An Introduction to Accounting,
Accountability in Organisations and
Society, 1st EMEA Edition
by Craig Deegan
Complete Chapter Solutions Manual
are included (Ch 1 to 12)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
Chapter 1: What is accounting?
Chapter 2: Organisations and their reporting boundaries
Chapter 3: An introduction to management accounting
Chapter 4: Budgeting as a means of organisational planning and
control
Chapter 5: Performance measurement and evaluation – further
considerations
Chapter 6: The external reporting of social and environmental
information
Chapter 7: An introduction to financial accounting
Chapter 8: Recording transactions in journals and ledgers – more
detail on the financial accounting process
Chapter 9: The balance sheet
Chapter 10: The income statement and the statement of changes in
equity
Chapter 11: The statement of cash flows, and cash controls
Chapter 12: The analysis of organisations’ external reports
,Solutions Manual organized in reverse order, with the last chapter displayed first, to
ensure that all chapters are included in this document.
(Complete Chapters included Ch12-1)
Solutions Manual Chapter 12:
The analysis of organisations’ external reports
12.1 ‘Financial statement analysis’ can be defined as the process of reviewing and
evaluating an organisation’s financial statements (which would include the income
statement, balance sheet, statement of cash flows, and statement of changes in equity)
and supporting notes in an endeavour to develop an understanding and appreciation of
the organisation’s financial performance and financial stability, and its likely future
prospects, thereby enabling more effective decisions to be made with respect to that
organisation.
12.2 In general, financial statement analysis can be undertaken in the ways shown in the
following table:
Method Explanation
Simple comparison A simple comparison of this year’s amount (perhaps of a
particular expense or revenue item) with the previous year’s
amount might be undertaken. This can be referred to as a form
of horizontal analysis.
Ratio analysis When ratio analysis is applied, particular amounts within the
financial statements are compared with other amounts within
the financial statements. This can be referred to as a form of
vertical analysis.
Trend analysis Trend analysis occurs when we can look at various financial
indicators – perhaps accounting ratios – over a number of
accounting periods to see if there is a pattern of improvement
or deterioration.
Comparison with Different performance measures, which might be encapsulated
benchmarks in various ratios, are compared with those of other
organisations, or to industry averages, in order to ‘benchmark’
how the organisation is performing relative to other
organisations.
12.3 It would seem sensible that people performing financial statement analysis should
actually understand the practice of financial accounting. That is, they should understand
accounting standards and other generally accepted accounting principles. If this is not
the case, then they could easily misinterpret what much of the information they are
using or analysing means or represents.
Further, those people undertaking financial statement analysis need to keep up to date
with the ongoing changes in financial accounting requirements (for example, changes
, 2
that occur when new accounting standards are released). Without being up to date they
might wrongly compare results of accounting periods (without adjustment), when
different financial accounting rules applied. This could generate misleading
interpretations and judgements.
12.4 Horizontal analysis occurs when we are comparing account balances over time – for
example, comparing the sales of one year with those of the next – whereas vertical
analysis occurs when we compare one item of the financial statements to another item
in the financial statements within a particular year of operations; for example,
comparing the profit of the organisation with the sales of the organisation (which can
be referred to as the profit ratio).
12.5 Arguably, the first item we should review as part of our financial statement analysis is
the auditor’s report. If the opinion provided by the auditor is that a report is poorly
prepared, then we might be wasting our time reviewing the financial statements.
If reports are prepared by management, then there will be incentives, at times, for
managers to be less than objective. An independent expert review of a report – whether
it is financial, social or environmental in focus – will, if done by a credible third party,
add credibility and ‘value’ to a report.
12.6 Knowledge of the accounting policies being used by an organisation are of direct
relevance to the practice of financial statement analysis.
For example, as there can be a choice between alternative measurement bases for some
assets and liabilities, it is important to ensure that if two or more organisations are
being compared, they should ideally be applying the same policies. Otherwise, the
comparison can be misleading without some form of adjustments being performed.
Organisations will also change accounting policies over time. Often, this might be
because new accounting standards have been released, or because managers and their
accountants believe that previously used accounting methods no longer provide
‘relevant’ information about the financial performance, and financial position, of the
organisation. Again, prior to performing an analysis of those financial statements,
interested stakeholders should be familiar with the accounting policies being used by an
organisation to generate its financial statements.
Calculations like ‘profits’, ‘total assets’, ‘total liabilities’ and so forth only really make
sense if we understand the rules (policies) that have been used to generate the numbers
– and these rules can frequently change.
12.7 A financial accounting ratio represents a relationship between two quantities, normally
expressed as one divided by the other – for example, a debt-to-equity ratio is calculated
by dividing total reported liabilities by total reported equity. Financial accounting ratios
represent a form of vertical analysis, wherein one number from a financial statement
can be compared with another number from the financial statements of the same year.
