1. Copyright © Cengage Learning. All rights reserved Evaluating Financial Statements Identify trends in sales, profits, borrowing, and other business variables Determine whether the firm is on track to meet long-term goals 17| 1

2. Copyright © Cengage Learning. All rights reserved Comparing Data for Previous Accounting Periods 17| 2 Source: Adapted from the Microsoft Corporation 2007 Annual Report, www.microsoft.com, September 25, 2008.

3. Copyright © Cengage Learning. All rights reserved Comparing Data with Other Firms’ Data Comparisons are possible because of GAAP Managers can get a general idea of a firm’s relative effectiveness and its standing within the industry Data are available from annual reports of public corporations Industry averages are available from Dun & Bradstreet, Standard & Poor’s, industry trade associations 17| 3

4. Copyright © Cengage Learning. All rights reserved Financial Ratios Numbers that show the relationship between two elements of a firm’s financial statements Can be compared with –The firm’s own past ratios –Ratios of competitors –Industry averages Information to calculate ratios is found on a firm’s balance sheet and income statement 17| 4

5. Copyright © Cengage Learning. All rights reserved Financial Ratios (cont’d) 17| 5

6. Copyright © Cengage Learning. All rights reserved Financial Ratios (cont’d) 17| 6

7. Copyright © Cengage Learning. All rights reserved Financial Ratios (cont’d) 17| 7