Financial statement analysis methods

Author: Chen Shaohua
Publisher:
Publish Date: 2004-02-01
Features: This book primarily studies the analytical system of financial statement analysis—analytical objectives, analytical perspectives, and analytical methods. The book is divided into five parts, totaling eleven chapters. Part I is the introduction, proposing the overall approach to financial statement analysis; Part II discusses the four perspectives of financial statement analysis; Part III introduces qualitative analytical methods—comparative analysis and index decomposition method; Part IV introduces quasi-quantitative analysis methods; and Part V discusses quantitative analytical methods such as index measurement, factor analysis, principal component analysis, factor analysis, and trend analysis. Financial accounting is primarily oriented toward external users, ultimately conveying information about a company's financial position, operating performance, and cash flows through financial reports (especially the core financial statements) to external information users. Financial reports, as important reflections of a company's financial position and operating performance, have become legally required materials for listed companies to publish regularly and are increasingly valued as the capital market develops. It is no exaggeration to say that almost everyone (natural persons and legal entities) surviving and thriving in a market economy environment uses financial information, especially the investors, creditors, and national economic management and supervision departments. Therefore, it is essential and important to correctly understand and utilize the financial statement information provided by enterprises to understand their true operating results and financial position. In today's rapidly changing business environment and complex economic society, efficiently and accurately interpreting financial statements is particularly crucial. Through the accounting data in financial statements, one can initially assess a company's operating performance, identify its strengths and weaknesses, and predict its future. However, the content reflected by financial statement data is highly summarized and condensed, and many statement items independently reflect certain economic contents. To make the economic content expressed and conveyed by financial statements clearer and more understandable, scientific analytical methods are needed to appropriately interpret financial statement data. There are numerous books and articles on financial statement analysis in China. However, reviewing these works, most follow the approach of analyzing three financial statements (or dividing them into solvency, profitability, and operational efficiency analysis); the analytical methods involved are mostly ratio analysis, or even mechanical calculations of some financial ratios. We believe that a complete financial statement analysis system should consist of analytical objectives, analytical perspectives, and analytical methods. This book expands on this approach. The book is divided into five parts, totaling eleven chapters, with the main content of each part as follows:
Part I: Introduction (Chapters 1 and 2). Chapter 1 starts from the basic categories of financial statement analysis, clarifying its meaning, and then, based on the relevant theories of financial accounting, elaborates in detail on the objects, objectives, and functions of financial statement analysis. Chapter 2 focuses on the theory of financial statement analysis methods, building on the previous chapter, introducing the research object—financial statement analysis methods. Fully drawing on the relevant research achievements of information analysis methods, it theoretically discusses financial statement analysis methods as a whole. Based on the newly proposed concept of financial statement analysis perspectives, it establishes a framework for the financial statement analysis method system and proposes the overall approach to financial statement analysis: analytical objectives → analytical perspectives → analytical methods, with subsequent chapters following this main thread.
Part II: Analytical Perspectives (Chapters 3 and 4). In Chapter 3, the four perspectives of financial statement analysis are proposed: original statement data, structural reconstruction, structural analysis, and ratio analysis. For each perspective, we explain its principles, supported by examples, detailing the content and specific applications, with brief summaries and evaluations at the end of each section. For the "timeless" financial statement analysis method of financial ratios, a separate Chapter 4 is dedicated to discussing the complex relationships among various ratios.
Part III: Qualitative Analytical Methods (Chapters 5 and 6). These two chapters comprehensively elaborate on qualitative financial statement analysis methods—comparative analysis and index decomposition method—particularly delving into key issues, such as the comparison benchmarks in comparative analysis.
Part IV: Quasi-Quantitative Analytical Methods (Chapter 7). This chapter takes the representative comprehensive scoring method as the object, elaborating in detail on its meaning, form, content, and characteristics. It also introduces the application status of this method in China's corporate performance evaluation system and credit rating.
Part V: Quantitative Analytical Methods (Chapters 8 to 11). Quantitative analytical methods are one of the key focuses of this book. Chapters 8 to 11 are devoted to discussing methods such as index measurement, factor analysis, principal component analysis, factor analysis, and trend analysis in greater detail, not only clarifying their meanings, content, characteristics, and functions but also providing sufficient explanations of their operations. Additionally, this section introduces new analytical methods that are currently less widely used in China. Throughout the book, we have made every effort to fully draw on research achievements in information analysis, statistics, and methodology, attempting to construct a theoretical foundation for the establishment and improvement of the financial statement analysis method system. At the same time, in response to the problem of false information disclosure in China's securities market, the book particularly emphasizes how to use financial statement analysis to identify false information, which has certain practical significance for improving China's securities market.
This book has the following features:
1. Distinct overall structure compared to similar books. In terms of content, it breaks free from the old approach of "focusing on ratio calculations" or "analyzing three financial statements," expanding the scope of financial statement analysis methods. The main thread of the financial statement analysis method system runs throughout the book.
2. Summarizes and categorizes existing commonly used financial statement analysis methods, while also introducing relatively new methods that are not yet widely used in China but play an important role, such as factor analysis and principal component analysis. On this basis, it clarifies the complex and varied financial statement analysis methods, integrating foundational, practical, and forward-looking aspects.
3. Elaborates on the advantages, disadvantages, and applicability of various financial statement analysis methods, helping users to select methods accurately and effectively.
4. The financial statement analysis methods presented are operational, with a particular focus on analyzing some fundamental issues in each method, constructing a theoretical framework for the financial statement analysis method system. On one hand, it reflects the functions and interrelationships of financial statement analysis methods. On the other hand, it bridges the gap between financial statement analysis objectives and specific methods—financial statement analysis perspectives—while also clarifying the approach to conducting financial statement analysis.
This book is edited by Professor Chen Shaohua as the chief editor, with Chen Yu and Wang Dong as deputy editors. The deputy editors assisted the chief editor in proposing the outline for writing. The chief editor revised, compiled, and finalized the manuscript. The division of labor for writing each chapter is as follows:
Chen Shaohua: , Chapters 2 and 11;
Chen Yu: Chapters 3, 4, 5, and 6;
Wang Dong: Chapters 7, 8, 9, and 10.
The book is written in an accessible yet rigorous manner, with key points and difficulties supplemented by case studies. Therefore, it can not only serve as a textbook or reference for postgraduate students, undergraduates, and teachers in accounting and economic management majors at universities but also as an important reference for business managers, researchers, and other professionals learning financial statement analysis. However, due to limitations in expertise, time, and resources, the insights presented in the book may not be fully mature, and some issues and viewpoints still require further discussion. We sincerely welcome criticism and corrections from readers.