Understanding Financial Ratios for Financial Statement Analysis

School: University of Michigan - Course: ACC 300 - Subject: Accounting

Financial Statement Analysis Financial Ratios - Introduction ACC 300 Reaching the Goal • Ratios are a great tool to help provide insights. • Best used in combination with a focused set of questions or ideas about the firm's value creating functions - that is, used to confirm or refute a hypothesis. This document is authorized for use by Vy Dang, from 8/29/2022 to 12/19/2022, in the course: ACC 300 - Financial Accounting - Kama, Anderson, Mehta (Fall 2022), University of Michigan, Ann Arbor. Any unauthorized use or reproduction of this document is strictly prohibited*.

2 How to Use Ratios The most important thing about using ratios is that you must Think Like any tool, it is important to choose the correct tool for the job, to understand why you are using it and what its purpose is What is the Purpose of a Financial Analysis? Economic reality of Firm 1.Balance Sheet 2.Income Statement 3.Statement of Cash Flow 4.Notes, etc Financial StatementsRatio analysisidentifies economic relationshipsbetween numbers in the financial statements and trends in these relationships. Ratio analysis provides a framework for us tointerpretthe information in the financial statements.