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Discuss briefly two decisions that require the analysis of financial statements.
The financial statement of any company can be used to give a glimpse or snapshot of the assets and liabilities owned by the company and how the assets and shareholders’ funds are being put to use. Also, the financial statements indicated the cash flow position the company regarding the cash inflows, expenses, losses and how all these are being managed. Before any financial institution lends money to a firm, it is essential to analyze their financial statement to ascertain whether the loan can be recovered from the assets in case of default. Also, the financial report will give the lender information concerning the profitability and whether the firm is a going concern. Secondly, the financial statement can be used by investors before putting their monies in a specific company. An investor will invest in a firm that has more chances of maximizing their wealth, and this can be indicated in the financial statement by indicators such as profitability and return on assets.
Why do analysts use financial ratios rather than the absolute numbers? Give an example.
The importance of the financial ratios cannot be gainsaid. The financial ratio is the backbone of any investment decision. The use of the financial ratios enables us to make an easy comparison of the performance of companies operating in the same industry or …
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