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Chapter 3 Understanding Financial Statements and Cash Flow Overview: We looked at standardized financial statement, introduces...

Chapter 3 Understanding Financial Statements and Cash Flow

Overview: We looked at standardized financial statement, introduces financial ratio analysis, and describes how to use financial statements.

Discuss the following question in one page discussion notes the question below and use the terms above in the discussion posts Minimum one page:

Discuss the advantage as well as limits of ratio analysis for publicly traded corporations.

Solutions

Expert Solution

Followings are the main advantages of ratio analysis for public traded corporations;

1. Ratio analysis is very helpful in measuring performance of a corporation because ratios helps in understanding increasing or decreasing trends.

2. Ratio analysis is very helpful in simplifying complex financial statements into understandable figures. As we know that some users can not understand complex financial statements but can understand simple accounting ratios.

3. Ratio analysis is very helpful tool in identifying strengths and weaknesses of a corporation.

4. Ratio analysis is very helpful tool in making comparative study in internal divisions of a corporation or between various corporations as well.

5. Ratio analysis is helpful in knowing profitability, liquidity, efficiency and solvency of a corporation.

6. Ratio analysis is very helpful in management decision making because ratios analysis provides precise financial information.

Followings are the main disadvantages of ratio analysis for public traded corporations;

1. Ratio analysis is based on financial statements, so if financial statements are suffered with some negative figures then ratio analysis will also show negative results.

2. There are not specific standards for ratio analysis that is why comparision can not be done in perfect manner.

3. Ratio analysis can not be done for qualitative analyis because ratio analysis is based of qualitative financial figures that is why qualitative analysis can not be made.

4. Price level changes can not be shown with the help of ratio analysis because ratio analysis is based on historical financial figures.

5. Sometime we see that some corporations uses ratios for its’ own benefits hence ratio analysis is affected by window dressing.

6. Ratio analysis does not provide solution for financial problems but it only provides simplifies financial infromation.

7. As we know that different corporations use different types of accounting policies that is why correct inter-corporation comparision is not possible.

jeff jeffy answered 2 years ago
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