Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 13 - Financial Analysis: The Big Picture - Questions: 6

Answer

(a) Analysis of financial statements is directed at three characteristics of a company: liquidity, solvency, and profitability. (b) Short term creditors are interested in liquidity of the company. They are interested to know the company's capacity to repay the short term liabilities.

Work Step by Step

(a)Liquidity of the company is for short term investors and creditors, whereas solvency is for long term investors, financiers, bond holders and stockholders. Profitability is for anyone and everyone concerned with the company in any way. (b)Long term creditors are interested in long term solvency of the company. They will like to assess the performance of the company, in respect to pay the regular dues like interest on loans etc and the capacity to repay the long term loans when due. Stock holders are interested in knowing liquidity, solvency and profitability of the company, as every small change will affect their earnings. Moreover, the increase of market value of their share also depends on the performance and distribution of earnings by the company, so they will be keen to see that the company not only earn well but also distribute the retained earnings.
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