Author: Joyce Buda


Chapter 17 “Analysis and Interpretation of Financial Statements” from Accounting Principles: A BusinessPerspective, Financial Accounting (Chapters 9-18) by Hermanson, Edwards, and Maher is availableunder Creative Commons license Attribution-Noncommercial-Share Alike 3.0. © Textbook Equity (2011)17 Analysis and interpretation of financialstatements17.1 Learning objectivesAfter 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 horizontalanalysis, vertical analysis, and trend analysis.•Perform ratio analysis on financial statements using liquidity ratios, long-termsolvency ratios, profitability tests, and market tests.•Describe the considerations used in financial statement analysis.17.2 Accountants as investment analystsMore than ever, accounting students are being hired as securities analysts,portfolio managers, strategists, consultants, or other investment specialists. Dutiesin these fields involve understanding the operations of the company, assessing thevalue of the company, and predicting its future performance. These fields can beenormously exciting and may reap tremendous monetary rewards to those who aresuccessful. For example, Apple's stock closed at USD 21.82 per share in January2002, and at USD 218.95 in March 2010. So, if you had invested in Apple stock in2002 your investment would have been worth ten times as much in 2010. Not bad!Of course, failure to understand the relationship between financial accountinginformation and company value can result in negative consequences as well. Forexample, 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 investorsrealized that the company could not meet expected earnings projections and wastherefore highly overvalued. (Later, however, framed Webvan stock certificates wereselling on Ebay for over USD 100.oo as stark symbols of the dot.com bust).In thearea of investing, what accounting information can be used to separate the winnersfrom the losers?463

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