I. Basics of Analysis—Transforming data into useful information.
A. Purpose of Analysis
To help users (both internal and external) make better business
1. Internal users (managers, officers, internal auditors,
consultants, budget officers, and market researchers) make the
strategic and operating decisions of a company. Purposes for
these users is to provide strategic information to improve
company efficiency and effectiveness in providing products
2. External users (shareholders, lenders, directors, customers,
suppliers, regulators, lawyers, brokers, and the press) rely on
financial statement analysis to make decisions in pursuing
their own goals.
3. The common goal of all users is to evaluate:
a. Past and current performance.
b. Current financial position.
c. Future performance and risk.
B. Building Blocks of Analysis
The four areas of inquiry or building blocks are:
1. Liquidity and efficiency—ability to meet short-term
obligations and to efficiently generate revenues.
2. Solvency—ability to generate future revenues and meet long-
3. Profitability—ability to provide financial rewards sufficient to
attract and retain financing.
4. Market prospects—ability to generate positive market
C. Information for Analysis
Most users rely on general purpose financial statements that
1. Income statement
2. Balance sheet
3. Statement of stockholders' equity (or statement of retained
4. Statement of cash flows
5. Notes related to the statements
6. Other useful financial data—10K/other SEC filings, news
releases, shareholders' meetings, forecasts, management
letters, auditor's report, and analyses published in annual