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14
Financial Statement
Analysis
Chapter

STUDY

OBJECTIVES

After studying this chapter, you should be able to:
1 Discuss the need for comparative analysis.
2 Identify the tools of financial statement analysis. 3 Explain and apply horizontal analysis.
4 Describe and apply vertical analysis.
5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency.
6 Understand the concept of earning power, and how irregular items are presented. 7 Understand the concept of quality of earnings. The Navigator

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Feature Story
IT PAYS TO BE PATIENT
In 2008 Forbes magazine listed Warren Buffett as the richest person in the world. His estimated wealth was $62 billion, give or take a few million. How much is $62 billion? If you invested $62 billion in an investment earning just
4%, you could spend $6.8 million per day—every day—forever. How did
Mr. Buffett amass this wealth? Through careful investing.
You think you might want to follow Buffett’s example and transform your humble nest-egg into a mountain of cash. His techniques have been widely circulated and emulated, but never practiced with the same degree of success. Buffett epitomizes a “value investor.” To this day he applies the same basic techniques he learned in the 1950s from the great value investor

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Benjamin Graham. That means he spends his time looking for companies that have good

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