ACCTG 101 Lecture Notes - Lecture 22: Current Liability, Quick Ratio, Financial Statement Analysis
Document Summary
Two major areas of financial performance include solvency and profitability. Stakeholders may have more interest in one area of financial performance than others. Creditors, for example, may be most concerned about an entity"s ability to repay debts (i. e. solvency). Shareholders may focus on the ability to generate income (i. e. profitability), but will likely be interested in all dimensions of financial performance including solvency. Many techniques for financial statement analysis involve ratio analysis. By computing ratios, financial statement amounts can be scaled, so that more meaningful comparisons can be made across entities of different sizes. Ratio analysis also exploits meaningful economic relationships between financial statement items to provide insights about several dimensions of financial performance. Ratio analysis can be used to assess both solvency and profitability. Although solvency and profitability may be analyzed separately, these dimensions of financial performance are interrelated. For example, a business that cannot pay its debts on a timely basis may experience difficulty in obtaining credit.
