Suppose you collect payment for your services, but you haven't provided your service yet. What is the basis for valuing the liability? 10 . Does the stockholders' equity we see on a balance sheet provide a good sense of the true ownership value of the company?

We now turn our attention to trying to get as much useful information as possible from a set of financial statements. There are a variety of reasons for wanting to be able to do this. First and foremost is to enable us to manage our firm better. Second, we want to be able to review the financial statements of close competitors to evaluate our performance as compared to theirs. Third, we may want to evaluate the financial statements of a firm in which we wish to invest. Fourth, we want to evaluate the financial statements of firms we are considering extending credit to.

We may be looking for different types of information in each case. Before extending credit, we want to assess a firm's liquidity and solvency. Before investing in a firm, we wish to know about its potential profitability. The goal of financial statement analysis is to derive from financial statements the information needed to make informed decisions.

We do this primarily through examination of the financial statements themselves, the notes that accompany the financial statements, and through the use of a technique called ratio analysis. Generally accepted accounting principles (GAAP), in recognition of many of the limitations of financial numbers generated by accounting systems, require that clarifying notes accompany financial statements. The information contained in these notes may be more relevant and important than the basic statements themselves. Ratio analysis is a method