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Financial Statement And Ratio Analysis: Key Tools To Successful Financial Management

2633 words - 11 pages

Financial Statement and Ratio Analysis: Key Tools to Successful Financial Management Executive SummaryHow do firms assess their own strengths and weaknesses? How does a firm measure management's performance? Finally, how do firms compare themselves against the competition? The answer to these questions lies in the fundamentals of financial management. A crucial element in the success of any business organization is understanding the fundamentals of financial management. "Financial management focuses on business decisions that add value to the firm" (Baker & Powell, 2005, p. 4). In order to make sound financial decisions that create value, a firm's management must critically employ a number of financial analysis principles and techniques. Financial statement and ratio analysis are the most common techniques utilized in today's business environment as a means to assess a firm's financial health. Although financial statement and ratio analysis have significant limitations, these tools are designed to provide essential guidelines and strategies for making well-informed managerial and business decisions.IntroductionA company's finances and operations are integrally connected. The activities, method of operation, and competitive strategy all serve as the foundation of a firm's financial structure. Conversely, almost all financial decisions affect company operations to some degree. The information presented on a firm's financial statements provides management with a valuable window to this reality. Financial statement analysis is the process by which management critically evaluates and compares relationships between various financial statement components. As a result, managers' are able to monitor and improve company performance as well as predict future financial health. Key financial decisions are based on management's ability to utilize financial analysis as a tool to measure the firm's financial performance, the effectiveness of its management, and as a means of comparison to companies within the same industry (Mautz & Angell, 2006).A firm uses financial analysis as a tool to make sound financial decisions, which contribute to general corporate objectives. It is imperative for a firm's management to view financial analysis as a means to ask the right questions about the firm's financial health; not expect clear-cut answers. Possessing the abilities to sort and determine which information is the most relevant and reliable is crucial to successful financial analysis.Financial statements report a firm's past financial performance and current financial position. They are designed to provide information on four primary business activities: planning, financing, investing, and operating activities. Accordingly, the effects of operating activities and other events are recorded in the appropriate financial statement(s). Because many transactions are reflected in more than one statement, a set of financial statements is required to evaluate a...

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