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How You Would Use a Large Number of Ratios to Perform a Complete Ratio Analysis of a Firm

In the contemporary business environment, the adequate assessment of the financial position of a company and its perspectives in a short-term and long-term perspective is very important because it creates the basis for the development of an effective marketing strategy and helps managers, investors, creditors, and employees better understand the current position of the company and its perspectives in the future. At the same time, the assessment and evaluation of the financial position of a company should be based on the profound analysis of basic financial statements which provide the information on the current position of the company as well as they give insights concerning its perspectives in the future. At the present moment, there are four basic financial statements that are traditionally taken into consideration in the process of financial analysis and which are closely interlinked and they are very important for managers, investors, creditors and employees. These four financial statements are balance sheet, income statement, statement of retained earnings, statement of cash flows.




In order to understand the significance and interrelatedness of all of the four financial statements mentioned above it is necessary to briefly dwell upon each of them. First of all, it should be said that the balance sheet is often referred as the statement of the company’s financial position or condition, reports on company’s assets, liabilities and net equity (Heilbroner and Milberg, 2000, p.177). Basically, all these data are collected for a definite period of time and the balance sheet actually represents the major points concerning the financial position of a company at the definite period of time. For instance, the balance sheet may provide the annual information concerning the financial performance of the company. This information may be very important, especially, when it is compared to the previous data, including balance sheet reflecting the financial position of the company in previous years.


Basically, mangers can use the balance sheet to assess the current position of the company and define its major financial achievements as well as failures. At the same time, the balance sheet give the general information about the financial position of the company and managers can use it to attract the attention of investors to the perspectives of investments into the company in case if its financial performance is positive. Moreover, the balance sheet shows to creditors whether the company is reliable and stable and whether it is worthy to continue the cooperation with this company or probably it could not be able to pay off in the nearest future. As for employees, the balance sheet reveals whether the company’s position is stable or probably they should better look for better job opportunities.


At the same time, income statement is also very important because it basically precise the information that may be retrieved from the balance sheet and it gives data on profit and losses of the company within a certain period of time (Gitlow, 1997, p.371).Obviously, the income statement may be viewed as the indicator of the effectiveness or ineffectiveness of the work of managers as well as it also reflects the extent of the productivity and effectiveness of the work of employees because if managers and employees work effectively the income statement will indicate to positive trends and growth of profits of the company. As for investors and creditors, the income statement shows the investment attractiveness of the company and its credit potential.


Furthermore, the statement of retained earnings may be effectively used by managers, investors, creditors and employees to assess the financial position of the company at the definite period of time (Pine and Gilmore, 1999, p.140). Basically, the statement of retained earnings explains the change in the company’s retained earnings over the reported period. This information is very important because it reveals the major trends and changes in the company’s financial performance through the changes in its earnings. Obviously, managers and investors can assess the effectiveness of the current or potential investments in the company, while creditors can assess the credit potential of the company since if the earnings of the company tend to decrease, it is quite probable that it will unable to fully pay off. For employees the decrease of earnings may threaten to the level of their wages. The statement of retained earnings is closely related to the income statement because it reveals the dynamic in the change of the income of the company.


Finally, the statement of cash flows reports on the company’s cash flow activities, including operating, investing and financial activities (Heilbroner and Milberg, 2000, p.196). Obviously, this statement accomplishes the basic information provided by the financial discussed above and it can be used to assess the effectiveness of operations of the company by mangers, the effectiveness of investments, which is important for investors, while creditors could analyze the financial activities of the company to assess its current position.

Works Cited:
Gitlow, H. S. The Deming guide to quality and competitive position. Englewood Cliffs, N.J.: Prentice-Hall, 1997.
Heilbroner, R. L. and W. Milberg. (2000). The Making of Economic Society. New York: New Press.
Pine, J. and Gilmore, J. (1999). The Experience Economy, Boston: Harvard Business School Press.