective of gaining an understanding of the status of financial health of the company. Additionally, financial statement analysis helps managers in decision-making processing because they will have a rough idea of the financial health of the company. (Wahlen, Baginski & Bradshaw, 2014). When using financial statement analysis, there could be vertical and horizontal analysis. Different income ratios can be used. These income ratios include profitability ratios which involve two methods of analysis. These methods include net profit margin and return on Equity. The Net Profit Ratio margin which is calculated by dividing the net income by the net sales. The amount that will be gotten is the total amount of profits that an organization has earned after paying taxes, and all the expenses have been deducted from sales (Ball, Li, & Shivakumar, 2015). Other profitability ratios used in income statement analysis include return on assets and return on equity as discussed earlier. Return on assets is assessed through getting the comparison between assets to determine the effectiveness of a company in deploying assets to generate sales to make profits (van Caneghem, 2016). This means that the more assets a company has, the more the chances of earning sales hence increased profits.

Return on Equity is a ratio concerned with equity holders of a particular company. It is important to note that, an increase in company’s assets leads to an increase in better return with a more significant margin (Kraft, 2014). These ratios are essential in any financial statement because it helps in determining the financial capability of a company and provide information to investors that can be used to analyze the performance of the company.
References
Ball, R., Li, X., & Shivakumar, L. (2015). Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), 915-963.
Kraft, P. (2014). Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads. The Accounting Review, 90(2), 641-674.
Van Caneghem, T. (2016). NPO Financial Statement Quality: An Empirical Analysis Based on Benford’s Law. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 27(6), 2685-2708.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. London. Nelson Education.