Session 19 Interpretation of financial statements
　　Main Contents
　　1. Why interpretation
　　2. Ratios calculation
　　3. Limitations of Ratios analysis
　　19.1 Why interpretation
　　Although financial statements have to be prepared by law for most companies, they are only of real value if useful information can be obtained from them. Having prepared the financial statements it is necessary to study them and to draw conclusions from them about a company’s affairs.
　　Such analysis is one obvious concern and value to the company’s own management.
　　Recall users of financial statement information
　　Investors Investment decisions- Stewardship and investment, future
　　Buy, hold or sell shares prospects
　　Lenders and suppliers Loan securityand ability to Profitability, liquidity and
　　Meet loan repayments and future asset security
　　Pay for suppliers
　　EmployeesJob security, wage and Profit and future prospect
　　Benefit negotiations analysis of expenditure
　　Customers Continuity of product and Future financial viability
　　Or service supply
　　Governments Tax collection, compliance Various
　　And policy formulation
　　Internal management Effectiveness of resource Resources performance
　　Allocation and long-term measurement
　　Planning
　　Other usersVarious Various
　　These users have a variety of information needs and the importance they will attach to different areas will also vary. These are some basic areas in which most users will be interested:
　　a.Profitability
　　b.Liquidity/ working capital
　　c.Gearing
　　d.Investor returns
　　Interpreting financial statements usually includes comparison- that of one company with another or for the same company over a period of yearsto examine performance and trend. Other comparisons may include those on an interim basis, with published industry average figures.