Accounting

Ratios

1. Pick a ratio and describe how it is figured. Then discuss what this ratio tells us about an organization.

Financial Statement Analysis author's Corners Video

2. What are the main objectives of ratio analysis and why is this important to external users of the financial statements, such as investors? Who else might find these ratios useful and why?

Comparative Analysis

3. What are the main objectives of comparative analysis and why is this important to external users of the financial statements, such as investors?

4. The main objective of a comparative analysis is to scale the financial statements of two different companies to allow for an equal comparison. This is especially useful when companies are in the same industry but very different in size. The comparative analysis allows external users to easily see the differences between companies. Investors would use this information when deciding where they should invest their capital. The comparative analysis identifies red flags and can highlight relative strengths and weaknesses in a company.

Ratios

5. Price Earnings (P-E) Ratio = Market Price per Share / Earnings per Share

This ratio is used to compare market prices and earnings between different companies. Investors are most interested in this ratio because it allows them to see the expected growth potential of companies. If two companies have the same stock price but their price earnings ratios are different, the one with the higher ratio is expected to have a higher future earnings growth rate. This ratio is especially valuable for two companies in the same industry because it will show expectations of future growth between similar companies and can identify if one of the companies is mispriced relative to the other.

Ethical Considerations

6. Why is it Important for managerial accountants to demonstrate ethical conduct in their reports?