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For Further Reading
Horngren, Charles T., Gary L. Sundem, John A. Elliott, and Donna Philbrick, Introduction to
Financial Accounting, Charles T. Horngren Series in Accounting (Upper Saddle River, NJ: Prentice-
Hall, 2005).
Ingram, Robert W., and Thomas L. Albright, Financial Accounting: Information for Decisions
(Florence, KY: South-Western College Publishing, 2007).
Stickney, Clyde P., and Roman L. Weil, Financial Accounting: An Introduction to Concepts, Methods
and Uses (Florence, KY: South-Western College Publishing, 2006).
Weygandt, Jerry J., Donald E. Kieso, and Paul D. Kimmel, Accounting Principles, 7th ed., with
PepsiCo Annual Report (Hoboken, NJ: John Wiley & Sons, 2004).
Wild, John J., Financial Accounting: Information for Decisions, 4th ed. (New York: McGraw-Hill,
2006).
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Les Livingstone
Analyzing Financial Statements
How to Analyze Financial Statements
Imagine that you are a health professional, such as a nurse or a physician, and that you work in the
emergency room of a busy hospital. Patients arrive with all kinds of serious injuries or illnesses, some
barely alive or perhaps even dead. Others arrive with less urgent problems, or minor complaints, or
only vaguely suspected ailments. Your training and experience have taught you to perform a quick
triage, in order to identify and prioritize the most endangered patients by means of vital signs, such as
respiration, pulse, blood pressure, temperature, and reflexes. Next, there follows a more detailed
diagnosis, based on appropriate medical tests.
We check the financial health of a company in much the same fashion, by analyzing the financial
statements. The vital signs are tested mostly by various financial ratios, which are calculated from the
financial statements. The financial vital signs can be classified into three main categories:
1. Short-term liquidity.
2. Long-term solvency.
3. Profitability.