Required information

Learning Objective $13-$C$1$: Define the building blocks of analysis and the standards for comparisons.

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The purpose of financial statement analysis is to help users make better business decisions. Internal users want information to improve company efficiency and effectiveness. External users want information to make better and more informed decisions in pursuing their goals. The common goals of all users are to evaluate a company$$s past and current performance, current financial position, and future performance and risk. Financial statement analysis focuses on four $$building blocks$$ of analysis:

$(1)$ liquidity and efficiency$$ ability to meet short$-$term obligations and efficiently generate revenues;

$(2)$ solvency$$ability to generate future revenues and meet long$-$term obligations;

$(3)$ profitability$$ability to provide financial rewards sufficient to attract and retain financing; and

$(4)$ market prospects$$ability to generate positive market expectations.

Standards for comparisons include

$(1)$ intracompany$$ prior performance and relations between financial items for the company under analysis;

$(2)$ competitor$$one or more direct competitors of the company;

$(3)$ industry$$industry statistics; and

$(4)$ guidelines $($rules of thumb$)$general standards developed from past experiences and personal judgments.

Purpose of Analysis

Knowledge Check $01$

Financial statement analysis provides information to internal users to improve:

multiple choice

financial statements

their own goals

efficiency and effectiveness

company performance and financial condition