Accounting and Finance for Managers

A Business Decision Making Approach

Matt Bamber, Simon Parry

• Publisher: Kogan Page
• Year: 2020
• ISBN:
  9781789667523
• Edition: 3
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

This textbook is the ideal guide for business and management students who need to understand accounting and finance information and develop analytical skills in order to make better-informed decisions. Accounting and Finance for Managers rebukes the myth that in order to excel in accounting and finance you need to be great at mathematics. Split into two broad sections which focus on financial accounting and management accounting and finance, this textbook uses clear, accessible language that will appeal to students from a variety of academic backgrounds. Taking a uniquely practical approach that focuses on the financial aspects of business decisions, the textbook covers all the core topics of accounting and finance, including basic bookkeeping, financial analysis, business planning, cash-flow analysis and investment decisions.Now in its third edition, Accounting and Finance for Managers contains updates on new accounting standards and regulations, as well as featuring up-to-date real-world examples of real options, value chain analysis and competitive advantage analysis. This textbook features 'traditional' accounting practices in detail, but also covers topics with a strategic focus to ensure students learn to think in broader strategic terms. Written for an international audience using International Financial Reporting Standards (IFRS) terminology with supporting online resources including additional exercise questions, curated further reading and lecture slides for each chapter.

03

Financial analysis: Part I

OBJECTIVE

The objective of this chapter is to help develop and refine financial accounting information analysis and interpretation skills. The emphasis of this first financial analysis chapter will be on undertaking appropriate forms of analysis, including calculating key management ratios. This chapter will show how the results of the various techniques described can be employed to help assess the position and performance of an entity.

LEARNING OUTCOMES

After studying this chapter, the reader will be able to:

• Identify the main aspects of performance which can be evaluated through financial statements.
• Apply horizontal, trend, vertical and ratio analysis to the financial statements contained within an organization’s annual report.
• Evaluate a company from the viewpoint of current and potential investors as well as other stakeholders.

KEY TOPICS COVERED

• Aspects of financial analysis: profitability, liquidity, efficiency, solvency and investors’ returns.
• The use of ratios and other techniques to analyse and appraise full sets of company accounts.
• This chapter will contain mini case study exercises in which students must evaluate a company from varying viewpoints.

MANAGEMENT ISSUES

Although it is useful that managers be able to compute ratios, it is more important that they are able to develop the analytical skills through interpretation and analysis of financial statements.

Introduction

This chapter considers various forms of financial statement analysis, including:

• horizontal analysis;
• trend analysis;
• vertical analysis;
• ratio analysis.

We will combine these approaches in the chapter that follows. We will assume that undertaking these forms of analysis is (relatively) new to you. When used appropriately, ratio analysis can be a highly effective way of manipulating data into meaningful information. The key to undertaking ratio analysis is to focus on the audience and their question(s). A current (or potential) investor, for example, might want to know about the position, performance and financial strategy of the organization. A lender might want to gauge the short-term liquidity – to gauge whether the firm can make their obligatory interest payments – and the long-term solvency – to identify whether there could be problems meeting repayment plans. On the other end of the continuum, an environmental campaigner would probably have very different motivations for investigating the annual report and financial statements. When calculating and interpreting key ratios they are likely to be judging the firm from a social, environmental or ethical perspective. Therefore, the ability to calculate a long series of financial ratios is good knowledge to have but a more useful skill-set to develop is being able to identify the most appropriate ratios and then having the capacity to interpret them.

The usefulness of financial ratios has long been established. Chen and Shimerda (1981) in their paper ‘An empirical analysis of useful financial ratios’ have this to say:

Financial ratios have played an imp...