Financial Reporting and Ethics - The Institute of Chartered ...

4ANALYSIS AND INTERPRETATION TION OFFINANCIAL STATEMENTSTEMENTS4.0 LEARNING OBJECTIVES:After studying this chapter, readers will be able to appreciate the following:! The application of IFRS, GAAP and other accounting and disclosure requirementsto financial statements’ preparation and publication;! The computation of significant accounting ratios from published financial statements;! The Interpretation of significant ratios;! Application of ratio analysis to group financial statements;! The choice of accounting treatments adopted in the preparation and presentationof financial statements;! The conduct of both vertical and horizontal analysis, trend analysis as well asinter-firm analysis using financial statements; and! The usefulness and limitations of ratio analysis.4.1 INTRODUCTIONThe information to be disclosed in financial statements for the purpose ofguiding informed decision making could be qualitative and quantitative innature. The information should be subjected to critical analysis and interpretationusing ratios and other relevant indicators for a good understanding of thecontents of the financial statements.The whole content of a company’s annual reports, rather than just some aspectsof the financial statements, should attract the attention of stakeholders to thereporting entity. Therefore, the ability to understand the implications of all theitems in the financial statements of a reporting entity and how to ruthlesslyanalyze and interpret the statements should be obtained by students at thislevel. The ability to compute accounting ratios is, however, a fundamentalrequirement.It is also pertinent to note than the application of ratio analysis to groupfinancial statements is additional requirement at this level. Students are,therefore, expected to have a good knowledge of the contents of consolidatedfinancial statements of companies that have subsidiary (and sometimes subsubsidiary)companies.67