Ottawa University Limits of Financial Statement Analysis

This module studies financial statements which represent a historical quantitative summary of a company’s operations and activities. As we learned in module 1, financial statements are primarily used by external stakeholders, such as banks and stockholders, to provide useful information on the health and future of a company. However, many large companies have failed, even though they appeared profitable on paper. What can we learn about the health of a company using ratio analysis? Garrison, Noreen, and Brewer (2018) state, “Ratios should not be viewed as an end, but rather as a starting point” (p. 726). What is meant by that?

In a 2-3 page APA style paper, discuss the limits of financial statement analysis and how managers’ decisions can manipulate ratios for their own personal gain. To make this more interesting, research the top accounting scandals and determine how the managers of these firms played a role… and where are they now? What can you do as a manager to help make sure this doesn’t happen to your company?

 

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