Financial Statement Analysis

Question 1

FS analysis used for:

Answer 1

• financial reporting (covenants based on ratios)
• Audit and assurance (ratios/analysis used throughout engagements(
• strategy and governance (identify SWOT)
• management accounting (achieve ratio targets)
• Finance (provides financial information for short and long term)

Question 2

Step 1: Assess the situation

Answer 2

• Approach: horizontal, vertical or ratio
• Horizontal: compare with PY by dollar change or percent change
• Vertical: present each line item as a percent of base item
• Ratio: report in a common way that makes easily comparable internally and externally

Question 3

Step 2: Analyze major issues

Answer 3

• interpret results and consider other information tied to calculations (economy slowdown, expansion during the year, new competition, new product, discontinued operations)
• Determine whether in line with benchmarks (if they purchase new equipment to lower costs, costs should be decreased during the year)
• if benchmarks are not met – address issue

Question 4

Step 3: Conclude and Advise

Answer 4

• discuss what accounts are at risk of MM and what procedures should be performed to mitigate