Introduction to Financial Ratios
When computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This means assets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.
These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.
Our explanation of financial ratios and financial statement analysis is organized as follows:
Balance Sheet
General discussion
Common-size balance sheet
Financial ratios based on the balance sheet
Income Statement
General discussion
Common-size income statement
Financial ratios based on the income statement
Statement of Cash Flows
Note: To assist you in understanding financial ratios, we developed business forms for computing 24 popular financial ratios. They are included in AccountingCoach PRO.