Bread Crumbs to Financial Statement Analysis: Writing Assignments to Enhance Students’ Interpretation

Abstract

Introductory financial accounting and financial management texts focus on the construction of financial statements andthe calculation of financial ratios with less attention to the interpretation of and connections among the ratios, except for briefpresentations of DuPont Analysis. Seeking to enhance student understanding of financial ratios and to provide them opportunitiesto write and think critically outside class, I created six assignments that lead students through simple questions and explanationsto analytical conclusions. Assignments are spaced throughout the semester to include related topics. For example, the leverageassignment is due after we cover bonds and risk and includes credit ratings and beta. In the first assignment, each studentchooses a firm and writes an introduction to the firm to provide context for later analysis. The second assignment directs themto Morningstar for common-sized statements and asks them to respond to questions related to their firms’ financing, investmentsand expenses. The third through sixth assignments use firm and industry data from Reuters and focus on financial ratios: leverageand coverage, liquidity and turnover, profitability, and market value. The assignments model an approach to critical thinkingthat progresses from data description and comparison through analysis and synthesis to evaluation.