Page 674 - Accounting Principles (A Business Perspective)

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17. Analysis and

interpretation of financial

statements

Learning objectives
After studying this chapter, you should be able to:
• Describe and explain the objectives of financial statement analysis.
• Describe the sources of information for financial statement analysis.

• Calculate and explain changes in financial statements using horizontal analysis, vertical analysis, and trend
analysis.
• Perform ratio analysis on financial statements using liquidity ratios, long-term solvency ratios, profitability
tests, and market tests.
• Describe the considerations used in financial statement analysis.

Accountants as investment analysts
More than ever, accounting students are being hired as securities analysts, portfolio managers, strategists,
consultants, or other investment specialists. Duties in these fields involve understanding the operations of the
company, assessing the value of the company, and predicting its future performance. These fields can be
enormously exciting and may reap tremendous monetary rewards to those who are successful. For example,

Apple's stock closed at USD 21.82 per share in January 2002, and at USD 218.95 in March 2010. So, if you had
invested in Apple stock in 2002 your investment would have been worth ten times as much in 2010. Not bad!
Of course, failure to understand the relationship between financial accounting information and company value can
result in negative consequences as well. For example, during the dot.com boom, the stock of Webvan, an online
grocer, plummeted from a high of USD 40 to just six cents within a few months as investors realized that the
company could not meet expected earnings projections and was therefore highly overvalued. (Later, however,
framed Webvan stock certificates were selling on Ebay for over USD 100.oo as stark symbols of the dot.com bust).
In the area of investing, what accounting information can be used to separate the winners from the losers?
This is the goal of investment analysts—to understand the current value of a company and then use available

information in predicting future performance. Investment analysts rely heavily on financial statements as a source
of information in predicting stock price movements. Since financial statements are prepared by accountants, it is no
surprise that accountants are being hired for purposes of interpreting financial information and making
predictions. Given the complexity of business organizations and business transactions in today's global markets,
accounting professionals no longer are solely responsible for preparing financial statements, but are being asked to
interpret these statements as well.

Accounting Principles: A Business Perspective 675 A Global Text