BUSF_A01.qxd

Chapter 3 • Financial statements and their interpretation

Most books on accounting provide an introduction to accounting and to accounting ratios.

Many business finance books include a chapter on accounting ratios. McLaney and Atrill (2008)

provide an introduction to accounting and accounting ratios. Neophytou, Charitou and

Charalamnous (2001) review the research into the use of Z-scores in the identification of busi-

nesses that are potential financial failures, including the work of Taffler.

Further reading

Further reading

The Financial Times/WILink site enables you to order the annual reports and accounts of many

listed businesses, including some overseas ones.

http://ft.ar.wilink.com

The Companies House site gives access to the addresses of all UK companies. You can write

to them to ask for a copy of their annual report and accounts.

http://www.companieshouse.gov.uk/info/

Most major businesses put a copy of their annual report and financial statements on their

website. If you go to the websites of any of the businesses mentioned in the various chapters

you can use the menu to bring up the financial statements. ‘Googling’ the company’s name and

the words ‘annual report’ will usually lead you in the right direction. The financial statements can

be read online or downloaded.

Relevant websites

Relevant websites

3.1 What is a balance sheet? Does the balance sheet tell us how much the business is

worth?

3.2 The first entry in the standard-layout cash flow statement is ‘cash flows from operating

activities’. How is this figure different from the operating profit for the same period?

3.3 People often refer to a business as having a ‘strong balance sheet’. What do they mean

by this?

(Note that the answer to this question is not really provided in the chapter. However, a

combination of background knowledge and common sense should enable you to come

up with some relevant points.)

3.4 What does the matching convention of accounting say?

3.5 The acid test ratio is not included in Taffler’s Z-score model for identifying potentially

failing businesses. Why is this?

(Note that the answer to this question is not really provided in the chapter. However, a

combination of background knowledge and common sense should enable you to come

up with some relevant points.)

3.6 Why is ratio analysis of financial statements considered to be so useful? Why is a care-

ful reading of the statements not enough?

Review questions

Suggested answers to

Review questions

in Appendix 3.