If you were to get a physical from your doctor and he or she only took your blood pressure prior to stating that you are in good health, would you be concerned? If you have noticed in your readings, starting in Chapter 3, there has been explanation of the methods by which you could determine the financial health of a company. Name one and explain how it is computed. Which financial statement(s) does the input come from? Most importantly, what does it tell you about the financial performance or health? Solution Financial analysis is an aspect of the overall business finance function that involves examining historical data to gain information about the current and future financial health of a company. Financial analysis can be applied in a wide variety of situations to give business managers the information they need to make critical decisions. \"The inability to understand and deal with financial data is a severe handicap in the corporate world,\" Alan S. Donnahoe wrote in his book What Every Manager Should Know about Financial Analysis. \"In a very real sense, finance is the language of business. Goals are set and performance is measured in financial terms. Plants are built, equipment ordered, and new projects undertaken based on clear investment return criteria. Financial analysis is required in every such case.\" The finance function in business organizations involves evaluating economic trends, setting financial policy, and creating long-range plans for business activities. It also involves applying a system of internal controls for the handling of cash, the recognition of sales, the disbursement of expenses, the valuation of inventory, and the approval of capital expenditures. In addition, the finance function reports on these internal control systems through the preparation of financial statements, such as income statements, balance sheets, and cash flow statements. Finally, finance involves analyzing the data contained in financial statements in order to provide valuable information for management decisions. In this way, financial analysis is only one part of the overall function of finance, but a very important one. \"The mathematical tools produce data, not explanations; information, not interpretation; measurement, not meaning,\" according to James E. Kristy and Susan Z. Diamond in their book Finance without Fear. \"To these tools you must add judgment, which develops slowly .

1. If you were to get a physical from your doctor and he or she only took your blood pressure prior
to stating that you are in good health, would you be concerned? If you have noticed in your
readings, starting in Chapter 3, there has been explanation of the methods by which you could
determine the financial health of a company. Name one and explain how it is computed. Which
financial statement(s) does the input come from? Most importantly, what does it tell you about
the financial performance or health?
Solution
Financial analysis is an aspect of the overall business finance function that involves examining
historical data to gain information about the current and future financial health of a company.
Financial analysis can be applied in a wide variety of situations to give business managers the
information they need to make critical decisions. "The inability to understand and deal with
financial data is a severe handicap in the corporate world," Alan S. Donnahoe wrote in his book
What Every Manager Should Know about Financial Analysis. "In a very real sense, finance is
the language of business. Goals are set and performance is measured in financial terms. Plants
are built, equipment ordered, and new projects undertaken based on clear investment return
criteria. Financial analysis is required in every such case."
The finance function in business organizations involves evaluating economic trends, setting
financial policy, and creating long-range plans for business activities. It also involves applying a
system of internal controls for the handling of cash, the recognition of sales, the disbursement of
expenses, the valuation of inventory, and the approval of capital expenditures. In addition, the
finance function reports on these internal control systems through the preparation of financial
statements, such as income statements, balance sheets, and cash flow statements.
Finally, finance involves analyzing the data contained in financial statements in order to provide
valuable information for management decisions. In this way, financial analysis is only one part
of the overall function of finance, but a very important one. "The mathematical tools produce
data, not explanations; information, not interpretation; measurement, not meaning," according to
James E. Kristy and Susan Z. Diamond in their book Finance without Fear. "To these tools you
must add judgment, which develops slowly