Standards for Financial Statement Analysis

Three commonly used standards for financial statement analysis are rule-of-thumb measures, the company’s past performance, and industry norms. Rule-of-thumb measures are weak because of the lack of evidence that they can be widely applied. The past performance of a company can offer a guideline for measuring improvement but is not helpful in judging performance relative to other companies. Although the use of industry norms overcomes this last problem, its disadvantage is that firms are not always comparable, even in the same industry.

• Diversified Companies