Analyzing Financial Statements

Running head: Analyzing Financial Statements

Analyzing Financial Statements

Tina Borntrager

University of Phoenix

MBA/503

Introduction to Finance and Accounting

George Peterson

January 16, 2008

Within this particular written work, one will be able to "identify the audience, nature and purpose of financial statements, interpret comparative analysis, calculate key financial ratios, evaluate the analysis tools and find business alternatives using these types of statements." (UOP, 2007).

When one speaks of the audience, nature and purpose of financial statements, they are indicating measurements of profitability which is what one would call an (income statement), the cash flow or the change that exists in the "cash position" of the firm and the balance sheet, which shows the assets and how those assets are financed. (Block, 2005).

The income statements can give a company the necessary view of adequate measurements for loss or gain within a certain period. An income statement will provide the calculation of gross profit by looking at the total sales and deducting the actual cost of those products. It also takes a look at operating profits and costs, shares, interest expenses, administrative and selling expenses, depreciation expense, taxes and anything that will affect the total profit of the firm. (Block, 2005). The cash flow determines investment activities such as bonds, stock and corporate securities. When the company sells corporate securities determines a "source" of income while the retirement or repurchasing determines the use of those funds. It is important for the firm to have knowledge of where they stand with their cash position because it will affect immediate and future decisions which will impact the company in long-term standings. The understanding of the balance sheet, like the cash flow, is just as vital to know. The determination of what is actually owned, the financing of those items within liabilities and or ownership interests can be a challenge for any company. Not unlike the income statements, the balance sheet helps realize what the company made or lost and lets them know the measure of its worth. (Block, 2005).

When a company wants to evaluate the ratios and the key indicators for profit so they can be compared with normal indicators and ratios of other companies functioning in similar fashion it is called a comparative analysis. For example, if one is writing a paper on organic food processes and he or she has chosen to compare wheat and oats, one has to ask why they chose those certain processes over another. He or she has to let the reader know the rationale behind