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Evaluating Financial Statements

• Identify trends in sales, profits, borrowing, and other business variables

• Determine whether the firm is on track to meet long-term goals

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Comparing Data for Previous Accounting Periods

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Source: Adapted from the Microsoft Corporation 2007 Annual Report, www.microsoft.com, September 25, 2008.

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Comparing Data with Other Firms’ Data

• Comparisons are possible because of GAAP

• Managers can get a general idea of a firm’s relative effectiveness and its standing within the industry

• Data are available from annual reports of public corporations

• Industry averages are available from Dun & Bradstreet, Standard & Poor’s, industry trade associations

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Financial Ratios

• Numbers that show the relationship between two elements of a firm’s financial statements

• Can be compared with– The firm’s own past ratios

– Ratios of competitors

– Industry averages

• Information to calculate ratios is found on a firm’s balance sheet and income statement

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Financial Ratios (cont’d)

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Financial Ratios (cont’d)

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Financial Ratios (cont’d)

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