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BUSN104 -notes quize 17th

Business Administration (Australian Catholic University)

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Lecture 7

Week 7 Analysis and Interpretation of Financial Statements (Ch 8)

Learning objectives:

 explain why different user groups require financial statements to be analysed and
interpreted
 describe the nature and purpose of financial analysis
 apply the analytical methods of horizontal, trend, vertical and ratio analysis
 define, calculate and interpret the ratios that measure: profitability, asset efficiency,
liquidity
 explain the interrelationships between ratios and use ratio analysis to discuss the
financial performance and position of an entity
 discuss the limitations of ratio analysis.

Nature and purpose of financial analysis

 By evaluating an entity’s financial past, users are in a better position to form an

opinion as to the entity’s future financial health.
 It is essential in financial analysis to compare figures with:
 the equivalent figures from previous years (rather than in one year’s absolute
terms)
 other figures in the financial statements.

4 methods:

1. Horizontal Analysis
2. Trend Analysis
3. Vertical Analysis
4. Ratio Analysis

Horizontal Analysis

 compares reported numbers in different reporting periods to highlight magnitude and

significance of changes.

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Trend Analysis

 Tries to predict the future direction of various items on the basis of the direction of the
items in the past.
 To calculate a trend, it is necessary to have at least three years of data.
 Trend analysis of a particular item involves expressing the item in subsequent years,
relative to a selected base year (starts at 100)
 Trends in JB Hi-Fi Ltd sales revenue, EBIT and profit after tax for 2010–2018

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