Question

How does analyzing financial statements help a managerial accountant or manager make decisions?

Can these be used to compare one company to another?

What are the benefits and limitations?

Is it better to compare industry averages?

It is stated that ratios are the starting point rather than the end. Are there other non-accounting factors to consider in analysis and decision making? State them and give your rationale.

Answer 1

How does analyzing financial statements help a managerial accountant or manager make decisions?

Answer: The role of financial statement analysis is to use the information in a company's financial statements along with other relevant information to make economic decisions.

example: whether to invest in a company securities or recommend them to investors.

Can these be used to compare one company to another?

Answer: yes, financial statement analysis can be used to compare different companies also known as cross sectional analysis. However companies of different sizes are not easily comparable hence the analyst will have to convert balance sheets into common size balance sheets to facilitate comparison.

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What are the benefits and limitations?

Benefits include being able to assess a company's profitability, leverage, solvency, operational efficiency, etc. It also helps in trend analysis. Financial statement analysis helps to understand firm's business strategies as well.

Limitations are - firms ignore inflation impact, different firms use different methods of accounting which might make comparison difficult, if a company is delaying income or expense recognition this can manipulate the revenue on the financial statements, companies may also have various off balance sheet transactions that are not reflected in the statements.

Is it better to compare industry averages?

If a company has a large or majority market share it will be performing better than industry average. If a company is a smaller company then the performance will be slower than industry average. It depends on various factors.

It is stated that ratios are the starting point rather than the end. Are there other non-accounting factors to consider in analysis and decision making? State them and give your rationale

Various non accounting factors to consider are macro economic variables such as economic conditions, inflation, business cycles, population and unemployment rates, foreign exchange rates. Etc

Government policies, monetary policies, fiscal policies

Demand and supply for the product, etc