Financial Statement Analysis Chapter 14

Submitted By mbabin1981
Words: 545
Pages: 3

In both chapters 13 and 14 the study of the financial statements and financial analysis are given a much deeper look. Both chapters touch on the same trend of processing journal entries to produce information needed in financial statements. Chapter 13 recognizes the statement of cash flows; which for many companies shows investors just how much money was used, where the money came from, and how money is received. “The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from operating, investing and financing activities during a period” (Weygandt, Kimmel, & Kieso, 2010, pp. 614). This makes the statement of cash flows a very important tool to potential investors; which is what most publically traded companies like to have. By examining a statement of cash flow in any business you can estimate the company’s ability to generate income, meet obligations, and see what kind of investing and financing the business is doing. In chapter 13, it discusses that there are two ways to prepare the statement of cash flows by indirect and direct methods. Both methods are used to “convert net income from an accrual basis to a cash basis” (Weygandt, Kimmel, & Kieso, 2010) for the purposes completing a statement of cash flows. On the other hand chapter, 14 gives an overlook of a financial statement analysis. “Financial statement analysis is defined as the process of identifying business strengths and weaknesses of the firm by properly establishing a relationship between the items of the balance sheet and the profit and loss account” ("Accounting For Management", 2014). There are three ways that a financial statement analysis can be done by intra-company basis, industry averages, and inter-company basis. Each uses a different method of analysis which are horizontal, vertical, and ratio analysis. Most individuals that use these statements and complete the kind of study in chapter 14 are interested in earning potential. The “earning power means the average level of income to be obtained in the future” (Weygandt, Kimmel, & Kieso, 2010, pp. 696). Both chapters give a more in depth look at the statements and analysis that most investors use to